Well Read: Hans van Mierlo on the economics of climate policy

Every week we ask SBE scholars to recommend an academic paper or book from outside their discipline. This week, Hans van Mierlo, full professor of public finance, recommends the papers “Economic Doctrines and Approaches to Climate Change Policy” by Robert D. Atkinson and Darrene Hackler (Information Technology and Innovation Foundation, October 2010) and “Climate Change Mitigation: A Role for Climate Clubs?” by Jon Hovi, Detlef F. Sprinz, Hakon Saelen and Arild Underdal (Palgrave Communications, 2016).

What is the genesis of your interest, as an economist, in the subject of climate change?

As of May 2000, I have held a chair in public finance, which is is a sub-discipline of economics. It consists of four pillars: taxation, public expenditures, public policies and public institutions. Its founders in the US are Richard Musgrave (Harvard University), and in the Netherlands Cees Goedhart (University of Amsterdam) and Theo Stevers (Tilburg University). In my work at Maastricht University, I focus on the latter two pillars, policy evaluation and institutional analysis.

In the early 1970s, I studied political science and political economy at Katholieke Universiteit Nijmegen (now Radboud University Nijmegen). My professors were Hans van den Doel (applied welfare economics) and Nico Douben (economics). Ever since then, I have been fascinated by the theory of collective/public goods proposed by Paul A. Samuelson and James M. Buchanan. The provision of these goods, combining non-rivalness in consumption and non-excludability of consumption, brings with it the problem of free rider-ship (as explored in Garrett Hardin’s seminal article “The Tragedy of the Commons”) and hence market failure.

So the government should step in, says economic theory. But how? And what should it do? Well-known government measures are classical regulation (setting quantity and quality), pigovian taxation (carbon taxes setting prices), and coasian quasi-market solutions (stock exchanges for emission permits). All three have serious problems. Policies that focus on only one measure have been shown not to work.

Why have you recommended these papers?

The reasons that climate policies do not work is analysed thoroughly in the paper by Atkinson and Hackler, which shows that we must go for a balanced combination of all three measures. The second paper I’ve mentioned here, by Hovi et al, goes further. Climate change policy is not a pure collective good but a specific sub-category: it is a club good, combining non-excludability and non-rivalrous to a certain extent. As soon rivalry occurs, excludability should be organised by pricing.

The famous example case is James Buchanan’s swimming pool. The first swimmer to enter the pool does not cause scarcity; hence non-rivalrous consumption and thus free access. But as soon as too many swimmers enter the pool, it gets crowded, and congestion and scarcity and rivalry arise. Non-rivalrousness turns into rivality in the swimming pool. This calls for excluding by pricing. If climate change policy is to be considered a club good, countries can be seen as a club of members (the IPCC) having to manage their club, controlling climate policy by a system of selective incentives (per Mancur Olson). And in turn an individual member-state consists itself of individual and institutional members, that (can/will/should) organise themselves as a club controlling their contribution to a climate policy that works better than has thus far been the case.

As a person and responsible citizen I consider myself a “sceptical environmentalist”. As a professional and rational economist I believe that our economic toolkit can help us to pursue a better climate policy. Both articles together inspire me to proceed on elaborating the path towards such a better climate change policy: not throwing away our economic tool kit as mere “economism”, but looking for better applications of it!