A Pricing Alternative To COP21

As an economist, I have a jaundice view of the COP21 agreement in which the world’s nations agreed to reduce climate changing pollution. My skepticism ties to a lack of price signals included in the agreement. My question is: Can the world can realize a green economic revolution that delivers less pollution plus economic growth without including the cost of pollution at the cash register, meter and pump?

Pricing vs. regulation

Regulation is the public policy alternative to reflecting externality costs in the price of goods and services. Regulation has proven its ability to enhance the welfare of people and the planet. Our cars are safer, with fewer Americans being annually killed or injured from auto accidents, due to automobile safety regulations mandating seat belts and air bags. Regulation of our country’s new car fleet mileage has significantly limited gasoline demand, and this slowing of demand is a significant reason why gasoline prices are lower. Our cities do not have Beijing’s horrific smog crisis because of our air emission regulations.

However, the price of regulation is consumer disenfranchisement from the decision-making process. Consumers often view regulation as an intrusion by big government. With regulation comes complex rules that most consumers do not have the time or interest in understanding. The result is the questioning of regulation's efficiency and benefits by consumers and voters.

Most critically, regulation does not achieve consumer buy-in because consumers do not “own” the procurement decisions being made for them by government. Rather than being given pricing signals that allow consumers to evaluate more harmful products against less harmful products, the consumer is disenfranchised by regulations that mandate their decision. Using regulation rather than price signals to influence consumer procurement can generate consumer mistrust of business and government.

Why businesses favor price signals vs regulation

The pricing of externality costs is not without politics or special interest lobbying. The question is whether politically arguing over regulation, or politically arguing over the price to assign a product for its externality costs, creates more value. From my business experience, you sell the sizzle but you close a sale on the numbers. Encouragingly, the “sizzle” of buying products that mean more in terms of human and environmental benefits is gaining consumer appeal. To convert this sizzle into mass-market consumption levels requires putting the cost of pollution into the price of a product so consumers can see that the less polluting product has the lower price.

This is a reason why companies like BP, clean-tech innovators like Elon Musk and consumer product companies like Unilever all call for the price of goods and services to include a cost for carbon pollution. Today, selling less polluting goods and services faces a huge competitive disadvantage when goods and services with higher levels of pollution also have a lower price because the cost of their pollution is not reflected at the cash register, pump or meter. Companies with less polluting fuels, cars or soaps are at competitive disadvantage when their externality benefits are not price obvious when consumers are price comparison shopping.

Disastrous consequences are the result (like climate change or an obesity epidemic) from consumers not buying the goods or services that are best for their health, the environment and our economy because more polluting or fattening products have a lower price.

A pricing alternative to COP21

Pricing pollution is the economic alternative to COP21. China, California, Mexico, Quebec and British Columbia, the European Union, and South Korea all have a form of carbon pricing. This is a basis for the largest percentage of the world’s economy to implement a unified carbon-pricing policy.

Economists are famous for using assumptions to remove an elephant in the room that retards their economic argument. I admit to doing so with this proposal. The political leadership of states that benefit from a carbon-intense economy would not support carbon pricing.

But the time may be on us where carbon-intense economic development has hit its growth wall. If a political consensus develops that ties job and economic growth to low-carbon innovation, then the door will open for the pricing of emissions to generate jobs and economic development.

Imagine the potential for economic growth, job creation and human health if the U.S., along with China and the European Union, agreed to a common pollution tax on all the products sold in their countries. Products that polluted more would costs more. Products that polluted less would cost less. With these three economic giants having a uniform and unified carbon price, no economic gains would be created or loss between these respective countries. No nation wishing to sell goods and services in these countries could ignore or discount their pollution to gain price-competitive advantage for their imports.

This single pricing step by the three economies that define more than 60 percent of the world’s annual gross domestic production would convey sales advantage to goods and services that pollute less and sales disadvantage to goods and services that pollute more. This would drive the world’s business community to massively re-gear around technology innovations that deliver price competitive, less polluting products. Consumer decision-making would shift as they see at the pump, meter and cash register the real price of products, including their pollution costs. The world, and the U.S., would be on an accelerated path toward a $250 trillion green economic revolution -- delivering more jobs, less pollution and a growing economy.

Image credit: Flickr/tales of a wandering youkai