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How should we incentivise the 'Green Recovery'.

By Simon Stromberg 24th November 2020


The Government's current approach is to incentivise decarbonisation by imposing either a carbon tax or incentives for green investment. (Committee on Climate Change, 2019; Department for Business Energy and Industrial Strategy, 2020). While this might seem like an obvious solution, and it is the economist's preferred solution, there can be unintended consequences of financial penalties that are designed to modify behavior. Here is an example of economic incentives that create an opposite behavior to that intended:


To reduce tardiness, an Israeli day care had instituted a penalty for parents who showed up late to pick up their children. This policy was in line with what economists would have recommended: if you want to reduce a behavior, make it more costly for the individuals who exhibit the behavior. To virtually everyone's surprise, tardiness actually increased after the penalty was put in place. Apparently, now that there was a fee, parents felt it was OK to show up late. A moral injunction that previously had kept parents' behavior in check was relaxed once the monetary penalty came into play. Or to put it in economists' terms, the moral cost of tardiness was reduced, and perhaps eliminated. As the economist Sam Bowles points out, this is an example of how material incentives may sometimes crowd out moral, or other-regarding behavior.(Rodrik, 2015 p191)


The analogy with decarbonisation is that if you tax carbon, firms feel they have the right to produce carbon (ibid). Putting a tax on larger and more polluting vehicles provides wealthier people with a justification for their car choice (I paid for it).


We arrive at a fundamental policy question, in terms of encouraging a Green Economy, what value does moral utility play in economics. Like Steven Levitt, the author of the popular book Freakonomics put it:


There are three basic flavors of incentive: economic, social, and moral.’


There can be no doubt that the UK is committed to electrification and integration of green energy production in all things electric,


'…… these budgets focussed on the UK moving to a 'highly-electric' future, in which electricity, generated from low-carbon sources, is increasingly used as the main energy carrier for heating and transport' (Foxon, 2013)


Currently, UK policy is mostly about fiscal incentives. On the one hand, taxes, for example, carbon taxes on firms, higher taxes on luxury vehicles. On the other hand, there are incentives for buying electric cars or installation of EV points or subsidies for insulating homes, or the installation of solar panels. What is missing from the policy landscape is a trust that the public will, with the right information, make good choices. If the Government were to give you a subsidy for an electric car, it relies on your only motivation being a great deal on an electric car.


'Because self-interest features prominently in economic models, economists exhibit a bias toward incentive-based solutions to public problems. Consider climate change and the question of how to address carbon emissions. Public opinion varies greatly, but economists are virtually unanimous: they recommend either taxing carbon or implementing a close equivalent, a quota on carbon emissions with trading of emission allowances among producers.' (Rodrik, 2015 p188)


What the Government does not seem to be prepared to do is allow individuals and firms to make the right choice based on information. Here is an example of how a decision to purchase an electric car might change with information.


Buying an electric car is an excellent environmental choice. Right? It must be, the Government incentivise you to do so. Well maybe. Let's see how choices might change with information.


What if I were to tell you that:


Cobalt is a primary ingredient in making an electric battery, and Chinese firms own 80% of the worlds cobalt refineries, and that about two-thirds of cobalt is sourced from the Congo in West Africa, where poverty wages and child labour are the norm.


https://youtu.be/JcJ8me22NVs


Armed with that information, you might make a different choice, rather than buy a new vehicle, petrol or electric, you might be morally compelled to change your lifestyle so you can live without a car. You might make a 'greener choice'. The Government dilemma is that buying no car at all is ultimately a poor economic choice for the UK:


'According to the Society for Motor Manufacturers and Traders, the UK produces around 1.5 million cars and commercial vehicles and 3 million engines, accounting for 9-11% of the UK's total exports. The sector generates more than £55 billion in annual turnover, employs around 700,000 people and delivers around £16 billion in net value-added to the economy.' (House of Commons, 2019; sapartners, n.d.)


I will now add in a different piece of information. Without the demand for batteries and cobalt mining, instead of slave wages working in unsafe conditions, the people working in Congo's cobalt mines would starve to death. Cobalt mining might be harmful, but it is not as harmful as no work or income. Or if I told you that that local leaders in the Congo are arguing for a more significant share of the wealth generated by Cobalt mining and safer conditions, rather than no mining at all. As one local worker put it


'Why can't we make the batteries that use our cobalt in our country and benefit from manufacturing and production like Apple or Tesla do?'.


The development of a cobalt industry might be the only route out of poverty.


Now, you might choose to put pressure on your local politician to argue for a fairer deal for the Congolese or request policies that incentivise the Congolese Government to put in place a regulated mining industry.


Armed with this new information we have gone from electric cars are the right choice, to electric cars are a good choice only if we have social justice for the people that supply the raw materials.


But who should make that choice, the Government, or you? UK governments, particularly a Conservative one, argue for economic liberalisation, freedom of choice, and a free market. However, without information, the only choice you can make is one based on the financial penalties and incentives that the Government choose to impose on you, and trusting that your politicians have made the best choice for you.


As it stands, the UK government is dictating 'green choices' mainly through fiscal policies of carrot and stick. Taxes on the one hand, and green incentives on the other. What is missing is trust, trust that with the right information the public can, and will make, better choices. What we lack in the UK are policies that put forward economic, social, and moral incentives and the information to weigh up these difficult choices.


A green policy should incorporate moral and social utility to maximise the opportunity for positive change.


Simon Stromberg is an Energy Consultant currently studying for an MSc in Energy Policy at the University of Sussex.


References


Committee on Climate Change, 2019. Reducing UK emissions - 2018 Progress Report to Parliament - Committee on Climate Change. Reducing UK Emiss. 2019 Prog. Rep. to Parliament.


Department for Business Energy and Industrial Strategy, 2020. Carbon Capture, Usage and Storage. A Government Response on potential business models for Carbon Capture, Usage and Storage.


Foxon, T.J., 2013. Transition pathways for a UK low carbon electricity future. Energy Policy. https://doi.org/10.1016/j.enpol.2012.04.001


House of Commons, 2019. The motor industry: statistics and policy.


Rodrik, D., 2015. Economics rules: why economics works, when it fails, and how to tell the difference. Oxford University Press, Oxford.


sapartners, n.d. The Importance and Impact of the UK Automotive Sector [WWW Document]. URL https://sapartners.com/importance-impact-uk-automotive-sector/ (accessed 11.18.20).


https://youtu.be/JcJ8me22NVs

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