Geoscience Reference
In-Depth Information
20
CLIMATE-CHANGE POLICIES
AT THE NATIONAL LEVEL
Economics brings two central lessons to policies on global warming.
The fi rst, discussed in Chapter 19, is that people and fi rms must face
economic incentives to tilt their behavior toward low-carbon activities.
Activities that lead to emissions of CO
2
and other greenhouse gases
(GHGs) must become more expensive, which primarily requires raising
the prices of carbon-based fuels. This is an inconvenient economic truth
because people resist paying more for energy.
The second economic truth is that markets alone will not solve this
problem. There is no genuine “free-market solution” to global warm-
ing. We need new national and international institutions to coordinate
and guide decisions about global warming policies. These mecha-
nisms can use the market, but they must be legislated and enforced
by governments. This second truth is the focus of this and the follow-
ing chapter.
THE TWO MECHANISMS FOR CARBON PRICING
Governments can limit emissions and raise the price of CO
2
and
other GHGs through two mechanisms: cap-and-trade systems and car-
bon taxes. The present chapter discusses these systems and their rela-
tive merits.
The fi rst approach raises the price of CO
2
emissions by making them
scarce and is called “cap and trade.” It begins with legislation in which
a country caps or limits its CO
2
and other GHG emissions. The country
then issues a limited number of allowances that convey the right to
