And that mathematician says \”I dunno, let the market sort it out\”.
I trust to science and am ready to believe there is some great mathematician, some Fermat\’s last theorem, who can write an equation showing where energy policy should turn. I have never met him.
The equation would start with the current market price of coal, gas, oil, nuclear and so-called \”renewables\”. That would give simple primacy to coal and gas. The equation would then factor in such variables as security of supply, which – being imponderable – can be argued from commercial interest and prejudice. Then it would have to take account of global warming and the virtue of lower carbon emissions. At this point the demons enter.
We must consider CO2 reduction through substituting gas for coal, carbon capture, nuclear investment, biomass, wind, wave, solar and tidal generation. We must consider the application of fiscal policy to gas and petrol use, to energy efficiency and house insulation. Each has a quantity attached to it and each a fanatical lobby drooling for subsidies. As for achieving a remotely significant degree of global cooling, that requires world diplomacy – which has, as yet, proved wholly elusive.
We actually have all of the tools that we need to deal with this calculation.
The first tool is to agree with the results of the socialist calculation problem of old. It\’s simply too complex a calculation to actually be done in anything approaching real time. Too much information is held locally and cannot be gained by the centre doing the calculation.
This does ot mean that the calculation is impossible of course. It just means that it\’s not going to be done by planners in an office. We have to turn to that other calculating method, the only one we\’ve actually got that can deal with the dispersed nature of information: the market.
However, we also know very well that the market unadorned does not deal with this problem. The effects of climate change are not incorporated into market prices and thus do not influence that behaviour which is guided by market prices. The externalities problem.
Which brings us to our second tool. We know how to deal with externalities: Pigou Taxes. So, we apply a carbon tax to emissions so that the costs of climate change are incorporated into market prices and thus influence those decisions which are guided by market prices.
And our third tool? The Stern Review. This tells us that the social cost of carbon emissions is $80 per tonne. Thus we add $80 a tonne to emissions and, whatever revenue is raised from such we reduce other taxes by the same amount.
We now have the future effects of climate change incorporated into market prices. We can now let the market be our calculating engine as to what we should do about climate change. We can simply ignore the politicians pontificating, shoot the lobbyists and all 65 million of us can go along in our own sweet manner of changing our behaviour as guided by these new prices.
In short, our mathematician is the market: we just have to feed him the right equation.