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?

  • $\begingroup$ 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

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

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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.

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    $\begingroup$ 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

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