Climate Change From First Principles

  • There is a carbon cycle.
  • We unnaturally distort this cycle by digging up fresh and dense carbon without the requisite absorption.
  • This leaves more carbon in the atmosphere and makes the globe ‘warmer’.
  • Even a marginal change in temperature will have a drastic effect at scale, society exists in very narrow harmony with climate.
  • Despite this, we add additional carbon to the carbon cycle every year. Carbon emitters are not incentivised to do otherwise.
  • Solution? A revenue-neutral carbon tax.

Climate Change From First Principles… It’s Carbon All The Way Down

Just to keep things simple… climate change from first principles.

A certain amount of carbon has been cycling throughout our atmosphere via release and absorption for billions of years. This carbon is sucked in by the trees and oceans and then released again by the animals and fire. This carbon cycles continuously in harmony and has been doing so for billions of years.

The problem now is that more carbon is being released into the atmosphere than can be absorbed naturally. We have tilted the billion-year-old carbon cycle off-balance.

We dug too deep. Our ambition exceeded our grasp. By welling up to the surface billions of barrels of oil (carbon) and by digging up from beneath our feet billions of tonnes of coal (carbon), we have introduced an additional measure of carbon into the atmosphere. These billions of tonnes of oil and coal are not part of the historic carbon cycle, and so throw off the harmonious equilibrium.

By introducing more carbon into the atmosphere without introducing an equal measure of absorbing capacity we increase the average temperature of our atmosphere.

When more carbon dioxide (CO2) is left in our atmosphere than we historically have been able to absorb, we create what has come to be known as ‘the greenhouse effect‘.

climate change from first principles

What Can Be Done To Curtail The Hidden Carbon Subsidy?

Subsidies exist to protect domestic markets from international competition. They are policies to ensure critical industries’ independence should shit hit the fan. For example, most of the countries you and I hail from are almost certainly subsidising their dairy and much of their agricultural industries.

A subsidy might pay for $2 of your $10 bill. This is government, tax-funded money that goes directly into the hands of certain domestic producers.

But could it really be the case that in the midst of our current climate crisis we would be subsidising the fossil fuel industry?

Pricing In Negative Externalities – Climate Change From First Principles

In a functioning market for a typical transaction, the public benefit will exceed the public costs.

In a healthy and functioning market, not only will the above apply, but the public cost (ie, negative externality) is also going to be accounted for.

The public costs of productivity in the markets are called negative externalities. There are also positive externalities too, like the largely intangible benefit of planting 100 trees in a public park.

Imagine if you didn’t pay for garbage collection? And instead, you just threw your trash out your window into the public tip. The downside is obvious, so instead, we pay a fee to have it taken care of.

Imagine if you didn’t pay for the public pollution of our atmosphere? And instead, just consumed and consumed and assumed the problem would just naturally go away.

Much like you would happily pay for someone to take away your garbage, one should be expected to pay for the filth that we pump into our atmosphere year on year which has knocked the carbon cycle off balance.

Much like the accumulated trash out your and your neighbour’s window would start to balloon into a pretty public negative externality, the effect that ongoing oil and coal carbon released into our atmosphere is as much a catastrophic negative externality as well. The difference being, that is distributed so thinly across our society that it is less of an eyesore and easy to pass off as unnoticeable.

Unnoticeable maybe, but nonetheless, deeply significant.

This negative externality is understood, but as we speak, not being accounted for. There is no tax to offset this public negative externality.

And this failure to account for the cost should actually be understood as a functioning subsidy instead. Because it is in this difference, the incentives have not been properly priced in. If you know that you can extract oil at x price because the y tax is not being enforced, then you are likely to continue business as usual and not invest money in reducing the mitigating factors of the y tax.

It’s incentives all the way down.

In a healthy, functioning market, all the costs are accounted for. This market is not healthy. The IMF estimated that as much as $5.3 trillion of negative externality is not being accounted for. If we decide to look at the untaxed negative externality as a subsidy then it would be the largest subsidy in history for the very industry the whole world demonises as the problem for our deteriorating environment.

Huge if true.

The Solution – Carbon Tax

Make the unaccounted for, accountable.

It’s not that wild a proposition. If climate change is to be taken seriously as an existential issue, then surely the lowest hanging intervention available to us should be pursued?

There are limitations, however…

  1. Calculating the exact price of the externality per producer is not an exact science, and so in this uncertainty, the big emitters make the most anti-tax noise. There is a promise that Planet can fill the gaps in knowledge, but it is yet to be seen.
  2. The pollution is not confined to political borders. If I emmit two tonnes in Western Sydney, there is no way of drawing a straight line from there to Arctic ice melt. Are all carbon emissions created equal? How does one solve this problem?
  3. You might hinder your own industry to the benefit of others. The economy is globalised. If I hinder efficiency by taxing Australian carbon emitters, does it then all of a sudden make Brazilian producers who don’t enforce the same tax more attractive?
What about implementation? Wouldn’t this tax on energy just increase the final price of everything?

In short, potentially.

An ideal and perfect solution would be to make the tax revenue-neutral. To offset the increase in the price of energy by decreasing tax elsewhere in the economy. This would ideally have the effect of not creating artificial inflation and price increase relative to wages. However, if one is honest, whoever suggests that they can cleanly implement such a proposal is selling snake oil. It would be unclean, it would be unfair, and it would be economically detrimental.

But worth it. Everything is a trade-off.

Such an implementation can be phased in, it doesn’t need to shock people overnight. Give the big carbon emitters a chance to innovate their practices and emit less carbon. They are the most essential ingredient in the transition to a renewable energy market and are such key inputs to a healthy and functioning economy.

The rules today incentivise you to emit carbon. This is absurd!

And So Climate Change From First Principles

  • There is a carbon cycle.
  • We unnaturally distort this cycle by adding additional carbon without the requisite absorption.
  • This leaves more carbon in the atmosphere and makes the globe ‘hotter’.
  • Even a marginal change in temperature will have a drastic effect at scale, society exists in very narrow harmony with climate.
  • Despite this, we add additional carbon to the carbon cycle every year. Carbon emitters are not incentivised to do otherwise.
  • Solution? Let’s try to implement a revenue-neutral carbon tax.

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