What Should Policy Do About Carbon Emissions?
The Trump administration has been scaling back support for clean energy, generating backlash from those concerned about carbon emissions. Which view is more convincing?
Take as given that carbon emissions are a significant externality. Then, in principle, policies that reduce carbon emissions can be beneficial, even if they decrease measured GDP. This is because they might reduce unmeasured, negative components of GDP—the externalities—even more.
Clean energy subsidies, however, are a blunt instrument for reducing carbon emissions. While they lower the cost of non-carbon energy relative to carbon-based energy, they also reduce total energy costs. This incentivizes greater energy utilization, some of which comes from carbon sources. Thus the net effect of clean energy subsidies is ambiguous, and they have other costs that arise from distorted incentives.
A better approach is carbon (Pigouvian) taxation.
A Pigouvian tax unambiguously raises the price of carbon-based energy relative to other sources, thus shifting energy use toward a more efficient outcome. This also avoids the unintended costs associated with clean energy subsidies. Carbon taxes are unpopular, however, because their added energy costs are explicit. In addition, setting the tax at the right level can be challenging due to complexities in measuring the social cost of carbon.
Therefore, in practice, the least bad response to the risks from carbon emissions might be doing nothing, other than eliminating existing subsidies for carbon-based fuels.
Cross-posted from Substack. Isadora Millay, a student at Harvard College, co-wrote this piece.
Source: https://www.cato.org/blog/what-should-policy-do-about-carbon-emissions
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