Mark Thoma:
William D. Nordhaus reviews Pope Francis’s encyclical on the environment and capitalism (Laudato Si’: On Care for Our Common Home
, an encyclical letter by Pope Francis, Vatican Press, 184 pp., available at w2.vatican.va):
The Pope & the Market, NYRB: Pope Francis’s encyclical on the environment and capitalism, Laudato Si’, is an eloquent description of the natural world and its relationship to human societies.1 ... Most commentaries have focused on the pope’s endorsement of climate science, but my focus here is primarily on the social sciences, particularly economics.
My major point is that the encyclical overlooks the central part that markets, particularly market-based environmental policies such as carbon pricing, must play if countries are to make substantial progress in slowing global warming. ...
{The encyclical states that the advances in slowing climate change have been regrettably few. There is a lack of “honesty, courage and responsibility.” Progress has been slow because countries have shown “failure of conscience and responsibility” (Paragraph 169).
But the growing peril of climate change and many other environmental problems arises primarily not from unethical individual behavior such as consumerism or cowardice, bad conscience or excessive profiteering. Rather, environmental degradation is the result of distorted market signals that put too low a price on harmful environmental effects.
Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is unpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions.
To understand environmental problems today—whether local ones like congestion or national ones like air pollution or global ones like global warming—requires understanding markets. Markets can work miracles when they work properly, but that power can be subverted and do the economic equivalent of the devil’s work when price signals are distorted. For climate change, the major need is to raise the price of CO2 emissions sufficiently high that they are reduced sharply. This can be done either by taxing emissions or by a system of cap-and-trade.} ...
Unfortunately, Laudato Si’ does not recognize the fact that environmental problems are caused by market distortions rather than by markets per se. This is seen in the condemnation of “carbon credits”... Many commentators have interpreted this passage as a condemnation of cap-and-trade... Whatever the specific target, this part of the encyclical is clearly a critique of market-based environmental approaches. ...
Cap-and-trade has in fact been successfully used, for example to phase out lead from gasoline, to limit sulfur dioxide emissions in the United States by more than half, and to limit carbon dioxide emissions both in the European Union and more recently in major Chinese municipalities. The alternative to cap-and-trade is carbon taxation, which raises carbon prices by taxing carbon emissions. Such a tax is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.
Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. ... He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.
[I left out quite a bit. All of his points, and much more, are fully explained in the review.]
via economistsview.typepad.com
I added the four {bracketed paragraphs} to Thoma's excerpt.
