Ask an environmental economist what they would do about climate change, and more than likely they’ll tell you to put the right price of carbon emissions and let markets do the rest.
“It's a harmonized, level-playing-field way of getting the prices right and aligning incentives,” economist Kenneth Gillingham said in an interview with the AEA.
He added that, although carbon pricing should be the starting point for climate policy, carbon isn’t usually priced and governments instead use a variety of other tools to combat climate change.
Gillingham and co-author James Stock explained how policymakers should think about fighting climate change, even when carbon can’t be priced, in the Fall issue of the Journal of Economic Perspectives.
The fundamental problem with carbon emissions is that people who emit pollutants don’t pay for the damage they cause.
Pricing carbon would impose the costs on the polluters, but this ideal tool has been politically infeasible in the US. So policymakers have turned to narrow interventions like subsidizing electric cars and forcing power plants to reduce their emissions by adopting abatement technologies.
However, policymakers need good cost estimates to know if these policies are worthwhile.
Most discussions about the cost of reducing climate change start with estimates from the consulting firm McKinsey, known as the “McKinsey curve.”
The McKinsey curve estimates how much a policy would cost for one ton of CO2 reduction. It claims, for example, that switching to nuclear power would cost roughly ten dollars per ton of CO2 reduction.
But most economists balk at the assumptions behind McKinsey’s estimates.
Gillingham and Stock are concerned that the McKinsey curve hides many costs. When they looked at economic research that estimated the cost of carbon-reduction policies in practice, they found that costs were almost always higher, sometimes much higher.