When politicians get caught in economics denialism

Dr Oliver Hartwich
The Australian
28 February, 2023

When politicians talk nonsense about economics, it often goes unnoticed. This is likely both because nonsense is such a routine occurrence in democratic politics, and because many people cannot distinguish economic sense from nonsense. No doubt some voters think economics is not all that important anyway.

However, when politicians depart from the mainstream view on climate science, they can be sure to attract attention.

Last week, New Zealand opposition backbencher Maureen Pugh found herself in the spotlight after a disastrous interview. Pugh claimed to have seen no scientific evidence for humanity’s impact on the climate. A cursory look at the relevant literature may have helped, but she was holding out for the climate change minister to send her materials.

Pugh’s comments provoked a vehement reaction. Within hours she had to retract them, issue a prepared statement accepting human-made climate change, and receive a reading list on the subject from her party leader. Ouch.

To be clear, Maureen Pugh is not a prominent politician. Even before her interview, she was unlikely to have become a minister in any National-led government after the election.

Even so, Pugh’s encounter with climate science made headlines in the New Zealand media for several days. One journalist even wrote an opinion piece arguing that climate change deniers like her have no place in Parliament. Funny that – I had always thought seats in parliament had more to do with elections.

But this is not the place to delve into climate science, especially considering I am not a scientist.

The reality is, very few people are experts in this field. This includes climate sceptics like Maureen Pugh and climate activists like Greta Thunberg. Or indeed yours truly. Maureen, Greta and I could not design a climate model if our lives depended on it. My school physics and chemistry are a bit rusty, too.

As non-experts, our best course of action is to listen to individuals who have a better understanding of the science than we do. Ideally, we should seek the opinions of multiple experts to inform our own viewpoints. What better chance do we have?

But if this approach makes sense, then why not also apply it to economics, specifically climate change economics? Maybe we should even listen to economists? What a strange thought that is.

Well, the Pugh affair demonstrated New Zealand is not quite there yet.

The following day, after opposition leader Christopher Luxon had given Pugh a reading list on climate science, he discussed her on breakfast TV. As expected, he was grilled about having a climate science sceptic in his caucus. It was the typical kind of ‘gotcha’ journalism we have become used to. This was no longer about a lone MP with strange views, but about her party’s leader.

Towards the end of the interview, Luxon shifted the conversation towards the government’s supposed failures on climate change. He claimed that New Zealand was importing record amounts of coal and that this should be the topic of discussion, not his maverick MP.

Luxon’s argument is problematic. Even though he is right that New Zealand’s coal imports have increased since 2017 under the Labour-led Government, this is not at all relevant from a climate policy perspective. Understanding why this is so requires some basic economics.

New Zealand’s climate policy is based on an Emissions Trading Scheme (ETS) – a system that caps the country’s net greenhouse gas emissions except in agriculture. Emitting a tonne of greenhouse gases requires surrendering a carbon certificate. Net emissions cannot exceed the number of certificates that the government issues. It is really not that complicated.

The ETS in New Zealand is broad. It covers around 95% of GDP and roughly half the country’s emissions. The remaining emissions come from agriculture, which are not included in the ETS.

All other sources of carbon emissions, including those from turning on lights, driving cars, using petrol and diesel, and heating with natural gas, and even using coal for electricity generation, are covered by the ETS.

Therefore, for the opposition leader to scold the Government for New Zealand’s coal imports on TV is misguided and wrong. It simply does not matter how much coal New Zealand imports. Not a bit. The country’s non-agricultural net carbon emissions will always be the same. That is because New Zealand’s non-agricultural carbon emissions are determined by the cap in the ETS.

To be fair, Luxon is not alone in making this basic mistake. Far from it. Much of the current Government’s climate change policy is a variant of it.

The New Zealand Government is attempting to control emissions by offering financial incentives to companies that exchange old equipment with energy-efficient replacements. They are regulating to decrease petrol usage in cars, subsidising electric vehicles, and imposing extra taxes on petrol and diesel cars. They pay incentives to energy companies to shift to renewable forms of electricity.

Although these measures may, at first sight, seem reasonable ways to reduce emissions, they do not actually make any sense whatsoever in the context of the ETS. None of these policies will reduce New Zealand’s overall emissions, not even by a gramme. They are a gargantuan waste of money. It is the cap, and the cap alone, that determines overall emissions.

In economics, issues are rarely as clear-cut as this one. Once an economic activity is covered by the ETS and the emissions cap, that should be the end of the matter. The Government should not introduce any policies on top of it, and the opposition should not attack the Government on any specific emissions that fall under the cap. They should both stand back and let the system work.

There is an overwhelming consensus among economists on the workings of the ETS. In a recent survey of New Zealand economists, 88% agreed or strongly agreed that tightening the ETS is more cost-effective than targeting emissions already covered by the ETS.

As an economist, watching the Pugh affair play out was more than a tad frustrating. On one hand, an MP was widely condemned for not accepting the scientific evidence on anthropogenic climate change. Fair enough.

But the same politicians that criticised Pugh are pursuing their pet climate change policies irrespective of economic evidence and logic. That is just not on.

If you demand that your opponents “listen to the science” when it comes to climate change, you should not yourself be deaf to climate change economics.

And for politicians who still struggle to understand how the ETS works, perhaps there should be reading lists for that, as well.­­­­

Read more

Stay in the loop: Subscribe to updates