Tuesday, July 08, 2014

Is it time to give up on pricing Carbon?

I've been coming to this conclusion for a while (summarized in this Tech Review article), that a price on carbon while great and likely first best, is futile given the political constraints of our global democratic system and just wasting political capital. I think the Obama Administration has come to this conclusion as well.

Ever since being there for the breakdown in talks at Copenhagen, as well as having my RAs comprehensively surveying the existing policies pertaining to climate change back at the CEA, I have come to two conclusions:

1) The political constraints are intense and binding
2) The impact of the optimal carbon price is quite small relative to existing policies.

While 2nd best, I don't think the lack of a global carbon price would be so consequential. Instead of carbon prices, we have loads of other existing policies like tax credits and fuel economy standards and renewable power mandates that put a effective price of carbon in many cases about an order of magnitude HIGHER than they need to be.

It is hard to imagine that instituting the optimal carbon tax which would raise coal electricity prices by say about 10-20%, would have much more effect on our energy system compared to the wild price swings from natural gas, or the massive tax credits and renewable mandates that have much larger effects on prices and quantities.

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