Geoscience Reference
In-Depth Information
WHAT ARE CARBON PRICES?
Something crucial is missing from our survey. We have concluded
that reducing concentrations of CO
2
and other greenhouse gases is the
only reliable way to slow the freight train of global warming. We saw
how much it costs to reduce emissions, and why all countries must par-
ticipate if we are to keep the costs down and why it is important to shift
power generation from coal to natural gas or low-carbon sources, to
develop energy-effi cient equipment, and to invent new low-carbon
technologies. People who are serious about slowing climate change
would probably agree with all these steps.
But this leaves individual choices out of the equation. What will
persuade you and me and everyone else to undertake the necessary
actions? How can we be induced to buy fuel-effi cient cars? To vacation
close to home rather than fl ying around the world? What incentives
will lead fi rms to redesign their operations in ways that reduce carbon
emissions while keeping their stockholders happy by maximizing prof-
its? What will convince scientists and engineers and venture capitalists
that a promising area for their talents is investing in new low-carbon
processes and products?
These questions are likely to make your head spin. Fortunately,
there is a simple answer. The history of economic interventions in the
energy sector and elsewhere shows that the best approach is to use mar-
ket mechanisms. And the single most important market mechanism
that is missing today is a high price on CO
2
emissions, or what is called
“carbon prices.”
Carbon prices? On fi rst hearing the idea of placing a price on car-
bon, and a high price at that, many people wonder whether this is some
hare-brained fantasy. Actually, the idea is fi rmly based in economic
theory and history. The main insight is that people must have economic
incentives to change their activities in ways that lower emissions of CO
2
and other greenhouse gases. The best way to accomplish this is by put-
ting a price on CO
2
emissions. This will in turn raise the relative prices
of carbon-intensive goods and lower the relative prices of carbon-free
goods, thereby bending down the trend of CO
2
emissions.
