Economics and the ethics of carbon emissions

In his book Climate Matters, John Broome (2012) ¹ examines climate change from the point of view of moral philosophy. Unlike many other essays that consider the ethics of social choice in this matter, Broome’s book contains some chapters that focus on the implications for individual ethics:

“Should you stop flying to distant places on vacation? Should you install a windmill in your garden? If not, should you at least buy your electricity from a green supplier? If you are hoping for answers to questions like these from this book, you are lucky.” (p. 73)

To provide the reader with an answer, Broome emphasizes two central ethical principles: goodness and justice. Goodness requires you to try and improve the world, like when you give money to a poorer person. Justice is more demanding: you owe restitution to a person or a group of persons if you undertake an unjust act towards them. Broome considers seven sufficient conditions to trigger the moral requirement of restitution: you harm the person; you are responsible for the act; the harms are serious; it is not accidental; the act benefits you; there is no reciprocal benefit; and restituting actions are inexpensive.

According to Broome, our carbon emissions meet the seven conditions and, therefore, ask for some short of restitution. Fortunately, it can be easily achieved at the individual level: “Your private duty is to reduce your carbon footprint to zero” (p. 100).

Nordhaus (2014) ² analyzes Broome’s recommendations, and provides his own model to study these ethical issues. He does that with the perspective gained by economic analysis, and starts by discussing the ethical position of individuals in well-regulated markets. Consider a market that meets all the conditions of the first welfare theorem: no market power (no monopolies or oligopolies), no externalities (like pollution), and no public goods (like street lights), among others. Under these conditions the theorem states that markets are efficient. In this case, individual actions are ethically neutral or positive, as they leave unaffected or raise the welfare of others. Or, to put it in Broome’s terms, our actions in these markets do not require restitution: if I buy bread in a market where there is no child abuse, no mafia that controls the market, and no other negative characteristics that upset the first welfare theorem, no harm is done, only a benefit for me and the bakery. After this general idea, Nordhaus makes various remarks.

1. Well-managed societies. Nordhaus extends the previous idea to a well-managed society. In his words, this is a society “that is designed to advance the well-being of its members, contains effective laws and customs to promote economic efficiency and fairness, and deals effectively with market failures and social inequities.” For instance, a well-managed society solves the externalities of driving (my private decision of driving can cause a harm to a third person in case I have an accident) by requiring a driver license, and also by deciding the many driving regulations we are familiar with (speed limits, enforcement of insurance, and the like). Engineers decide where stoplights go or where to post a sign to prohibit passing other cars. Once the well-managed society sets these norms, individuals who abide by the law do not owe restitution to others if some harm is done.

2. Internalizing externalities. One of the acts of a well-managed society is the internalization of externalities. Say it is estimated that emissions should not exceed amount X in one year. If the society issues X emissions bonds and requires that any one that emits one unit must own one bond, then the market price of emissions bonds reflects the social cost of emissions. Without the emissions market, neither firms nor individuals pay the social cost and they owe restitution. With the emissions market this negative external effect is internalized, and individuals in this well-managed society can live their lives without any need to restitute harms. The emissions market is already taking care of the problem. Alternative mechanisms, like imposing an emissions tax have the same effect.

3. Not well-managed societies. Like the tragedy of the commons or the pollution case, the problem of carbon emissions has the structure of a prisoners’ dilemma. My emissions add very little to the total, my decision to offset my emissions affects every one by very little, but I pay the full cost. My action does not solve the problem, and to cooperate while others defect make me a chump. Many philosophers have analyzed this problem and found no clear ethical norm that applies to them (see Hardin, 1968 ³ and Kuhn, 2009 ⁴).

4. CO₂ emissions cannot be neglected ethically. We can hardly declare that individual emissions fall into a de minimis exception, as they can amount to about $10,000 for the average American in their lifetime. There is a harm, and restitution is in order. How do you offset your emissions? To begin with, individuals don’t know how much to offset. And even if they did, they do not know how to do it in an efficient manner. Actually, when they try, they do it in an extremely inefficient way (Victor 2010 ⁵, Wara and Victor 2008 ⁶, Aldy and Stavins 2012 ⁷, IPCC Fifth Assessment, Mitigation 2014c, chapters 13 and 15 ⁸). In addition, if an individual purchases offsets in a country with no emissions cap (e.g., in the Chicago Climate Exchange, before it went bankrupt), rather than benefiting to those harmed by climate change, the benefit goes to current emitters, as their emissions are now less expensive. A last issue involves the relative value of our dedication to offset emissions relative to other important externalities such as world hunger, poverty or warfare.

5. Efficient means to offset our externalities. If individual action is a very bad way to offset emissions, it should not be regarded as the ethical solution to emissions. But then, which is the appropriate ethical solution? Nordhaus suggests a multilateral approach. It is computationally impossible to ensure a balance in every externality account given the constant and complex acts in which we engage everyday. By contrast, it would be relative simple to undertake an overall compensation once we have determined a reasonable total of our harmful actions.

To elaborate on this approach, Nordhaus proposes a thought experiment in the spirit of Rawls’ veil of ignorance: in society B people offset their harms externality-by-externality. Since this is very inefficient, lots of resources are wasted in high transactions and computational costs, and even so, there will be no guarantee that the right calculations are done. In society M people make an estimate of all harms and compensate the affected groups (e.g., when emissions bonds are issued and individuals pay a price to use them). Now, if you do not know whether you will be causing a harm or be a recipient of a compensation, which society would you choose? Then the big ethical question is: if we have to conduct our actions to the construction of society B or society M, where will our limited resources as individuals be better spent?