5
$\begingroup$

To pre-face this, I am not an economist by education. Recently I have read a significant number of policy papers concerning climate change that make the claim, a priori, that a universal carbon price is the most efficient method for decarbonising the economy.

I am looking for a justification of this claim?

Improve this question
$\endgroup$
1
  • $\begingroup$ What justification did they offer in those papers? What shortcomings do you see about their justifications, or what else might be missing from their analysis? $\endgroup$ – nathanwww Apr 29 '18 at 22:12
5
$\begingroup$

The justification goes back to the work of Pigou in the early 20th century. The essence is this: the burning of fossil fuels creates a negative externality: a cost that is incurred, but not by that consumer, but by the general population, and for a century or so.

This in essence creates a kind of "social subsidy": the price does not fully reflect the costs. This means that fossil fuels are over-consumed, relative to the economically efficient quantity.

As I wrote on that other answer: the "Economics Help" site explains the issue

enter image description here

The deadweight loss from fossil fuel consumption is the red striped triangle: this comes about because fossil fuel producers do not have to pay for their pollution, leading to a competitive advantage, and an artificially high quantity sold Q1 at price P1.

This inefficiency can be corrected (in long-run equilibrium) if the externality is priced back in - which is what the carbon price is intended to do.

Given the presence of fossil-fuel incumbents, their lobbying power, and their decades of direct and indirect subsidies, it is highly likely that a carbon price set at the marginal social cost of carbon would be an insufficient signal. A very helpful one, but insufficient on its own.

Improve this answer
$\endgroup$
3
  • 1
    $\begingroup$ Price mechanisms can be contrasted with command and control approaches. For example, a $10 a tonne tax to reclaim some subsidy amount implicit in a do nothing approach, as compared to a quota system with prison/gulags for CEOs of companies that breach a quota. 'Do nothing' is also a useful point of reference. $\endgroup$ – nathanwww Apr 30 '18 at 16:21
  • $\begingroup$ @energyNumbers thanks for the response. I suppose that the question I am interested in is not "why does a carbon price drive climate mitigation", which you have argued above, but "why is a carbon price the most efficient way to drive climate mitigation"? . So take for example the power sector that you have referenced. I see a lot of papers/pieces where economists argue that what is required is a carbon price, and this will drive fossil generation off the system and incentivise low-carbon generation. However, there are alternatives to this, the government could just directly.... $\endgroup$ – hmmmm Sep 22 '18 at 10:35
  • $\begingroup$ (ctd) procure the low-carbon generation required, or run competitive auctions for it to be delivered - as is done in many countries today. It seems to me that economists always assume the former (carbon price) would be more efficient than the later (procurement/auctions), but I struggle to see why this is necessarily the case? $\endgroup$ – hmmmm Sep 22 '18 at 10:37

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.