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Incentives Matter – Even With The Environment



One of the things the economically literate have been trying to point out to varied environmentalists is that the first great lesson of economics – that incentives matter – really is true. The implication of this is that we don;t in fact need to overturn society, assuming that that’s not the goal in the first place, in order to deliver ourselves from climate change. We simply need to change the incentives that people face. Thus the idea of a carbon tax of course.

But it is also true that this makes much of Richard Murphy’s blatherings about savings and the direction of their investment a nonsense. For he keeps insisting that savings must be invested in this and that in order to save the planet yet he never comes to grip with how it is that a return will be made by those savers. This then ignoring the base economic problem we have here, which is that while going Green is all very nice and all that it’s exceedingly difficult to capture those benefits.

You know, as the Stern Review points out at length, emissions are an externality not captured in market prices. So, investment to reduce emissions might be collectively good and beneficial but the person doing the investment doesn’t gain the personal return from that benefit. This is what externality means. Thus the economists answer, incorporate the externality into market prices. Or, another way of saying the same thing, make investment in those Green lovelies profitable to the investor and people will be lining up to do it.

The effort has to go into making solar, wind, hydro, wave etc profitable to investors. Once that is done we can leave normal human greed to deal with the rest of the problem for us.

In more detail if we make solar cheap enough that it’s profitable in its own right compared to the alternatives then we can again just leave the normal human reaction to a good deal to deal with climate change for us.

This is largely the Lomborg argument. Solar has been going down in price 20% a year for decades now. We can’t see any good reason why it shouldn’t continue. Make solar cheap enough – still further to go for this last part to be true – and we can easily overcome the expense of intermittency through varied storage means. Say, hydrogen and the associated conversion losses. There really is a price at which this is true which just brings us back to the economic insistence that prices, incentives, they matter.

This also works better than appealing to peoples’ social solidarity:

Based purely on economics, there should be a lot more solar panels on roofs in the United States. With the dramatic plunge in the price of panels, solar systems have become competitive with the cost of electricity in a growing number of states, leaving the question of sun exposure to be the primary driver of whether adoption makes sense. Yet photovoltaic-equipped houses remain a rarity in the US, despite many states pushing for the adoption of renewable energy.

So why isn’t that push working? To try to find out, a small team of researchers worked with a non-profit that promotes solar installs, helping test out two different message. One message focused on self-interest and emphasized the economic benefits of installing panels. The other was what’s termed “pro-social,” meaning it emphasized that installation of solar would bring benefits to the community. As the researchers found, self-interest was king—even after the promotion was over. But self-interest did have a side benefit in that the systems that were installed tended to get the most energy out of their panels.

The do it for the planet rhetoric is counterproductive. The human greed thing works once again.

Or, our strategy should have been, should be and should be to make being green profitable an hen we’ve really got them all by the short and curlies. Which is why the correct answer has always been markets, capitalism and a carbon tax.



  1. Renewables get subsidies. Subsidy is bad. Just occasionally it is the lesser evil, if constrained and temporary. Permanent subsidy is always bad. Solar is receiving subsidy. Not necessarily in cash. but in the ability to usurp other more despatchable forms of power when the sun finally shines. Those other sources are expected, required, to stand by not generating or making money while solar IS able to deliver. Any examination which does not take this into account is incomplete.

    (The subsidy comes straight from the punter’s pocket when the electricity retailer pays the grid.)

  2. “But self-interest did have a side benefit in that the systems that were installed tended to get the most energy out of their panels.” ? It is hilarious what writers reveal about their prejudices when tying up loose ends in an article. Words like “but, nevertheless” and “unexpectedly” introduce phenomenon well known to all but the deluded souls who’ve bought into the blathering.

  3. Oh dear, the old carbon tax again. If we want to stop people doing stuff and make them poorer, we tax them. Given that there is no viable alternative to FF, carbon tax stops us doing stuff and makes us all poorer. (This is one of the Big Six Worstall Fallacies but I guess that by now we’re getting used to them.)


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