The typical baseline economist response to the problem of global warming is a very simple and straightforward one. Climate change is a negative externality, and the carbon emissions that generate it are easily targetable. The clear thing to do, then, is to place a tax on carbon emissions which will lead economic actors to internalise the cost of the warming they create with their decisions. This will discourage carbon-intensive activities and contribute to the development of clean alternative, reducing emissions and climate change.
Easy enough. Unfortunately, this strategy quickly runs into difficulty. One big problem is political. It’s very difficult to convince people to accept higher energy costs, and it’s very difficult to coordinate policy across countries, which is necessary to ensure that the policy works correctly. But there are also economic challenges. Society wants to avert a disaster scenario, which becomes more likely the greater atmospheric carbon concentrations rise. There is some uncertain but real threshold level of carbon that humanity needs to avoid. The closer the world is to that level, the faster the carbon tax needs to ramp up in order to prevent disaster, but the faster the carbon tax ramps up, the more painful it will be. Economies are good at finding substitutes for key technologies, but it does take some time. And so because the world has waited so long to act, it now seems that the disaster-avoiding carbon tax path may itself be too economically damaging.
As I mentioned earlier, what we know of both cap-and-trade plans and of the willingness of the American public (well, pretty much voters anywhere) to accept severe economic discomfort from higher energy prices suggests that carbon pricing will be only a smart part of the solution vs. a pro-research and innovation agenda. And that is where the economic research is leading as well. “The Environment and Directed Technical Change” by Daron Acemoglu, Philippe Aghion, Leonardo Bursztyn, and David Hemous: “Interestingly, in most cases, optimal environmental regulation involves small carbon taxes because research subsidies are able to redirect innovation to clean technologies before there is more extensive environmental damage.”
But US emissions are today declining not because of cap and trade — it died in the Senate two years ago — but because we are awash in natural gas. And we are awash in gas neither because of caps nor taxes nor regs but because of a government technology push started by Presidents Ford and Carter. … Over the next century, global energy demand will double, and perhaps triple. But even were energy consumption to stay flat, significantly reducing emissions from today’s levels will require the creation of disruptive new technologies. It’s a task for which a doctrine focused on the efficient allocation of scarce resources could hardly be more ill-suited.