The Congressional Budget Office released a study about the role of prices and research and development in reducing carbon dioxide emissions. Carbon dioxide released by the burning of coal, oil and natural gas is the chief component of climate polluting greenhouse gases (GHG).
As usual, the CBO refrained from explicit recommendations, but their study makes clear the importance of combining efforts in both pricing (e.g. a carbon tax or 'cap and trade system') and R&D. It also makes clear that external costs of carbon emissions result in a failure of the market system to produce "voluntary" solutions sufficient to overcome short-term motivations.
From the Introduction: "The possibility of climate change involves two distinct 'market failures' that prevent unregulated markets from achieving the appropriate balance between fossil fuel use and changes in climate. One market failure involves the external effects of emissions from the combustion of fossil fuels—that is, the costs that are imposed on society by the use of fossil fuels but that are not reflected in the prices paid for them. The other market failure is a general underinvestment in research and development (R&D) that occurs because investments in innovation may yield “spillover” benefits to society that do not translate into profits for the innovating firm. The first market failure yields inefficiently high use of fossil fuels; the second yields inefficiently low R&D."
This study is useful in balancing the assertions by those policymakers that claim that "voluntary" measures are the best choice to deal with the climate threat. Doing so denies the reality of external costs and the limitations of the market economy to deal with them.
Congressional Budget Office - Evaluating the Role of Prices and R+D in Reducing Carbon Dioxide Emissions (September 18, 2006)
Posted by dougsimpson at September 23, 2006 08:28 AM