- Aug 20, 2005
I’ve already explained it, a price is a function of a market economy whereby market participants come together for mutual benefit to exchange goods and services. Their preferences are then conveyed through this act of exchange and only through this process is a price discovered. These prices contain useful information that can then be used to perform economic calculation to determine what is profitable and what is not, and this then allows resources to be allocated in line with consumer preferences. This is not without error as it still relies on the skill of the entrepreneur to predict future demand but it at least allows for some sense to be made. Without prices, there can be no economic calculation.
When a bureaucrat slaps on an extra cost to CO2 emissions, this cost has no connection to the demonstrated preferences of market participants. It is completely made up and guaranteed to lead to malinvestment and squandered resources. The whole price structure is falsified by this intervention. It does not guarantee CO2 emissions will be reduced in the long term, it may in the short term but as it will lead to general impoverishment and a reduction in the supply of fossil fuels it will in all likelihood lead to more CO2 emissions as the demand for energy hasn’t decreased. Coal will have to fill the gap and where it can’t it will just lead to shortages. This is what we are seeing in Europe right now.
I think the most likely scenario is that non-Western fossil fuel production will increase to fill the gap and the west will have scored an incredible own goal, now reliant on countries they do not have great relations with and who would be willing to use this leverage to advance political goals.
I agree there is a phenomenon called the cobra effect and the root cause issue is demand for energy / materials so unless this gets addressed we get all sorts of other effects by picking a symptom of energy demand (co2 levels) without addressing that root cause. Unless there is a global ‘price/disencentive’ consistently applied then i agree it will force energy to be generated where that disincentive isn’t applied. If there is a global disencentive then this can lead to more nuclear power, renewable power etc but these also come with their own negative effects and yes energy would cost more at least in the short term.
I can’t see how we will agree that the market comes up with the right answer (always) using the legal system and price. I can see as you get to more micro levels, and if market participants have similar powers and abilities to access the legal system it can work. But that just isn’t true. Someone being exploited in South Africa doesn’t likely have the education or resources or political capital to hold their exploiter to account.
Everything has flaws as we don’t have perfect knowledge and nor can we predict the future. So I get the appeal of an approach based on what people and corporations do to measure what they want and if that impacts someone else illegally to use a legal system to address it. You can assert that this will always lead to the best (fairest?) outcomes and any other approach won’t, but since you can’t predict the future, the argument is flawed IMO and more a belief. Much like I have a belief intervention is warranted when the evidence starts to mount up.
We can’t play out two separate universes perfectly to see what would happen if we don’t intervene but Id guess there is enough evidence where countries have made different choices to show the benefits of government market manipulation on smoking rates via tax on cigarettes / packaging laws etc. and rules around drink driving / seat belt use etc and even right now with vaccine uptake. There are also plenty of counter factuals where it has failed such as diesel driven car policies in Europe leading to smog. I’d certainly advocate to look to improve things where there is evidence the market is failing, but if the intervention isn’t working, then you need to be open to reversing it.