Why Europe is Right on Climate Change

The normally-excellent John Kay seems to be very confused today, in a column about energy policy and climate change. Incredibly, he says that George W Bush is right, and that the Europeans, led by Angela Merkel, are wrong.

Kay's main problem is that he thinks Europe wants to reduce its carbon emissions by means of a big, overarching energy plan.

Energy, along with agriculture, is the last home of the methods of socialist planning. Agriculture exemplifies micro-management, in which yet more complex measures follow from the unintended consequences of earlier plans, and carbon trading promises to go the same way. Energy offers an irresistible temptation to engage in long-range planning because of the extended lead times associated with investment in both production and consumption. All such planning requires that those who would undertake it hold information that they do not have and to which they cannot realistically aspire...
We should not allow Europe's energy needs to be planned by multinational, multi-utility behemoths or set a target for the temperature of the world.

But there is no European conspiracy of governments and multi-utility behemoths, all engaged in a massive multi-year plan. That's the beauty of cap-and-trade. The governments just set a cap on carbon emissions and step back; the market does the rest. No long-range planning, no target for the temperature of the world, nothing.

Kay complains that "the carbon emissions trading scheme borders on farce, doing little to reduce emissions but providing a subsidy to emitters". He then says that tightening the scheme in future will not alter the fact of its "irrelevance". He's entirely wrong on both counts. For one thing, the scheme, though imperfect, is working. And as Europe sets increasingly stringent carbon-emissions caps, it will work better. This can be seen already in the futures price for carbon, which is much higher than the spot price.

Kay's proposed solution is... well, Kay doesn't have a proposed solution. Instead, he asks for "modesty of aspiration and acknowledgement that many uncertainties cannot be resolved". In other words, absolutely nothing. We can – we must – do better than that.