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Matt Ridley is the author of provocative books on evolution, genetics and society. His books have sold over a million copies, been translated into thirty languages, and have won several awards.

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Worstall on Stern

Economics for environmentalsist in one short volume

Bishop Hill has a review of Tim Worstall's book Chasing Rainbows, which reminds me that I meant to write about this book. I wrote a cover quote for it that described it `fearless, fresh, forensic and funny'.

What is particularly clever about the book is the way that Worstall makes economic theory so digestible, even delicious. He refutes the dreary cliche so popular among environmentalists that economics just `does not get' the environment (by which they usually mean that they would like to do the equivalent of repeal the laws of gravity and make things to happen even if they make no sense for people: like getting people to give up cheap forms of energy to take up expensive ones). Quite the reverse is true: environmentalists all too often just don't get what economists are trying to tell them.

I especially liked this little section which so neatly eviscerates the Stern Report:

That climate change is a market failure does not, as has already been pointed out, mean that all markets have failed, that all possible variants of markets will fail to deal with this problem, only that the market system as currently extant is failing to deal with this specific problem. Our choice of how to use markets to rectify this comes in one of two flavours: we can either shoehorn the problem into current markets or we can create a new market to deal with this problem.

Shoehorning comes from (as Stern goes to great lengths to point out) the acknowledgement that emissions are an externality. They are an effect of our actions which are not currently included in the market prices which guide our actions. As Marshall pointed out at the turn of the last century and as his successor Pigou went on to solve for, we know what to do with these. We add a tax to the action so that market prices now reflect the true costs of said actions. We've even got a number from Stern as to what that tax should be: $80 per tonne CO2.

We ought to take a little detour here to discuss the validity of that $80 and truth be told, there's not a great deal of validity to it. The Stern Review plays a number of tricks to get to it. The first and most obvious is that all of the calculations are based upon only one of the four families of possible economic (and thus emissions scenarios) that the IPCC itself considers. You don't have to be as cynical as I am (although I prefer "realist" when trying to describe my bleak and total cynicism about the actions of politicians and their hirelings) to guess that he used the very worst of those economic models, the family that produces hugely high emissions by comparison with the others.

No, sorry, let me backtrack a little. He does use another set of emissions: one he made up for the task. One that the IPCC hasn't considered and one which is, yes, you guessed it (see, told you, realism) even worse. So our $80 is based upon as bad as the IPCC thinks it could be and worse: no consideration is given to the idea that it might not be that bad but that's still part of where we get our $80 from.

The second trick is that Stern essentially invents a new way of dealing with discount rates. No, we'll not go there, it's very long and boring but let's just say that his treatment of this issue received a great deal of commentary ("commentary" is the polite way economists describe making the point "You did what? But, but, don't you understand the implications of that? Buffoon!**") from economists who had actually been working within the IPCC structure, economists like Sir Partha Dasgupta and Richard Tol.

A third trick, well, no, not really a trick, rather a gross oversight, comes in the treatment of the technological and capital cycles.

One of the great arguments in economics (it's at the heart of what all those talking heads on the TV screens are shouting about, recession, unemployment, government spending and the rest) is about how quickly things happen. If this bit of the economy over here changes then how long does it take for that bit over there to adjust to it? A Keynesian (or even a New Keynesian, although for slightly different reasons) will think that in a recession then wages won't change, won't change quickly enough at least, which is why we get unemployment. A New Classical (or again, for slightly different reasons, a Real Business Cycle theorist) would say that of course wages will adjust, near instantaneously and thus there cannot be recessions and whatever it is that we're seeing is caused by something else. Entirely. No doubt at all. That however is macroeconomics, as PJ O'Rourke pointed out, the part of the subject where we're reasonably certain that we don't know what we're talking about.

However, microeconomics (the bit where we know a bit is correct at least) covers the same point about how quickly things happen. For example, we know that the short and long term effects of tax changes are different: it takes time for people to change their behaviour. We also know that we've something we can call the technological cycle: how long does it take to get some new whizzy way of doing something into the hands of people who will use it to do whizzy things? Specifically, here, with climate change, we'd like to know how long it takes to get some nice new low carbon technology thought about, developed, tested, manufactured and thus really ready for use. Given that windmills have been around in Europe since at least the 12 th century we can see that it can be a fairly considerable amount of time.