The economics—and politics—of carbon pricing

The selection of William Nordhaus as co-recipient of the Nobel Prize for Economics raises anew the question of whether a compelling public policy idea generated within an academic discipline can survive and endure in the real world of politics. Nordhaus has long led a sizable and diverse chorus of economists, contending that the only plausible path toward climate protection would entail a market-based strategy. This would involve placing a price on carbon emissions from the use of coal, oil, and natural gas.

Either a carbon tax or cap-and-trade system could fit the bill. Ideally, such policies would set clear price signals over an extended time period, discouraging fossil fuel use and accelerating the search for more climate-friendly energy alternatives. Furthermore, they would foster this transition with the least possible economic disruption. The idea is both elegant and intriguing. It was propelled by a number of early experiments, ranging from a quintet of Nordic countries adopting carbon taxes to the heralded U.S. experience with cap-and-trade to cut sulfur dioxide emissions.

Varying forms of carbon pricing have been aggressively promoted by advocates in every international climate deliberation from Kyoto to Paris. Much of the voluminous academic literature on climate change has assumed that its widespread adoption was inevitable. However, compelling ideas from economics do not necessarily suspend the laws of politics. Carbon pricing presumes that politicians are willing and able to make the case for sustained increases in the price of commodities that are familiar and essential in everyday life. It further assumes that the public will rally to the cause.

In practice, carbon pricing adoption remains one of the heaviest political lifts anywhere in the world. Since the 1997 Kyoto agreement, the rate of non-symbolic carbon price adoption has been rather modest. And carbon taxes and cap-and-trade are among the most likely climate policies to be reversed after they have been launched.

In the United States, the political path forward is challenging at best. The U.S. House Climate Solutions Caucus nears triple digits in membership but a great many…

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.