Wednesday, January 23, 2013

Economic Heresy: Carbon Prices are Useless

My policy views tend to align pretty close to the economic consensus. Especially on the many issues where the profession is close to 100% in agreement. One where I disagree a bit (perhaps due to the cognitive dissonance of spending a year defending Bush Era climate policy) is that carbon prices are useless. The problem is that most cost-benefit analyses suggest relatively small carbon prices (that would say increase the price of gasoline or electricity by about 10-20%). However, the major externality is not the carbon externality, it is the technology externality. Such small carbon prices have had (in Europe where they have been in place for a decade) and likely will have minimal impact. This recent economist article on coal notes that despite Europe's carbon pricing, they have moved in the wrong direction on climate while the US's carbon price free economy is getting significantly more carbon free. The reason is largely due to shifts in technology (mostly natural gas related) that far swamp out any small carbon price effect. Which is why R&D focused policies (like the nearly identical policies under both Bush and Obama) may be far more important than carbon prices. Especially because technology has a better chance shifting behaviors in places like China and Africa, than political wrangling will.
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