Friday, June 27, 2008

Dubious Cap-and-Trade Skepticism

In a Washington Post op-ed, Bjorn "the Skeptical Environmentalist" Lomborg argues that more government funding for research is a better way to reduce carbon emissions than a cap-and-trade system, as in the Lieberman-Warner bill (recently fillibustered by Senate Republicans). He writes:
Politicians favor the cap-and-trade system because it is an indirect tax that disguises the true costs of reducing carbon emissions. It also gives lawmakers an opportunity to control the number and distribution of emissions allowances, and the flow of billions of dollars of subsidies and sweeteners.

Many people believe that everyone has a moral obligation to ask how we can best combat climate change. Attempts to curb carbon emissions along the lines of the bill now pending are a poor answer compared with other options.

Consider that today, solar panels are one-tenth as efficient as the cheapest fossil fuels. Only the very wealthy can afford them. Many "green" approaches do little more than make rich people feel they are helping the planet. We can't avoid climate change by forcing a few more inefficient solar panels onto rooftops.

The answer is to dramatically increase research and development so that solar panels become cheaper than fossil fuels sooner rather than later. Imagine if solar panels became cheaper than fossil fuels by 2050: We would have solved the problem of global warming, because switching to the environmentally friendly option wouldn't be the preserve of rich Westerners.

Lomborg seems to miss the point of a cap-and-trade: by making it more costly to emit carbon, the system would create incentives to develop energy alternatives and increase efficiency (a carbon tax would do the same thing). By changing relative prices, cap-and-trade will create opportunities for firms, entrepreneurs and inventors in the private sector to profit from developing less carbon-intensive methods of producing energy and products that use less energy. It would also give everyone an incentive to be less wasteful by bringing the price of carbon emissions in line with the true cost (i.e. reflecting the private as well as social costs).

Though government research grants might be helpful (as an academic, I can't argue against throwing more money at universities...) using market forces to mobilize the private sector is likely to be a more effective, lower-cost way of getting us to those cheap solar panels.

That logic is standard intermediate microeconomics, but Lomborg - who has a PhD in political science - doesn't appear to get it.

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