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External factors must be handled carefully



Externalities should be handled with care

The Financial times has an interesting interview with Esther Duflo, who received the Nobel Prize for Economics in 2019. She argues that developed countries have a moral obligation to compensate poor countries for the damage caused by CO2 emissions:

If you combine these three figures you basically get the monetary value of the cost of carbon in the air. [University of Chicago economist] Michael Greenstone and his team estimate it at $37 per ton. So take $37 per ton, multiply it by 14 billion tons of CO2 emissions per year – that’s the total footprint, including consumption, of Europe and the US. And you get about a little over $500 billion a year. That is the damage we do to poor countries, just the mortality damage. Just from the rich part of the world to the poor part of the world.

So I call that a moral debt. This isn’t what it would cost to adapt; this is not what it would cost to alleviate. This is what we owe.

She advocates raising these funds by taxing the rich:

The minimum tax for companies is set at 15 percent [under an international agreement]. But originally the suggested number was 25. So I think: there might be a bit of margin. And if you went from 15 percent to 18 percent, you could raise about $200 billion a year.

And then in February, the G20 discussed Gabriel Zucman and the EU Tax Observatory’s proposal for a tax on the super-rich – a 2 percent annual tax on the wealth of the 3,000 richest billionaires. That would generate $300 billion. So if you combine the two, you get to your $500 billion.

I sympathize with her claim that Western carbon emissions have harmed poor countries, although as a utilitarian I don’t think in terms of “moral debt.” What does that sentence actually mean? Does this mean that transferring $500 billion from the rich world to the poor world would make the world a better place? If so, why not say so? Why speak in terms of moral debt?

By now I may have antagonized both sides: supporters of Duflo’s proposal and conservatives skeptical of utilitarianism. So let’s examine some specific flaws in Duflo’s approach to public policy.

Duflo is right when he argues that rich countries have imposed major negative externalities on poor countries by warming the Earth’s climate. But it ignores the fact that rich countries have also imposed large positive externalities on poor countries, or that these positive externalities have a order of magnitude larger than the negative external effects. Here are three obvious examples:

1. Western technology has caused the populations of poor countries to become much larger than they would have been without contact with the West.

2. Western technology has made life expectancy in poor countries much longer than before exposure to this technology.

3. Western technology has made GDP per capita in poor countries much higher than it would have been without it.

So if we were to take seriously the idea that external factors cause moral debt, we would be forced to conclude that the poor world must pay large reparations to the rich world. This idea seems absurd to me. To be fair, many people I talk to are in favor of forcing China to pay a lot more for the technology it has taken from Western companies. But these people are often silent about the West’s “moral debt” to paper, the compass, gunpowder, the printing press, and all the other Chinese inventions that have helped shape the modern world.

History is almost infinitely complex, and so any attempt to develop a ledger of net moral debits and credits, based on positive and negative externalities, will ultimately founder on a host of arbitrary judgments.

A second problem is that the tax proposed by Duflo makes no sense if the underlying problem is external factors. Economic theory suggests that the optimal remedy for negative externalities is to impose a tax equal to the external cost – in this case a carbon tax. (This assumes that transaction costs prevent a voluntary solution.) Instead, Duflo proposes a tax on the rich, which would do little or nothing to address the problem of global warming.

In my opinion, Duflo’s proposal is an illustration of what can go wrong when you replace utilitarian reasoning with deontological reasoning. When it comes to government policy, it doesn’t make sense to think in terms of ‘moral debts’. Rather, there are policies that stimulate total global utility, and policies that reduce total global utility. Policies that slow capital accumulation and do nothing to address global warming are unlikely to lead to an increase in global utility.

P.S. I am not arguing that victims should never be compensated for the damages they receive. Rather, I suggest that compensation schemes should be assessed on utilitarian grounds. Our legal system is therefore based on the premise that people and companies are generally liable for specific damages imposed on others.

PPP. I guess a wealth tax on billionaires sounds “progressive,” especially if the money is given to “poor countries.” But people like Bill Gates donate a greater share of their wealth to poor countries than rich governments, and it is likely that (dollar for dollar) his donations are more effective than those of governments. To be fair, Duflo suggests donating the money directly to the people in poor countries (which is much better than the approach used in many government-run foreign aid programs), but I suspect that once governments get involved, the money will ultimately flow from one government. to another.