Austrian economics and climate change

Abstract

The aim of this paper is to outline and defend an Austrian policy response to climate change. A privatised climate change policy, based on Austrian welfare economics, is the only way to defend to the greatest possible degree the liberties both of fossil fuel users and people whose property rights will be violated if carbon emissions cause climate change. Neoclassical and ‘Post-Austrian’ analyses of climate change are both theoretically unsound and impractical, in requiring for their implementation a foundation in reliable scientific knowledge that is not available. Anthropogenic climate change is a putative interpersonal conflict rather than market failure. The use of fossil fuels should be subject to side-constraints designed to avoid the infringement of other people’s property rights. Tort litigation would protect these rights, where necessary. Litigation would also promote the public understanding and even the advancement of climate science.

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Notes

  1. 1.

    Neoclassical economics informed the market-based policies, notably carbon taxes and emissions trading, that were negotiated as part of the Kyoto Protocol in 1997, with the aim of reducing carbon emissions at the lowest possible cost. However global climate change policy initiatives seem to be on a decline from the high water mark of climate alarmism, which might be identified with the publication of the Stern Review, sponsored by the UK government, in 2006. The recession following the credit crunch in US and EU industrial economies has cooled enthusiasm for a hair-shirt policy stance; we no longer need climate change to offer us austerity. There is also a widespread realization that the emerging markets are far from compromising their catch-up growth by signing up to emissions reduction targets. A global climate change mitigation policy regime, whether taxes or a trading system, seems to be a distant prospect.

    A carbon tax penalises, not output produced using fossil fuels, but the CO2 actually emitted. If producers switch to a less carbon-intensive production technology, they do not need to reduce output. However carbon taxes encounter two main problems. First, they work only in the long run because, in the short run, demand for carbon-intensive activities, such as electricity generation and transport, is unresponsive to changes in price (Helm et al. 2005). A carbon tax is therefore ‘a good source of revenue for the [government] (Smith 2000, p. 8).’

    Second, any tax directed towards mitigating climate change must be internationally harmonised. Otherwise, firms in high-tax countries have an incentive to relocate to countries with lower climate taxes to avoid competitive disadvantage. The tax would merely redistribute carbon-intensive activities without achieving a global reduction in carbon emissions.

    Many countries, including some members of the European Union, subsidise fossil fuels, particularly coal. For example, in Germany ‘coal remains untaxed under the ecological tax reform introduced in 1999’ (European Environmental Agency 2004, p.14); this subsidy was worth about €3.5 billion in 2001. The world is a long way from a globally harmonised carbon tax

  2. 2.

    A reviewer has pointed out that rule utilitarianism is consistent with the Austrian approach and reaches a similar solution to the problem of climate change to the one advocated in this paper. Rule utilitarianism holds that an act is right if it conforms to a rule or set of rules such as property rights and it is the set of rules that is judged in terms of its effect on aggregate utility. I do not follow up this interesting line of thought here because I take Stern’s neoclassical approach to be an act-utilitarian one.

  3. 3.

    Adler (2009) fails, however, to convert this concern with individual rights into a policy that will protect them, aligning himself with the Free Market Environmentalism of Anderson and Leal (2001) in advocating emissions trading, which rests upon the same utilitarian foundations as neoclassical environmental economics (Section 4.1).

  4. 4.

    For a devastating critique of carbon emissions trading, from an Austrian perspective, see Cordato (1999).

  5. 5.

    No less than a carbon tax, an effective carbon trading scheme will not be effective without global coverage, which requires international political agreement on issues that the UK and EU member states have so far failed to resolve in connection with their own trading schemes. Whether carbon trading actually reduces emissions depends crucially on the quality of government decision-making in the design of the emissions trading system. First, the scheme should cover all carbon emissions with no industries exempt. In fact the UK ETS and EU ETS both include significant exemptions, being limited to carbon-intensive industries that are not at immediate risk from competition in international markets. The use of fossil fuels in industries that are granted exemption is in effect subsidised and, other things equal, can be expected to increase.

    Second, the number of permits allocated by free distribution must be limited, and at least some permits should be auctioned. Free distribution has been used by the UK and the EU in order to win acceptance from sceptical firms, but it acts as a barrier to the entry of new firms, undermining the degree of competition in industries covered by the scheme. Incumbent firms receive a free allocation of permits when the trading system begins, but new entrants have to purchase permits at the prevailing market price. The implication is that ‘the free distribution system imposes a bias against new users in the sense that their financial burden is greater than that of an otherwise identical existing user’ (Tietenberg 2005, p.184).

    Third, the quota, the quantity of CO2 that may be emitted, must be sufficiently lower than ‘business than usual’ to lead to the reduction in emissions that is believed to be necessary to avert dangerous climate change. The EU ETS has not secured a reduction in emissions because national quotas have been too generous. Firms such as electricity generators had increased prices in anticipation of having to purchase extra permits at the predicted market price. But too many permits had been issued, the price of permits collapsed and the funds raised for purchasing permits became windfall profits. The distributive effects on society were regressive, with money being redistributed from electricity customers, many of whom are on low incomes, to shareholders who may be expected on average to be more affluent.

    The prospects for international collaboration to establish an effective and globally comprehensive Pigovian tax, carbon tax or carbon trading regime seem remote. Moreover, it is far from clear that climate science can provide a reliable estimate of the safe atmospheric concentration of CO2 that would inform the efficient rate of CO2 emissions reduction. Too much trust in computer modelling helped to bring us the credit crunch. How much trust should we place in computer predictions of future climate change and its effects?

  6. 6.

    If the climate changes as a consequence of intrinsic variability of natural processes, that is unfortunate.

  7. 7.

    Jaeger et al. (2008) employ a Bayesian learning methodology to the Alpine heat wave of 200 in order to calculate the fraction of heat wave risk attributable to anthropogenic climate change, concluding that anthropogenic climate change has contributed more than 90% to the probability of the Alpine heat wave of 2003. The Bayesian procedure begins by attaching a weight to each of four rival hypotheses seeking to explain the heat wave. This merely prioritizes the hypotheses, in that the weights are 1, 2, 3 and 4. Different orders of priority are included to express the range of opinion among researchers. A hypothesis that a researcher finds thoroughly implausible is still given a positive weighting. The Bayesian explicitly takes a non-critical attitude to the hypotheses and the result is no more than a survey of opinion. Jaeger et al. (2008) are open about this; they admit that this result is a reflection of research in progress rather than knowledge that is true beyond reasonable doubt. However it is difficult to agree with their belief that their methodology allows decision-makers to reach practically relevant conclusions.

  8. 8.

    ‘Black Rook in Rainy Weather’, lines 9–10, Plath 1981.

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Correspondence to Graham Dawson.

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Dawson, G. Austrian economics and climate change. Rev Austrian Econ 26, 183–206 (2013). https://doi.org/10.1007/s11138-012-0174-8

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Keywords

  • Climate change
  • Neoclassical economics
  • ‘Post-Austrian’ economics
  • Austrian economics

JEL

  • B5
  • K3
  • Q5