I was honoured to today sit on a panel at the University of Melbourne MD Student Conference with Professor David Griggs, Associate Professor Marion Carey, and Senator Richard di Natale. Our panel topic was Climate Change and Health: The Greatest Moral, Economic and Social Challenge of Our Time.
Professor Griggs spoke on the sciene of climate change, I spoke on the economics of climate change, A/Prof. Carey spoke on the health effects of climate change, and Senator di Natale – who was delayed and missed most of our speeches – spoke across all three topics.
The text of my speech is below.
Climate Change and Health: The Greatest Moral, Economic and Social Challenge of Our Time
Speech presented at the University of Melbourne MD Student Conference, 03.07.2014
I would like to acknowledge the traditional owners of the land on which we meet, and pay my respects to their elders past and present.
The topics one could cover in this session are quite broad, but I’m told that climate change isn’t part of your curriculum and, given that you’re not economists, you’ve probably not subjected yourself to any environmental economics courses.
I’m therefore not going to focus on health, per se, but would like to give you a framework with which to understand different climate change policies and their strengths and weaknesses, in the hope you can apply this framework to more specific suggestions made by my esteemed fellow panellists, or indeed by anyone else.
During the industrial revolution, widespread use of coal to generate heat and electricity led to poor air quality in many cities due to ash and other pollutants. In London, the ‘Great Smog’ of December 1952 led to a spike in mortality of 80% versus the previous December, while mortality rates in January and February 1953 were 50% and 40% higher, respectively, than a year before.1
The air pollution from burning coal is an example of what, in economics, is called an “externality”. Residents of London who didn’t themselves burn coal, or use electricity made from burning coal, were none-the-less exposed to the consequences of coal being burnt. On the other hand, those choosing to burn coal were not exposed to the full health costs they were inflicting on others: others’ concerns were external to their decisions.
Formally, “Externalities are costs or benefits arising from an economic activity that affect somebody other than the people engaged in the economic activity and are not reflected fully in prices.”2
London responded to the ‘Great Smog’ by introducing “smokeless zones” and mandating the use of tall chimneys to help disperse emissions.3 Unfortunately, high chimneys simply dispersed the effects of pollution over a greater area.
One of those effects was acid rain, caused by the sulphur dioxide and nitrous oxides released by burning coal.
Unlike smog, acid rain was not a local nor an immediate result of air pollution, as it often formed hundreds of kilometres away from where the pollutants were emitted,4 and obviously only when it rained. The total societal costs of coal-fired electricity were thus even more external to power producers’ and consumers’ decisions than before.
To solve the problem of acid rain, the Republican U.S. Congress and Presidents Ronald Reagan and George Bush Senior were drawn to the market-based, cost effective policy of “cap and trade”. Thus, in 1990, the USA legislated one of the world’s first emissions trading schemes, for sulphur dioxide. Covering almost entirely, but also almost only the fossil-fuel electricity sector, it was highly successful at reducing sulphur dioxide pollution at relatively low cost.5
Climate change, like air pollution, is a problem of externalities. The costs or benefits of an action to society are different to the costs or benefits to the individual taking the action. When private costs equal social costs, what is best for the individual is also best for society. With externalities, that’s not the case. A corollary is that, in the presence of externalities, an unregulated market where individual pursue their own interest is likely to fail to result in a socially optimal outcome.
Greenhouse gases affect society through their contribution to climate change.6 The costs to society are different – most probably greater – than the costs to the individual causing the emissions: there is therefore an externality. The individual makes decisions that are best for him or herself (e.g. burning lots of petrol, using lots of coal-fired electricity), but those decisions are not best for society. There is a market failure.
Responses to market failure
To correct this failure achieve a socially optimal outcome, one could command people to take the actions that are best for society, even if those actions aren’t best for the individuals. Or one could change the costs and benefits facing the individuals so that they take socially optimal actions of their own accord. The first response is known as “command and control”; the second as “incentive-based regulation”.
