Steven Levitt, author of the widely read Freakonomics, has been widely attacked this week for suggesting in a new book that governments, individuals and businesses face the wrong incentives needed to get them to reduce carbon emissions, and that it is hard if not impossible to find a way to overcome this fact.  He has written in response that he has been widely misunderstood, and that the rumors of his global-warming denial are greatly exaggerated. He says: “[W]e (he and his co-author) believe that rising global temperatures are a man-made phenomenon and that global warming is an important issue to solve. Where we differ from the critics is in our view of the most effective solutions to this problem. Meaningfully reducing global carbon emissions has proven to be difficult, if not impossible. This isn’t likely to change, for the reasons we discussed”.  Thus he suggests an engineering solution, rather than systems of penalties and incentives, which involves pumping sulfur dioxide into the atmosphere from 8 miles up.

His reasons are quite simple, namely that any solutions that require individuals, businesses and governments to reduce carbon emissions depend at a minimum upon them believing that they can count on others to do the same.  Such solutions require that each must respond collectively with measures that themselves inherently reward cheating by others, thus generating corrosive distrust.

All such solutions require rules to encourage actors to behave differently than they now do.   Incentives that in the absence of action reward emitting carbon (because it is cheaper to emit the carbon than stopping) have to be changed if we are depend on changed behavior.  Ones that penalize emissions (because it is more costly to emit carbon than stopping it) are needed.  But the creation of these involves an inherent and awkward truth – namely that most see the most advantageous situation for ourselves as one where we individually escape rules that others have to follow. This contributes to the rational belief, based on self observation, and honestly held, that others are like us and thus cannot be trusted to seriously enforce any rules adopted.  This in turn acts to discourage each from cooperating in the making of such rules, for the simple reason that each does not believe that others will actually follow any rules made.  Each acts on the assumption that none of the others intend to obey any new rules.  This kind of tendency “trickles up” in the sense that individuals believe that individuals and businesses will not seriously alter behavior unless rules are made and enforced by government, both believe that governments won’t unless they are made by all governments, and governments won’t make rules unless all governments make and enforce the same rules.  But governments do not trust each other (why would they; look at Canada’s behavior on Kyoto, for instance?). Thus all can agree that global warming is serious and man-made, that something must be done, but meanwhile hold back on action because they can’t trust the others.  That being the case, they all are discouraged from acting themselves to have rules – after all, that would be costly for them but nothing is going to improve unless all act together.  It is a classic vicious circle of mistrust and resulting paralysis.

Optimists hope that cooperative action can create a virtuous circle of action where each follows the leaders who are determined to act.  Levitt rejects this.  He argues there is just no incentive to follow such leaders, since each will always get maximum advantage by letting others act virtuously while taking the lower cost route of taking no action oneself while benefiting from the virtue of others.  He believes that fundamentally countries are self interested, which is the root of the whole problem, and nothing can change that.

He may be right.  We all hope not.  Many people think that there is a way around the problem, based on contract theory of government.  As long as every country, or at least every one large enough to matter, knows it will suffer global warming harm unless an international contract or treaty is reached, and each understands that it must set up a super national enforcement agency that can impose costly penalties, then the conditions for cooperative action through a climate change treaty can be developed.  That is the current theory.  But no one knows for sure this is true.  Kyoto does not provide a basis for hope.  So far, the possibility of something better at Copenhagen in December is not looking good.

We will find out soon enough whether Levitt is right.  If nothing happens at Copenhagen it may well be because there is not enough trust among countries that others will follow new rules and that too many will selfishly believe that they can escape the need to follow rules that apply to others with the result that none will agree to anything meaningful.  If so Levitt’s argument that self interest drives action in the wrong direction will receive support.  Rather than respond with outrage, we should all pay very careful attention to what Levitt has to say.  Because if he is right, we have a very big problem that we should all think about.