From the perspective of economics, greenhouse gas emissions represent a so-called “externality”. In economics, externality refers to the effects of the production or consumption of an economic good that are insufficiently reflected in the price of the good, or not at all. For example, the production of cement generates large amounts of CO2, for which (most) producers in the world do not have to pay any taxes. Similarly, we emit CO2 when we drive a gasoline or diesel engine car, without having to pay for the side effects of these emissions.
These emissions contribute to global warming in the long run and thus have a negative impact on the quality of life of mankind, but their polluters do not pay for this damage. Take Switzerland for example: we pay for road and rail infrastructure, but not for the consequences of thawing permafrost, melting glaciers, mudslides or flooding caused by extreme climate events resulting from global warming. For this reason, economists also refer to the lack of pricing for such negative externalities as a market failure. This is what led to the gigantic overproduction of greenhouse gases worldwide in the first place.
Now, there are two ways to correct this market failure. Either we build the cost of the consequences into the goods in question, i.e., adjust the market prices. For example, the aviation fuel kerosene is virtually tax-free today. This means that no consequential costs are priced into flights, which warm the climate and thus contribute to damage. One option, therefore, would be to tax kerosene – on the one hand, fewer flights might be made, while on the other hand the tax revenues could be used to alleviate the damage. However, it still seems illusory that the global community will agree on such an approach.
So there is the second way: levying incentive taxes. Switzerland had planned to do this in the CO2 Act, for example with a flat-rate surcharge on airline tickets. However, the law was rejected this year. Apparently, the majority of Swiss residents are not yet ready to take this step. Yet the CO2 tax on heating oil has shown that steering actually works well; It has reduced CO2 emissions from heating in Switzerland between 1990 and 2020 by more than 30%.
Whatever the citizens of a country decide, international pressure may well increase after the Intergovernmental Panel on Climate Change published its truly alarming figures and force countries to make certain goods more expensive. Switzerland would probably follow this step “autonomously”. It would be nicer if – as a rich country – it would set a good example and do it quickly and independently. We will by no means end up in socialism because of this. Instead, as “good capitalists” we are merely adjusting prices to reflect the effective costs.
This article was originally published in German in the NZZ.