The dominant form of environmental regulation is “command and control” regulation.7 In essence, a regulator collects the information necessary to decide what actions must be taken to address a problem then commands individual polluters to carry out those actions.
This could involve mandating the use of particular technologies, such as ‘scrubbers’ on smokestacks or catalytic converters on cars to remove pollutants; it could involve approving (or disallowing) the use of certain substances or processes, or mandating standards for how much pollution may be produced and fining companies that breach that standard.
Most of health policy is, as I understand it, ‘command and control’ based: regulators specify what may, must, and must not be done.
As an alternative to commanding people’s behaviour, governments can attempt to influence people’s behaviour by making their private costs or benefits equal to the social costs or benefits. Incentives to do this are usually provided via the market, i.e. via changing prices.
A simple way of closing the gap between low private costs and high social costs is to put a tax on the private actions – for example, the private action of emitting greenhouse gases.
However, it can be difficult to know precisely what the difference between private and social costs is – set the tax too low, and behaviour doesn’t change enough; too high, and it changes too much.
Where the desired level of behaviour is better known than the private/social cost difference, it can be easier to specify the level – or quantity – and let people between themselves decide what they should pay to engage in that behaviour. We do this by creating permits – representing the right to engage in the behaviour – and, just like a sharemarket, selling them at auctions and letting people trade permits between each other to determine the price.
Strengths and weaknesses of policy tools
A major advantage of command and control mechanisms is their ability to regulate complex processes and provide certainty about the outcomes that will be achieved.8
It is also reasonably simple to monitor compliance with command and control schemes, since they usually involved detailed and specific process descriptions. Compliance monitoring then becomes a matter of comparing what people do with what they are supposed to do; this is often easier than monitoring the outcomes of their actions.
A downside is that command and control mechanisms require a great deal of information and skill, and are thus very costly to administer. Different industries, different processes, and different technologies must be analysed in detail to determine the appropriate level and nature of control.
Often, the regulator will not have the information needed to make a good decision, and must rely on the industry being regulated to provide that information. This has obvious pitfalls.
Command and control mechanisms also reduce the incentives to find better ways of addressing problems. There is little incentive to innovate and find new solutions if regulations specify that a specific process must occur to achieve a particular outcome.
Perhaps one of the biggest problems with command and control mechanisms – one that they share with taxation – is that they are not suited to dealing with people having different costs.
To achieve a goal efficiently, a policy should use the solution that’s cheapest (for a given effect) until it becomes expensive, then switch to whatever the new cheapest solution is until that’s expensive, and so on until the goal is achieved.
A study of historical USA regulations to reduce the risk of death9 found that:
- regulating unvented space heaters saved 63,000 lives per year at a cost of $100,000 per life (in 1984 dollars);
- regulating aircraft seat cushion flammability saved 37,000 lives per year at a cost of $600,000 per life; and
- regulating asbestos in the workplace saved 74,700 lives per year at a cost of $89 million per life.
Now, the USA didn’t consider trade-offs in their regulations; they didn’t think, “Well, we could save just as many lives at lower cost if we did less asbestos regulation and more heater regulation.” That’s not how regulation works: everyone has to meet the same standard, even if it’s expensive. That’s both a strength and a weakness.
Taxes have a similar weakness. This chart is a bit busy, so just concentrate on the height of the columns for the moment: they represent how much it would cost an investor to reduce greenhouse gas emissions by one tonne.
If we slapped a tax on greenhouse gases – say $50 – everyone who could avoid the tax by reducing emissions for less than $50 would do so, and everyone for whom abatement cost more than $50 would just pay the tax. It’s enticingly simple, and everyone affected has certainty about what their costs will be: no more than $50 per tonne.
It’s not necessarily the most efficient at reducing emissions, though. What if these grey people on the right – the power sector – rather than paying $50 in tax, could pay these green people – the forestry industry – $30 to reduce a tonne of greenhouse gases on the power sector’s behalf. The power sector saves $20, foresters make some money, and the same environmental outcome is achieved.
