Thread by @tom_krebs_

The German government unveiled a major policy package to combat #climate change. The subsequent discussion in the German media shows the huge political and economic cost of a simple-minded focus on #carbon pricing – it’s the 1980s all over again! A Thread @BMF_Bund @JWMason1

The policy package contains a mix of mainly sensible measures: A slowly increasing carbon price, public investment (public trains), subsidies for switching to green technology, transfers to compensate “losers”, and a plan to move out of coal energy.

What happened in the subsequent media discussion is very interesting. As expected, there was critique of certain transfers and subsidies that some groups did not like (“waste of money”). Also, the opposition parties were critical – no surprise here.

However, what was stunning about the media coverage: There was very strong focus on one number, the carbon price. Very quickly many “independent experts” declared that the carbon price set by the government was far too low to achieve the climate goals.

Next, statements like “independent experts say the carbon price is ridiculously low” made it into news reports and talk shows. Implication: The German government is not serious about climate policy because only! a high carbon price makes you a good environmentalist.

Why is this focus on carbon price only so harmful? Because it pretends that all we need to do is to set the right carbon price and then the market will take care of the rest – the 1980s with a twist! It completely neglects, for example, the importance of public infrastructure.

Good public infrastructure is important because it provides an opportunity for people – in particular low-income people – to switch from high-carbon to low-carbon means of transportation. The elasticity w.r.t carbon price increases with public infrastructure and income.

This means the effectiveness of carbon pricing in terms of achieving the environmental goals very much depends on public infrastructure investment. In addition, the social impact of carbon pricing depends on public infrastructure, and this is not equivalent to transfers.

There was little coverage of the public infrastructure dimension on German news channels. Was this a typical case of bad media reporting? No, it was a case of bad economics/science working behind the scene. Why?

The German government and the media reporting relied heavily on two studies: “Start of a new climate policy” by the German Council of Economic Experts and “options for carbon pricing “ by the Potsdam Institute for Climate Impact Research.

Both studies disregard the issue of public infrastructure – the first report covers it in one paragraph on page 123 and the second not at all. Was this a simple oversight? I think not. Both reports convey a message with a clear political agenda. Which one?

The one that says: Only a small government is a good government. You want to invest more into the public train system to reduce carbon emission? Well, this might be bad because it reduces incentives for Tesla to invent flying busses – I kid you not.

So, boys and girls of the carbon-pricing fan club. If you want Reaganomics reloaded, go ahead (and say it). If you don‘t, think before you talk (policy).