Kyoto, Global Warming, and the Economy
by Fred E. Foldvary, Senior Editor
The Kyoto Treaty on atmospheric pollution came into effect on February 16, 2005. The signatories have committed themselves to reduce carbon emissions below the 1990 level by 2012. Air pollution is believed to create a greater greenhouse effect, resulting in global warming, the rise of ocean levels, and possibly catastrophic changes in ocean currents, climates, ecologies and economies.
The U.S. Senate refused to ratify the treaty during the Clinton administration, and President Bush has rejected the treaty. Australia has also rejected the Kyoto Protocol, but Russia has joined it. One of the problems with the 1997 Kyoto Protocol is that it does not apply to developing economies, such as India and China. With these countries rapidly growing and creating a significant amount of the global pollution, a reduction in pollution in the USA will have little effect unless India and China and other developing countries get on board.
The governing chiefs of India and China argue that reducing pollution would stifle their economic development. They say that the U.S., Europe, and Russia had few pollution controls when their economies were industrializing, and so the developing economies today should not be handicapped with pollution reduction. Once these economies catch up with North America, Europe, and Japan in development, then they would join the treaty.
By that argument, India and China could adopt slavery to promote economic development, since the U.S. exploited slaves during its initial development. Nobody today argues that slavery would be justified in India and China just because the U.S. had it earlier. An evil committed in the past does not justify an evil in the present.
The most efficient way to reduce pollution has been well known in economics for 80 years. The economist Arthur Pigou showed how when there is a negative external effect such as pollution, the buyer is not paying the full social cost of the good. In effect, the user is subsidized. To eliminate the subsidy and make him pay the social cost, there needs to be a pollution charge on the sale of the good, ideally equal to the social cost of the pollution contributed by that item.
These charges or pollution taxes are called "Pigovian," after Pigou. Every economics textbook discusses negative externalities such as pollution, and the Pigovian taxes that internalize the cost, illustrated with graphs showing the supply curves of the buyer's cost and the social cost. With a Pigovian tax, the buyer's cost equals the social cost. The polluter either avoids the charge by reducing pollution, or else pays the charge and passes on the cost to the buyer. At the higher price, less is bought, less is produced, so there is less pollution, and society is compensated for the damage.
Governing chiefs have economic advisors, and they are aware of the possibility of pollution charges to reduce gaseous emissions. But the chiefs of India, China, and the USA have rejected pollution charges. The argument that pollution reduction would damage their economies is false. The government revenue from pollution charges can be offset by a reduction of taxes on wages, capital, value added, and sales. These taxes burden the economy, so an increase in pollution charges accompanied by a reduction of punitive taxes would leave the overall tax burden the same, while reducing pollution.
The economic reality is that in the long run, there need not be any economic cost to reducing pollution. The political reality is that the governing chiefs do not want to enact pollution-reducing charges because the chiefs of the polluting industries have huge political clout.
For example, in China, there is growing air pollution from burning coal. The Chinese chiefs seek to decrease their dependence on oil by using more coal for energy. They regard the heavy pollution as an acceptable price for rapid economic growth. But they could grow just as rapidly by eliminating all their taxes on wages, capital, and sales and shifting public revenue to pollution charges and the tapping of land rent. They could also eliminate the corruption taxes with high penalties on governing officials who demand bribes. Production would be shifted to less polluting industries and methods. The chiefs of China have rejected this solution, because the coal-mining interests have great political clout.
Similarly, the USA could implement the Kyoto goals by shifting public revenue to pollution and land rent. But the US chiefs have rejected this. The coal and oil industry chiefs in the US have great political clout, and will not allow a tax shift that will reduce their economic dominance. The public is too ignorant and apathetic to demand the efficient solution to pollution.
Most environmentalists can also be blamed for the pollution problem. They cry "Kyoto! Kyoto!" but reject the efficient tax shift. They want to reduce pollution with regulations, by command and control. If you try to explain the economics to them, they refuse to listen. They present the public with the false choice between the environment and the economy. It seems that they prefer command and control to the reduction in pollution. It has been said that such stubbornly ignorant environmentalists are green on the outside and red on the inside.
Most "liberals" and "progressives" can also be blamed for air pollution. They say that the Social Security problem is not urgent, so why reform the system? Well, global warming is also important but not urgent, so why not postpone a solution? This is a false argument. If there is a long-term problem which gets more costly every year, we should solve it sooner rather than later.
Is air pollution causing global warming? Nobody knows for sure. Possibly we are in a natural cycle of warming. When the ice age ended, that global warming was not caused by industrial pollution. But an important rule of life is that it is best not to fool with mother nature. It is quite possible that pollution is contributing to an increase in global warming. The economic cost of catastrophic warming far exceeds the transition to efficient public revenues.
Most of the countries that have adopted the Kyoto Treaty are in fact not making progress towards reducing pollution. But there is no economic excuse for excessive pollution. Greedy special interests are exploiting public ignorance, and the typical human is apathetic, too busy making a living, dealing with oppression, and being entertained, to get aroused about global warming.
If you care, if you want to do something, and you think this reasoning make sense, then email this article to your liberal, progressive, conservative, radical, or libertarian friends. We need to educate the public, and you at least could have the satisfaction of helping if only just a little bit.
-- Fred Foldvary
Copyright 2005 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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