Thursday, August 9, 2012

Eco-nomics: The Law if Unintended Consequences

Here, via The New York Times, is a cautionary tale of what happens when well meaning policy makers don't fully understand the science.
When the United Nations wanted to help slow climate change, it established what seemed a sensible system.

Greenhouse gases were rated based on their power to warm the atmosphere. The more dangerous the gas, the more that manufacturers in developing nations would be compensated as they reduced their emissions.

But where the United Nations envisioned environmental reform, some manufacturers of gases used in air-conditioning and refrigeration saw a lucrative business opportunity.

They quickly figured out that they could earn one carbon credit by eliminating one ton of carbon dioxide, but could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of a widely used coolant gas. That is because that byproduct has a huge global warming effect. The credits could be sold on international markets, earning tens of millions of dollars a year.

That incentive has driven plants in the developing world not only to increase production of the coolant gas but also to keep it high — a huge problem because the coolant itself contributes to global warming and depletes the ozone layer. That coolant gas is being phased out under a global treaty, but the effort has been a struggle.
The moral for this economist is that people respond to incentives and so it is critical to understand all of the incentives before implementing policy.

Perhaps the other moral is that you need to build in flexibility in policies so that you can quickly respond to unintended consequences.

Or perhaps the real moral is that the world clearly needs is more economists!