This weekend an extraordinarily simplistic and frequently incorrect view of the global economy and the huge challenge it faces in climate change, made its way into the mass media.

The Mail on Sunday talked about Gordon Brown introducing a stealth tax to fight global warming, and said families with big cars would have to pay an extra £1,000 per year in tax. While on the Andrew Marr programme some guests seemed to think that taxes would have to be raised in order to fund the £3.6 trillion hit the global economy is expected to take from global warming. In fact, this is not the case at all.

The reality is that taxes are required to give consumers choice, the freedom to decide how important their need for energy is, and balance this against the cost of global warming.

The earliest economic theories said the price mechanism, in which price reflected the coming together of demand and supply, was the most efficient way for allocating scarce resources, but that sometimes, admitted these theories, there’s failure. Sometimes, when the producer does not pay the full cost of producing a product, price is not a fair reflection of the true forces of demand and supply, and to even the balance, taxes must be paid. And whether the producer swallows these taxes and its profits fall, or whether it passes them on to the consumer, depends on the alternatives out there.

So when the Mail on Sunday expresses the view that some families will have to pay £1,000 a year on extra tax for a car, it is doing no more than describing a capitalist system working. Why then was the tone of language, in this supposedly pro free market paper, so stacked against tax? To describe Gordon Brown as planning a stealth tax, when the reality is that any tax on pollution is likely to be made in the full glare of publicity, also seems a little odd.

While the Stern report is not yet out, (but by the time you read this it may well be) there’s no shortage of press reports telling us what it will say. Yesterday’s Observer led with the headline: “£3.68 trillion – the price of failing to act on climate change” and says that the report will warn that unless the world takes appropriate action, the cost will be £3.68 trillion. But if we were to tackle this problem head on today, the cost of avoiding it would be round £184 billion.

Reuters said that the Stern report will warn that climate change will plunge the global economy into a 1930s style depression unless measures are taken to avoid it.

And one very important statistic, that is expected to be revealed, but which most press reports have passed over, is that Deforestation is expected to account for 18 per cent of global emissions. Apparently, the entire transport sector including the bogey man of green protestors, air travel, will only account for half that amount. It’s a sobering thought, that of all the economies in the world, the most advanced user of bio fuel is Brazil, but it’s cutting down trees to grow the sugar to sweeten up its car’s use of oil.
Earlier this month, PWC, published a report saying the cost of measures designed to fight global warming is likely to come in at no more than two to three times the total GDP by 2050, a cost that the Independent reckoned would add up to 1 trillion dollars. It’s difficult to make a direct comparison between the cost of fighting global warming and the cost of doing nothing. For one thing, the cost of fighting it is largely an upfront expenditure, whereas the cost of doing nothing will be felt over hundreds of years. This begs the question should you apply a rate of interest computation to the comparison. After all if you were to discount the future cost of global warming, using perhaps the same kind of formulas that an accountant would apply to future earning when valuing a company, then in today’s terms the cost of global warming falls. Others argue that we owe the generations of the future more than that. That simply applying a discount rate to future costs that we incurred is morally repugnant.
The Stern report, however, may condemn this debate to the dustbin as it is expected to say the cost of fighting climate change is likely to be 1 percent of global output, and the cost of doing nothing is likely to be between five and 20 percent. And that would be something of a no brainier.
Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes.” For a global economy that is literally overheating, thanks to green house gases, it would appear two things are certain if this danger is going to be beaten. One is taxes, and two, for companies that operate in renewables, an extraordinary business opportunity awaits.

© Investment & Business News 2013