When Frank Convery, then working in the ESRI, began research on environmental economics a quarter a century ago, this was very much a “new” area of research, one which attracted little attention from policy-makers and the wider community. By contrast, today key issues of environmental policy have moved closer to central stage in debate. Nonetheless, much more needs to be done as progress on tackling our environmental problems has been slow, and in some cases we have actually gone backwards.
One of the lessons from economic research is that using market mechanisms, such as taxation, to produce behavioural change is likely to have the most enduring (and least cost) impact on human behaviour. The EU Commission in the early 1990s proposed a tax on greenhouse gas emissions (and energy) in order to tackle the long-term problem of global warming. If such a tax had been introduced as proposed twenty years ago we would see the benefits today. Firstly, it would have encouraged us all to work harder to reduce our emissions. Secondly, and probably more important in the long run, it would have told the world that research into reducing greenhouse gas emissions would be profitable. While fuel switching and energy efficiency can and should make a valuable contribution to reducing emissions, the development of carbon free technologies will hold out the key to long-term sustainability. While governments can and do finance research, experience has shown that the most effective stimulus to R&D in this field is the prospect of future profitability.
Experience with the oil crises of the 1970s showed that they stimulated major research into energy efficiency. This research paid off handsomely in the mid 1980s, ironically at the same time as the oil price collapsed. However, once new technology was invented it was impossible to “forget it”, even if it proved to be less profitable than expected. For the future policy needs to hold out a good prospect that carbon saving or carbon free technologies will be profitable in the future. For this to happen policies need to hold out a certain prospect that the price of carbon in the future will be significantly higher than they are today. Widespread adoption of carbon taxes would achieve this. It is for this reason that economists favour the taxation route to dealing with the problem of global warming.
The advantage of using taxation is that the revenue accruing to governments can be used for other good purposes – welfare payments or cutting other taxes. The research done by colleagues suggests that the costs of tackling global warming in Ireland will fall disproportionately on the poor. Without the revenue from the environmental taxes will governments provide the increased welfare payments and other expenditures to insulate (literally) the poor?
One alternative to taxation currently being implemented on a limited scale is to effectively give ownership of some of the environment to individual companies. This can achieve the desired effect of reducing pollution. However, it is both economically much less efficient and also, at least for me, offensive to make the shareholders in certain companies richer by allowing them to effectively sell the environment.
An interesting example of the inferiority of other methods of signalling to people how to be good is the case of “food miles”. Just because food has travelled a long distance does not make it more environmentally damaging. For example, if we grow strawberries or tomatoes in greenhouses in Ireland heated by gas this may be much more polluting than growing them in Spain and driving them to Ireland, or even growing them in the open in Ethiopia and flying them to Europe. If consumers had to consider the food miles of all their purchases, as well as the price, shopping might never get done. Instead if governments put the correct price on all fuel then we will know that if we buy the cheapest tomatoes they are also the most environmentally friendly. Blind adherence to a “food miles” philosophy could also seriously damage some of the poorest countries in the world, such as Ethiopia.
The lessons from economic research also show that progress will be slow. This partly reflects the need to develop new technologies to meet our needs in a sustainable manner. It also reflects the fact that sustainability will require major investment – for example, in new types of cars and in new types of electricity generating technology. Even once the new technologies are developed, putting in place the new investment can take at least a generation.
The need to invest today so that our children and grandchildren will reap the benefits makes environmental policy-making a very different challenge than other policy areas, where problems are immediate and solutions can be expected within a few years. However, the fact that progress will be slow is not a reason to give up. Rather we need to redouble our efforts if progress is to happen at all. If we had acted on global warming in the early 1990s by introducing suitable taxes, as early policy research had suggested, we would today see the difference. Instead the threat of global warming has increased as policy initiatives have been endlessly delayed. Failure to implement good policy today could further delay the essential progress by another 20 years.
Promising too much or aiming too high too soon could discredit the policy changes that are essential to protect and develop our environment. What is needed is a realistic approach which accepts the need for some short-term pain in the interest of achieving very long-term benefits. There needs to be more concentration on doing something real through implementing policy changes that may hurt a little today rather than setting endless targets for the future, which have no current cost, and where no means of making sure that they are attained are implemented.
