Sunday, March 18, 2007

Pigou or Cap-n-Trade?

One of the big debates of climate change policy concerns the choice of regulatory instruments. Everyone knows we should not mandate technology adoptions or force across-the-board reductions. If environmental economics has taught us anything, it is to let the market forces work. Use taxes or tradable permits to take advantage of cost differences across industries and accomplish the emissions reductions but at a lower cost. These policies give individuals incentives to create ever more efficient means of reducing emissions, rather than simple compliance by adopting the currentl;y mandated technology.

The current debate centers around whether we should choose taxes or quanity policies. Should we institute a carbon tax or institute cap-and-trade carbon permits? Some of the iddues to think about are, "What do we know more about, the damage caused by emissions, or the optimal quantity of emissions?"

On this topic, here are a couple of good resources describing the advantages and disadvantages of the various policy options.

William D. Nordhaus, "After Kyoto: Alternative Mechanisms to Control Global Warming," (Silver City, NM and Washington, DC: Foreign Policy In Focus, March 27, 2006).

Steven Postrel, "Taxes al Carbon" at Organizations and Markets

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