There’s a clear economic solution to climate change: Losers must bribe winners

COP26 is wrapping up in Glasgow. COP, which stands for the Conference of the Parties, is organized by the United Nations. The number 26 signifies that this is the 26th year in a row that global leaders have given long-winded speeches but failed to agree on appropriate carbon-mitigation policy, let alone provide a mechanism for its timely and assured implementation. So President Biden was smart to use COP26 to snag a few minutes of shut eye.

Deals get done when all parties are at the table and all stand to gain. When it comes to climate change, the interested parties –today’s and tomorrow’s generations – obviously aren’t all at the table. And, at first glance, they seem to have diametrically opposed interests in limiting climate change.

Current generations, particularly in regions that rely heavily on fossil fuels, seek to use the cheapest energy available. If that entails burning fossil fuels and heating the planet well beyond the COP26-prescribed maximum 1.5 degree Celsius limit, so be it. Current generations will be dead and gone and their ghosts will, from all indications, have no remorse. In short, generations are selfish. If they weren’t, we wouldn’t be heading to COP27.

Were future generations, who face all manner of climate damage, present at COP26, they would surely seek to bribe current generations to immediately impose a hefty global carbon tax. But how to deliver the bribe? Easy. Future generations would tell current generations to cut their personal income and other taxes, leaving larger debts for them (the future generations) to repay once they are born. This would produce a generational win-win. Current generations would be better off thanks to paying lower taxes overall despite immediately implementing a carbon tax, and future generations would, on balance, be better off thanks to inheriting a cooler planet, albeit one in which they inherit larger debts to repay. 

Want proof that such a win-win scheme is feasible? Please read this just-released study I conducted with Felix Kubler of the University of Zurich, Andrei Polbin of the Gaidar Institute and the Russian Presidential Academy of National Economy and Public Administration, and Simon Scheidegger of the University of Lausanne. Our research appears to provide the most detailed, scientifically grounded dynamic, carbon-tax model yet developed by economists. The model features more than three million equations (non-linear, for my fellow math geeks) in an equal number of unknowns — all solved to an extremely high degree of precision. 

This precision matters. It means that all aspects of the model’s solution can be fully verified and intuitively explained. Yes, it’s a black box to non-economists. But so is a new Porsche to all but its engineers. When you floor a Porsche, you know it’s working. The same is true with our model when you put it through its paces.

Our model is large (has lots of equations), in part because all the world’s countries are combined into 18 large regions, each with its own temperature increase and economic damages arising from global warming. The model also incorporates the truly amazing and terribly scary global population explosion and population aging projected by the UN through the course of this century.

And it includes the unsustainable fiscal policies being pursued by the U.S. and other industrialized regions — the policies Sen. Joe Manchin (D-W.Va.) quite properly keeps warning us about. On the positive side, it assumes that many regions, such as China, will continue to narrow the productivity gap with the U.S. Finally, the model considers the extended period over which carbon will heat up the planet.

Our study shows that a $100 per-ton carbon-emissions tax growing at 1.5 percent per year above inflation plus appropriate generation – and region-specific net compensation payments (i.e. bribes) – would produce not just an intergenerational win-win, but also an interregional win-win. Indeed, our paper solves for the highest uniform welfare improving solution, delivering a lifetime net living-standard gain to all mankind, no matter when and where they are born, of more than 4 percent. 

What does this deal comprise beyond the annually rising global carbon tax, which would raise today’s U.S. gas prices by roughly one dollar a gallon? It would mean bribing current generations across the planet to accept the carbon tax and requiring almost all future generations to pay off the bribe, including accumulated interest. Future generations in certain very cold regions, particularly Canada and Russia, would receive money since they would be giving up the advantages to them of a warmer planet.

In the case of China, the world’s worst carbon emitter, which largely holds the temperature of the planet in its hands, the optimal win-win policy involves major payments to current Chinese to tax carbon and, thus, burn far less coal. But it also entails major payments from future Chinese who, like everyone in every region and every generation, will be, on balance, equally better off. 

This may all sound like pie-in-the-sky since no one from the future is around today to negotiate our proposed win-win intergenerational and interregional compact. But that’s where the UN or some other global institution can play a key role. They can stand in as today’s fiduciaries for future generations and immediately cut the requisite deal.

The UN could, for example, issue (sell) climate bonds and use the proceeds to compensate current generations in each country to the appropriate degree, as spelled out in our study. Through time each country would need to collect the appropriate amount of taxes from their future generations and give the funds to the UN to let it make principal plus interest payments on its outstanding climate bonds. If a country didn’t pay what it owed, its older generations wouldn’t get paid the amount owed on their holdings of climate bonds. Hence, our scheme has an internal enforcement mechanism. 

Why have economists failed for so long to provide a solution to climate change that recognizes the inherent selfishness of successive generations? My answer is that realistically calculating the win-win deal that gives all generations in all regions an equal stake in resolving climate change (the deal with the best chance of political adoption) is not easy. Our model took years to construct and calibrate and is based on decades of prior research.

Absent this model, climate economists have, in effect, searched for their keys under the lamppost, making the absurd assumption that generations are altruistic toward each other. This permitted far easier calculation of the “optimal” carbon tax, but quickly devolved into a debate over the proper degree of intergenerational altruism to assume. In short, climate economists transformed carbon policy into a moral question and, out of expediency, abandoned our positive science. 

The hour is very late. Economists must explain with one voice that the only practical solution to climate change is immediate carbon taxation coupled with bribing apparent carbon-tax losers to ensure they have the same stake in the policy as apparent carbon-tax winners — who must help pay the bribes once they are born.

Laurence Kotlikoff is a professor of economics at Boston University, author of “Money Magic” (forthcoming) and a regular contributing columnist for The Hill.