We all need to pay for climate change mitigation

While the latest IPCC report on mitigation doesn’t recommend any particular strategy for reducing carbon emissions, it suggests changing energy consumption is a key mitigation strategy.

According to the summary of the report electricity generation produces the greatest share of carbon emissions (25% in 2010). Within electricity, buildings and industry are the key emitters.

For the best chance to keep global warming under the internationally-agreed 2C guardrail, greenhouse gas concentrations (measured relative to CO₂) need to be limited to 450 parts per million by 2100.

In Australia, two mitigation strategies are competing for favour: a carbon price and emissions trading scheme, and Direct Action. The government has vowed to dissolve the carbon price from July, to be replaced with Direct Action. Is Direct Action a better policy for changing our energy consumption? Long-standing ecological and economic theory would suggest not.

Of cows and commons

In 1968, an ecologist by the name of Garrett Hardin developed a powerful idea that explains our tendency to overexploit resources. He pointed out that shared resources — clean air and fossil fuels, for example — will tend to be overexploited. To make this idea concrete, Hardin imagined a town commons — a shared paddock — where several farmers graze their cattle.

There comes a time when the number of cattle on the commons is at a sustainable level: any more cattle and the health of all cattle will suffer because there is not quite enough grass to go around.

But a rational farmer will add another cow to the commons because she gains the full benefit of that extra animal, while the cost of her action (the slightly undernourished state of the entire herd) is shared by all the farmers. This is the rational choice for all the farmers to make, and so the farmers, acting individually and rationally, make choices that rapidly cause the overexploitation of the shared resource. Hardin called this idea the “Tragedy of the Commons”.

Hardin chose the word “tragedy” with care: he used it not to denote a sad happening so much as an inevitable outcome. An imbalance between individual benefit and shared cost leads, inevitably, to overexploitation.

The Tragedy of the Commons is a powerful idea, and one of the few ecological ideas that have been taken up by economists. It applies to all shared resources, natural or otherwise, and like all powerful ideas it is as valid now as when it was first expressed.

Indeed the 2009 Nobel prize in economics was awarded to Elinor Ostrom for her work on the idea. Ostrom showed that while Hardin was right about the dangers of an imbalance between individual benefit and shared costs, he was wrong about the inevitability of overexploitation. If the commons are managed carefully, it turns out, overexploitation can be avoided.

Encouraging exploitation

Both Direct Action and carbon pricing can be looked at in terms of the Tragedy, and their impact on our behaviour.

Direct Action does nothing to mitigate the Tragedy. It pays a handful of businesses to cut their emissions, while the ultimate cause of overexploitation, human behaviour, remains unchallenged. Rational individuals and corporations everywhere will continue to overexploit fossil fuels.

With Direct Action there is no incentive for people or companies to change their behaviour; no deep innovation; no new markets. It probably won’t succeed in hitting our emissions reduction targets, but even if it does it will have missed the more fundamental target of human behaviour.

In missing this target, Direct Action sets itself up as a strategy that needs to run forever. It doesn’t treat the disease (human behaviour), and so the symptoms (carbon emissions) don’t go away. It is either short-sighted, misguided, or massively cynical to claim that Direct Action is more effective policy than a price on carbon.

Avoiding exploitation

One of the simplest ways to short-circuit the Tragedy is to regulate so that the costs of an action are no longer shared, but flow back to the one making the action. This is precisely what a price on carbon does.

We, all of us, use shared resources every second of our lives. Fossil fuels are only one example, but they happen to be one that matters a lot. At the moment we can’t help but use fossil fuels: they probably power your web browser, and they almost certainly were used to produce the food you ate for breakfast.

In a world with no price on carbon, we pay for fossil fuels to be dug up and burnt. We do not, however, pay the full costs of that action. We don’t pay full price for the air pollution, the resulting climate change, the attendant natural disasters. These costs are shared by all.

A price on carbon works to change that imbalance, by bringing some of the true cost of an activity back to those undertaking it. In doing so, it redresses the imbalance between individual benefit and shared cost, changes individual and corporate behaviour and encourages innovation and new markets.

It also holds to account the mining and power companies that have long profited from the exploitation of fossil fuels, without being held financially accountable for the shared costs of their business model.

Sharing the burden

But what about electricity prices? Won’t they go up when there is a price on carbon? Yes, they will, but that is the point.

Increasing electricity prices simply reflect a shift towards the true cost of consuming fossil fuels. They bring the shared cost home. Individual behaviour and business models that have a high environmental cost will also have a high financial cost. Higher electricity prices are part of the painful cure that, if we are sensible, we will undertake willingly.

There’s nowhere to hide from climate change. Treating the symptoms won’t help us in the end.

Ben Phillips receives funding from the Australian Research Council.