By ORA MORISON, The Globe and Mail
25 July 2012
The severe drought hitting U.S. farms may be just the latest sign of climate change and the impact it will have on the economy.
Climate change and economics have been intersecting long before a drought descended upon the Midwest this year. Over the past 20 years, policies that impose a “cap and trade” system or emission reduction targets have been called economically irresponsible and haven’t put a dent in the climate change problem. Carbon emission levels in Canada were actually 25 per cent higher in 2007 than in 1990.
These policies, and reduction targets in general, failed because they put the chicken before the egg, say a group of economists writing for the Institute for Research on Public Policy (IRPP).
That is, emissions-reduction targets came before the technological developments that would have made reaching those targets a reasonable possibility.
In a report released this week, Christopher Green, an economics professor at McGill University who began researching climate change in 1988, partnered with Isabel Galiana, a PhD candidate at McGill University and Jeremy Leonard, research director at the IRPP, and tried to come up with a strategy to reduce carbon emissions that is both economically and politically palatable.
The authors say that a very low carbon tax could be used to establish a low-carbon energy research council that funds research and development. Canadian companies would then be encouraged to develop the kind of major technologies that actually have a hope to help reduce climate change.
“Nothing short of a technological revolution will be required to sufficiently cut emissions,” the report says.
While other economists have assumed carbon pricing will encourage development of new energy technology in the private sector, the authors say this is probably only true for technologies that are close to commercialization.
The public sector has a role here, the authors argue, because the outcomes of these technologies would be closely tied to public good.
“It is highly unlikely that [current policies] would spur the large and risky up-front investments in basic research and development testing and demonstration required to develop next-generation technologies,” the authors wrote.
A big challenge will be deciding which companies and technologies to “bet” on with public funds. Transparently choosing the projects most likely to come up with the best technologies will be critical for this policy to be successful, but also difficult and fraught with potential political problems.
Another trick lies in how the money is collected. Raising taxes or fees on businesses and voters could be political suicide.
The authors suggest a very low, but steadily rising carbon tax. A tax of $5 per tonne of carbon would add about 1 cent per litre of gasoline, not enough to raise the ire of businesses or voters, eliminating political risk.
If this tax doubled every decade, it would reach $80 per tonne by 2050. A hefty fee, but one the authors argue would be imposed only after businesses have had decades to plan for and create new technologies to avoid paying it. […]
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