Geoscience Reference
In-Depth Information
The reason is that they cannot fi ne-tune the response of different pro-
ducers and sectors. Second, even a robust set of regulations is unlikely to
achieve ambitious targets such as those set at the Copenhagen climate
convention. They might contribute in some sectors, but they are insuf-
fi cient to make a substantial contribution. Third, the selection of the
portfolio of regulations is a diffi cult problem because some options are
extremely expensive or even counterproductive, such as the use of corn-
based ethanol. Therefore, the regulatory approach alone is unlikely to
effectively address the climate-change problem, and defi nitely will not
solve the problem effi ciently.
This analysis indicates that the best approach to preventing “dan-
gerous interferences” with the climate is actually straightforward from
an economic perspective. The countries of the world need to move
quickly to a high and rising price on CO
2
emissions and other green-
house gases, and these prices should be harmonized so that they are
roughly equivalent in all countries. Such policies can be undertaken
with either taxes or tradable emissions limits. While the two mecha-
nisms are not identical, either could, if well designed, reduce emissions
to attain environmental objectives; would provide governments with
precious revenues to pay for public services or reduce other taxes; and
would do so in a manner that improves rather than impedes economic
effi ciency. This is one of those rare cases where the right solution is a
simple solution.
THE COMPLICATION OF ENERGY-COST MYOPIA
The previous section concluded that regulatory approaches to re-
duce CO
2
emissions are ineffi cient and sometimes even counterproduc-
tive. If that were the whole story, we could write off regulations as a
political convenience with little to recommend them.
But the regulatory story is more complex than this simple picture.
Analyses of energy markets have found many market failures and im-
pediments on the road to energy effi ciency. Some involve institutional
factors, such as the fact that people who rent houses have little incen-
tive to make energy-saving investments that may pay off in the long
run. A similar problem is seen in energy use in college dormitories.
