Saying no to markets

Over the past year or so, a number of economists and other market-friendly commentators have fallen out of love with market solutions to climate change. Most of them would prefer a carbon tax - which is, on the face of it, surprising.

‘Economists demand new taxes' is not a commonly used headline. So what's going on?

Martin Wolf, the FT's chief economic commentator, is one of those leading the charge for taxes. Unlike some who rely purely utilitarian arguments, Wolf is refreshingly explicit about his libertarian (or as a Brit would put it, liberal) concerns.

If binding targets are bought in, he frets, a ‘government would be held legally liable for failing to compel the people of this country to behave as it desires over the next half century.'

Tradable allowances, meanwhile, remind him of war-time rationing. Start with allowances for big businesses and eventually individuals will have them too. That's far too egalitarian for Wolf's taste, and relies on an overbearing state for enforcement. He finds such ‘interventionist gimmickry' a frightening thought.

But, like others on the pro-carbon tax bandwagon, Wolf also suspects that markets won't work. Cap emissions, and he worries that carbon prices will shoot around all over the place, introducing unprecedented volatility into the economy.

Much better to set a tax, which gives every economic actor (whether individual or multinational) certainty about what their energy costs will be.

Now there is an obvious counter argument. You can only get ‘price certainty' if you give up ‘emissions certainty'. That may not be a good idea when such deep cuts in emissions are needed. That's something we'll explore in more detail in a forthcoming post.

To support his views on markets, Wolf needs to look no further than the world's biggest existing carbon market - the European emission trading scheme - which will be worth €60 billion in its second phase.

Stavros Dimas, Europe's environment commissioner, has dubbed it ‘a supertanker and a standard setter.' Wolf, in contrast, would probably prefer ‘Titanic' as a designation.

Writing in the FT a few days ago, he didn't mince his words:

Ironically, Wolf's opposition to markets puts him in the same camp as a sizeable chunk of the campaigning groups here at Bali. Friends of the Earth International , for example, opposes all trading that includes carbon sinks (for example, where rich countries receive credits for pay poor ones to stop cutting their forests down).

According to its climate campaigner, Joseph Zacune, the organisation is not completely opposed to trading between rich countries, but like Wolf, it believes most schemes fail.

They too have the Europe's current trading scheme in their sights:

Earlier today, I asked Artur Runge-Metzger for his opinion on Wolf's attack on the ETS. Runge-Metzger heads Europe's climate unit and had been wheeled out by the Europeans to defend a market-based approach to solving the climate problem.

He told me he was completely convinced that carbon markets could help reduce emissions. And while he defended the first phase of the ETS as ‘learning by doing', he argued that even that had produced major changes in company behaviour.

'I deeply believe in this,' he said, 'and have no doubt that our market has already played a significant role in driving emissions down.'

It will be interesting to see whether the Europeans can substantiate this claim (either now, or in the coming phase), but even if they can, opposition to markets will remain strong.