The Power of Prices
In his new book, Adapt, economic journalist Tim Harford tells the story of ‘Geoff’, a man who is determined to reduce his carbon emissions. As he goes through his day, Harford shows Geoff making a series of well-intentioned mistakes: going out of his way to wash his dishes by hand rather than use the dishwasher (Harford argues that the dishwasher has a smaller carbon footprint), but then choosing to tumble-dry rather than line-dry his clothes (which uses significantly more carbon). Geoff buys energy-efficient lightbulbs, but then decides not to install them until his existing ones pop (which will cost him more). He switches off his mobile phone charger, but leaves his desktop computer on standby (Harford tell us that the computer uses 100 times as much energy).
The point of Harford’s story is that solving climate change through personal action alone is hard. Even if we had a sophisticated computer program that could tell us the carbon intensity of a particular decision, how many of us would bother to check it?
Thankfully, there’s a simpler solution. The effect of putting a price on carbon is to change prices so that they reflect the carbon emissions embodied in them. Under a carbon price, an environmentalist doesn’t have to know precisely how a product was made – you just need to look at the price tag. By modestly changing prices (overall price impacts will be just 0.7 percent), carbon prices will change consumption patterns. As any marketer can tell you, customers already flock to cheaper brands. With a carbon price, there will be an incentive to choose the low-carbon option.
This incentive will exist for both firms and households. For firms, carbon pricing will encourage them to think hard about how they can reduce emissions. A recent Economist article gave the example of the potato chip firm Walkers, which discovered its carbon footprint was unexpectedly high.
‘It turned out that because Walkers was buying its potatoes by gross weight, farmers were keeping their potatoes in humidified sheds to increase the water content. Walkers then had to fry the sliced potatoes for longer to drive out the extra moisture. By switching to buying potatoes by dry weight, Walkers could reduce frying time by 10% and farmers could avoid the cost of humidification. Both measures saved money and energy and reduced the carbon footprint of the final product.’
With carbon pricing, we can expect to see simple changes like this taking place inside each of the 500 large polluters, as managers and workers look together for ways to reduce emissions. The better companies succeed, the more that business assistance can be used to grow the firm and increase employment.
Changing prices and providing assistance is the Labor way of achieving reform. As Paul Keating pointed out on Lateline, this is precisely why we floated the dollar. But it’s also a simple description of trade liberalisation (which reduced prices of imported vehicles and clothing, and provided industry assistance for textile and car workers), as well as the Accord itself (which kept real wages constant in exchange for improvements in the social safety net).
Unlike previous Liberal Party leaders – and conservative leaders in Britain and New Zealand – Tony Abbott refuses to accept that the market can be used to solve environmental problems. (Perhaps this suspicion of markets isn’t so surprising from a self-confessed admirer of the late BA Santamaria.) What Mr Abbott fails to realise is that a government that won’t use price signals has to fall back on heavy-handed alternatives like regulation, mandates and bans. That’s why the Coalition’s ‘Direct Action’ plan is so much more expensive – and less effective – than the Gillard Government’s Clean Energy Future approach. We’re now in the ‘Bizarro World’ in which Tony Abbott is the proponent of highly interventionist solutions, while Labor favours the market-based approach of pricing carbon.
Little wonder that a poll of members of the Economic Society of Australia, released at last week’s Australian Conference of Economists, found that 79 percent agreed with carbon pricing, while only 12 percent supported direct regulation. When it comes to reducing carbon pollution, a carbon price is the only sensible way to go.
(Cross-posted at the ALP blog)
Excellent post. Reposted it. U should give Abbott a copy of Hayek’s masterful 1945 article on the same theme: http://www.econlib.org/library/Essays/hykKnw1.html
What a great post! As the father of a four-year-old daughter, I really don’t want to imagine that my daughter’s kids living in a dark earth before finding a new planet.
However, I am not sure whether the 79% members of ESA at ACE think about following quesions:
1/ How to get a ‘price’ that reflect the carbon emissions? Any prodction activities produce carbon. Should we charge the additional part or all the carbon? What is a fair rate?
2/ What is the price elasticity we are talking about? Can a 0.7% increase work?
3/ May or may not a general 0.7% increment impact the already-high inflation? If may, what will the influence be? Has any ‘presure test’ done already?
4/ It is true that ‘For firms, carbon pricing will encourage …’, but did all the economists think a possible bias? It is: we think we are nudging firms to reduce emissions, but the firms are thinking how the profit-decrease from carbon-tax can be transfered to households. Walkers is a good example, but will carbon pricing lead to a win-win game?
Perhaps, we may think in another way: instead of carbon price, we decrease the price of green energy. I just took a lease from a property agent weeks ago, so I connected gas and electricity recently. All the utlity suppliers asked me whether I would like to pay extra several bucks per month to get green energy, but you can imagine what I responded. I am more than willing to use green energy for offsprings, but how can I squeeze more dollars from the tough-already living? I have to eat bread before think offsprings.
As an ordinary, I might think too much, but was ‘nudged’ to provide some of my naive thoughts
What a load of rubbish. What ‘science of climate change’? It is based on guesswork, and I don’t believe tnat you know any more gacts than I do. Yet you seek to burden australians with a massive tax, simply because you think it’s a good idea?
For starters, where’s your evidence? Any moron can get the climate history of just about anywhere and see that there were similar peaks around the 1860′s and then that tapered away until the 1950′s and then started increasing again. Wouldn’t it be smarter to assume that there is a big cycle there, rather than just look at the last half of a cycle and deduce that unrevocable climate change is occuring?
Sorry mate, but you are a great example of the ‘chicken little’ syndrome. But chicken little is either right or he is wrong. If he is right, then there must be evidence, not guesswork. SO give us real evidence – or get real!
As they say – all you experts – can’t even tell me what the weather is going to be next Friday, yet you claim to be able to tell us what is going to happen in 10 or more years.
My opinion is that we need to keep a register of people like you, so that down the track when this all pans out as a massive wasre of money, that the people who have been hurt by it can bring some retribution back on you!
Your advert claims it is not a tax on the individual – well, if it isn’t, why then is the individual taxed?
A filthy commie concept which we don’t need in Australia!
Hi Andrew
Your post is completely filled with errors. Here is a link that I think you should read. http://www.skepticalscience.com/global-cooling-intermediate.htm . This comment “similar peaks around the 1860′s and then that tapered away until the 1950′s and then started increasing again. Wouldn’t it be smarter to assume that there is a big cycle there, rather than just look at the last half of a cycle and deduce that unrevocable climate change is occuring” is addressed in full at the link provided. If you don’t bother reading it then you cannot claim to be armed with the facts and you therefore have an uninformed opinion. I’d suggest that you also watch this link: http://www.getup.org.au/campaigns/climate-action-now/climate-announcement/give-facts-a-head-start The video expalins that the tax is NOT on individuals. In fact, the bills have been introduced to parliament now and they show that the taxes are NOT directly applied to the individual. So your statement that “Your advert claims it is not a tax on the individual – well, if it isn’t, why then is the individual taxed?” is completely wrong.
If you don’t watch the video at the link above, then again, you will continue to be manipulated by the big polluters and the biased media slant that is swaying public opinion on putting a price on pollutioin.
Also, I’d like to point out that the non-communist countries around the world also have carbon taxes. Here is a link: http://www.sbs.com.au/news/article/1492651/factbox-carbon-taxes-around-the-world
If you don’t read the information at the link then you will continue to have an uninformed opion.
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