Paul Ormerod: Prisons, incentives and how to save the planet

Criminals are refusing to leave Portugal’s prisons. According to the International Herald Tribune, prisoners are starting to want to serve the full amount of their sentences rather than be released on parole. This is despite the fact that there is record over-crowding and conditions inside are reported to be dire. Motoring offenders are increasingly failing to pay fines, opting instead to serve three or even six month sentences. This is a remarkable illustration of the effect of economic incentives.

Portugal’s economy is now in its fifth successive year of crisis. In prison, people are at least guaranteed accommodation, clothes, hot water and three full meals a day. Outside, many of them would be unemployed and struggling to pay for even the bare essentials.

The Coalition government is banking in the fact that people will respond to incentives in an even more straightforward way when it comes to energy. The changes announced last Friday will eventually quadruple the charges levied on consumers to help support electricity generation from low-carbon sources. And higher prices should mean that people will consume less.

This controversial policy is entirely in keeping with the trend in energy policy not just in the UK but in the rest of Europe. If we want to reduce emissions, we make energy expensive.

But is it the best approach? Unlike in the natural sciences like physics, it is hard for social scientists to conduct real-life experiments. However, in the case of emissions, a massive experiment is being played out before our very eyes.

Europe wants to try and solve the problem by making energy more expensive. In complete contrast, the US is making energy more affordable. And it is the American way which is delivering the better results. Since 2006, US emissions have declined by 8 per cent, the largest drop in any country in the world. This is quite unconnected with the economic crisis. Energy consumption is also connected to the total amount of economic activity. But GDP in the EU is only some 2 per cent higher now than it was in 2006, and in the US it is 6 per cent higher.

America has done this by technological innovation, by making things more efficient and, above all, by developing cheaper energy sources. Michael Shellenberger at the Breakthrough Institute in California points out that significant investment by both government and the private sector has made solar and wind energy much more efficient. Even more dramatically, the development of shale gas in America has led natural gas prices to fall by 80 per cent. So gas rather than coal is used to make electricity.

Innovation is the driving force behind the stupendous increase in living standards across the world over the past 200 years. Economics, with its emphasis on equilibrium, finds it hard to cope with the concept, because innovation means change. But it is innovation rather than incentives which will solve our emissions problems. To save the planet, invest in making energy cheap.

Paul Ormerod is an economist at Volterra Partners LLP, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World