Over the last few years there has been extensive rhetoric about the benefits of a green economy. While jobs are welcome, and under present circumstances in very short supply, the objective of environmental policy should be to tackle the key environmental problems facing Ireland at minimum cost. Digging holes (metaphorically) and filling them in again, while creating jobs, would not be welfare improving. It would also not be sustainable in an economic sense. Jobs in industries or businesses which produce “green” goods and services will be welcome if they are profitable. However, the rhetoric of green jobs may sometimes ignore reality. The Irish economy does not have a comparative advantage in mechanical engineering. Thus it seems unlikely that we will ever create substantial jobs in firms making machines to generate electricity from wave, ocean or air. Where Ireland does appear to have a comparative advantage is in software engineering – so that control systems may be an area where we will see new business developing. However, for any such jobs to be economically sustainable they must be profitable. For any such businesses to be environmentally desirable they must help minimise the costs of meeting our environmental objectives.
Agriculture in Ireland is one of the major producers of greenhouse gases. Apart from the problem of global warming, it is also one of the major sources of pollution, especially of water pollution. As a result, if policy makers are serious they need to address the question as to how the environmental footprint of agriculture can be minimised.
While one of the cheapest ways of reducing Ireland’s greenhouse gas emissions would be to get rid of all of our cattle this would be neither optimal from an environmental point of view or from an economic point of view. As Ireland has a comparative advantage in livestock production, shutting off that outlet for Irish agriculture would merely see the relocation of such activity to other countries where the environmental impact would be even more negative. It is only if there were a simultaneous fall in world demand for livestock products that such a solution would see a reduction in worldwide emissions. Even then it would prove economically inefficient.
However, just because Ireland may have a comparative advantage in producing livestock products does not mean that policy should favour their production over other uses for the land. Over the last 20 years the CAP has done just that. For the future farmers should be encouraged to produce the crops that are most profitable. If these should prove to be energy crops, such as biomass for heating, then there would be a simultaneous reduction in Irish greenhouse gas emissions. However, provided that carbon emissions are appropriately priced this should be left to market forces to determine.
Where action is needed, possibly through tax measures, is the area of water pollution. As this is Ireland’s greatest domestic environmental problem it is important for our future welfare that it is tackled seriously over the next few years. While this may well involve tax measures, it also will require regulatory action. Regulatory action will be more appropriate where the impact of emissions on the environment depends on the absorptive capacity of the receiving waters. For example, where pollution from a particular farm is damaging a river or a lake, taxing that pollution is too complex an approach. It is better just to set a limit on the acceptable emissions and then legally enforce that limit.
Finally, there are crucial environmental problems, other than global warming, where benefits are likely to be reaped in a more medium-term time scale. For example, Ireland faces a serious water pollution problem and I have just discussed the role of agriculture as a source of that pollution. However, tackling other sources of water pollution will require major further capital investment if we are to make serious progress.
The current economic crisis is posing a challenge for all environmental improvements which require large-scale investment. This applies in the case of investment in renewable electricity but it also applies to the sphere of water pollution. Funding the necessary environmental investment in the future will be a much greater challenge and involve greater cost than was envisaged even three or four years ago, because of the effects of the current economic crisis on the cost of capital.
If serious progress is to be made on tackling water pollution we need to consider how to fund the necessary investment at least cost; otherwise the investment may not happen or may be delayed. In the case of investment in water infrastructure what is needed is a new water utility with responsibility for all Irish water infrastructure. Such a utility should mirror the responsibilities of ESB and Eirgrid for the electricity network and BGE for the Gas network. (Maybe one of these utilities might end up also performing the role for water). To allow such a utility to work, just as in the case of electricity or gas, it would need its own independent income stream from user charges. It would also need an initial equity investment by its owner – the people of Ireland. Once such an income stream were established, guaranteed, and regulated by an independent regulatory authority, it could then borrow independently of the state, just as happens with the energy utilities. This would free the funding of investment to tackle water pollution from the currently very tight constraints on public funding. (It would also reduce government borrowing and the national debt as conventionally defined.)
A new water utility, with well defined objectives, should be able to deliver the necessary investment and maintenance of the water infrastructure at much lower cost than the current plethora of local authorities that have responsibilities in the area. Running costs should be reduced through a reduction in employment and an increase in productivity. Such productivity gains have been realised elsewhere where independent utilities have clear responsibility for water services. Even more important, the independence of the utility from current constraints should allow the essential objective of cleaning up our environment to be achieved more rapidly and at lower cost than will happen if we maintain the current approach to tackling the problem.
John FitzGerald, The Economic and Social Research Institute, Dublin.
The article is based on a talk by the author at a public lecture on Ireland’s Sustainable Future, sponsored by the Irish Environmental Protection Agency on 22 June 2010