If you’ve realised I’m describing emissions trading, well done. By creating a market for the right to pollute, you also create a market for not polluting, and nothing gets entrepreneurs motivated quite like a good market.
As well as its potential efficiency benefits, emissions trading has one other great strength: certainty about pollution. Rather than prescribing an action (as under command and control), or setting a price (as under a tax), the government sets a quantity – and that’s the limit.
The big weakness is that you don’t know the price. That’s basically the trade-off: you can be certain of the price, or the quantity, but not both at once. And that’s because the world isn’t as simple as this graph: we don’t really know how high those columns are. If we did, all the people on the left – people who live in buildings or drive cars – would reduce their greenhouse gas emissions and save money doing it.
Why aren’t they? Lack of knowledge is one reason, but there are other non-monetary barriers like not having the right to change your property even though you pay the bills, social pressure, or simply habit. I guarantee that everyone in this room does something unnecessarily expensive out of habit.
In this situation, regulation becomes useful again: the government can force people to do things that will make them better off – through energy efficiency standards, for example. In 2013, the Equipment Energy Efficiency program reduced Australia’s greenhouse gas emissions by 13.5 million tonnes at a cost of minus $119 per tonne. Appliance energy efficiency saves the average household $6 per week,10 but you wouldn’t have seen it without regulation.
I’ve talked a lot so far about climate change mitigation – that is, efforts to reduce the incidence of climate change. A complementary policy goal, however, and one that’s possibly more important for developing countries, in climate change adaptation – efforts to cope with climate change when it occurs.
The big reason I think developing countries might find adaptation more important than mitigation is their ability to prevent the problem is less than their need to deal with the problem. Developing countries hold the power to make things worse, but past emissions – overwhelmingly by developed countries – have already ‘locked in’ climate change that developing countries will need to deal with.
Many developing countries, in addition to fiercely lobbying the developed world to mitigate climate change, have begun to prepare to adapt to it. Approaches include disaster risk management, basic public health measures, livelihood diversification, early warning systems, water resources management, and resilient crops.11
To some extent, climate change won’t present the developing world with new problems so much as exacerbate problems it already has.
Many developing countries already face the primary climatic events that climate change will worsen, such as floods, droughts, coastal storms, cyclones, and heat waves or cold waves.
Some also face climate change’s secondary events, such as malnutrition, outbreaks of diseases or epidemics, crop failure, or landslides.12
To some extent, those problem don’t require new policies so much as further or better implementation of old policies. The strength of institutions to monitor and enforce whatever policies they choose will be key, so that we don’t end up with fake abatement or an illegal construction industry that flouts building codes.
Where new policies are required, Australia is in a good place to help. International colleagues tell me we are one of the world’s leading countries in adaptation research, and speak highly of the National Climate Change Adaptation Research Facility.
It is to the Federal Government’s credit that they reinstated funding to the NCCARF in their first budget, after it was cut in Labor’s last. I can only hope the Government change their stance on mitigation policy so that my conversations with international colleagues are not as shameful as they have been of late, and that we minimise the harm we do to developing countries.
1 Bell, Davis, and Fletcher (2004) A retrospective assessment of mortality from the London smog episode of 1952: the role of influenza and pollution. Environ Health Perspect. Jan 2004; 112(1): 6–8.
2 Economics A-Z, The Economist
4 Schmalensee and Stavins (2012) The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment
6 This section draws on http://www.martincjones.com/posts/2011/3/22/carbon-pricing-101.html
7 Kolstad (2000) Environmental Economics, p. 139
8 This section draws on Kolstad (2000) Environmental Economics, pp. 139–154
9 Viscusi (1996) Regulating the Regulators
11 IPCC WGII AR5 Summary for Policymakers
12 M. Monirul Qader Mirza (2003) Climate change and extreme weather events: can developing countries adapt?