The role of cost-benefit analysis in climate policy

Cost-benefit analysis has been used to propose a target for greenhouse gas emission reduction. This inevitably starts a brawl, because CBA forces you to make explicit all assumptions and value judgements that imply said target. There are other, less abrasive ways to set targets, but those can be reverse-engineered to reveal the implicit assumptions that make them “optimal” in the sense of a CBA. I think it is better to be upfront about your assumptions and values.

CBA is a good way to get published in an economics journal. It is less suitable for climate policy advice. A CBA tells a philosopher-queen what to do, but it is an academic exercise until we endow Lady Gaga with her rightful powers. She would find it better to steer on price than quantity, a robust, near-consensus finding in the academic literature that our actual leaders have studiously ignored.

Politicians favour quantities, and in recent years, dates for net-zero. Promising that your successor’s successor will meet your goal may be good politics, but policies matter more than targets. I aim to lose weight. I’ve set a target: 78 kg. That does not help. More exercise, less food does.

Targets can, of course, be used to guide policy. Say you want to reach zero emissions of carbon dioxide by 2070. Coal-fired power plants have a life-time of 40 years or more. Any plant that goes online in 2030 will need to be capture-ready so it can be zero-emission in 2070. Planning and building a power plant takes 10 years, so regulations will have to be in place by 2020. Oopsy.

(I know. It is cheaper to close the plant a year early. But you would like to know this when you start planning.)

Politicians have set targets and timetables for greenhouse gas emissions for 40 years, since 1985 — and missed most (some were hit by accident). Emissions have continued to rise. Climate policy has been a resounding failure if you define “success” as “target met”.

At the same time, we have seen a revolution in the energy supply — first, shale oil and gas, then wind and solar, and now batteries. Alternative proteins and new rice varieties may do something similar to the food supply. Projected emissions have fallen, and actual emissions may be about to peak.

This suggests that useful targets are for the commercialisation of carbon-free alternatives. Renewables are beyond grid parity, electric vehicles are almost there. One aim is for people to want electric heating — rather than being forced to. More importantly than establishing that aim is answering the question what needs to happen to cost, performance and supporting infrastructure to get there. That’s what successful climate policy did in the past, and that is what it needs to focus on in the future.

This can be misinterpreted as a call for micromanagement. It is not. Politicians are good at politics, civil servants at civil service. What is needed is broad support for pre-commercial research and development and sufficient regulatory stability for investors to want to punt on a future product. A carbon price may help to stabilize regulation. Cost-benefit analysis would help to decide which targets are worth pursuing. But, at the end of day, the climate problem will be solved by entrepreneurs putting carbon-neutral products on the market that people will want to buy regardless of the climate.