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November 14, 2006

Externalities and a Good Idea from France

Even a Francophobe has to like French Prime Minister Dominique de Villepin’s plan to impose a 20% tax on imports of manufactured goods from countries that don’t ratify the Kyoto treaty by 2012.  President Bush and I have been against Kyoto because it does not limit emissions from developing countries like China and because it leaves environmental good guys at a commercial disadvantage to environmental bad guys.  The French plan, as reported in this morning’s NY Times,  would turn Kyoto from feel-good symbolism to  a policy which can work.

The risk that anthropogenic increases in atmospheric carbon dioxide will dramatically accelerate the warning trend which has been going on in fits and starts since the last glacial peak is an externality to a business which releases carbon dioxide into the atmosphere and to those of us who use carbon-based fuels.  The cost of that externality should be born by those businesses (actually, by the customers of those businesses) and by us.

In other words, there should be a carbon tax and tradable carbon credits.  Trouble is that any country which unilaterally increases the cost of energy for its citizens ends up pricing energy-intensive manufactured goods out of the global market.  Protectionism is not a good cure for that no matter what Lou Dobbs might think.  However, a high tariff on manufactured goods gives a country like China – particularly China – a huge incentive to pay the cost of carbon reduction internally rather than become uncompetitive and to feed the treasuries of its customers with tariffs.

Just as no country can be a unilateral good guy on carbon dioxide emissions, neither can any company.  If just one coal fired electric plant, for example, sequesters all carbon dioxide before it can get into the atmosphere, that plant will produce electricity at too high a price for the national grid and disadvantage local energy customers and their finished products.  So we need to either limit carbon dioxide output or start to tax it at an increasing rate.  In either case, we need to encourage tradable credits (a European market for these already exists) so that the most economic means of reducing carbon dioxide will be found and rewarded.  We can afford to do that domestically once something like the French plan is in effect wordwide.  We can start preparing for carbon limits now in anticipation of such a plan.

Hey, if France and the US were to agree on a major policy, almost anything can happen.

In my favorite book of the month, Collapse, Jared Diamond writes:

“It is easy and cheap for the rest of us to blame a business for helping itself by hurting other people.  But that blaming alone is unlikely to produce change.  It ignores the fact that businesses are not non-profit charities… and that publicly owned companies with shareholders are under an obligation to those shareholders to maximize profits, provided they do so by legal means.  Our laws make a company’s directors liable for something termed ‘breach of fiduciary responsibility’ if they knowingly manage a company in a way that reduces profits…”

He then says that some effective means to make sure that companies don’t act contrary to the public interest are to make such actions illegal or expensive or for consumers to buy only from certified good guys even if that means paying higher prices.  The certified good guy approach isn’t going to work with something like energy which enters our economy in so many ways.  Government action can work as long as it’s world-wide.  Good idea, de Villepin.  So are the nukes which supply most of France’s electricity.

Capitalism and Externalities is a previous post about externaliies.

Fact and Theory and Global Warming explains why I consider anthropogenic global warming a risk worth acting on but not a fact.

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