The free market solution to carbon emissions is to work out the cost of external damages caused by pollution and force the polluter to pay via a Pigouvian tax (tax on any market activity that generates negative externalities)

Legislating markets

Is pricing our way out of an emissions crisis, possible? The Dept for Business, Energy & Industrial Strategy (BEIS) listed 17 interventions in their desires to intrude in the energy market.

Their wish list includes obligations on energy suppliers to source a proportion of their energy from renewables, Contracts for Difference which guarantee low-carbon electricity generators a fixed price above the market rate paid by consumers via a levy on energy suppliers.

Academics don’t have to bother with the practical. Problems…

Problem #1 Requires Gov to make forecasts about energy prices

”If the gov…contract(ing) on a tech-by-tech basis, and run multiple policy interventions, it needs to try to second-guess the results the market would otherwise have produced’. Prof Helm of Energy Policy, Oxford

Government is bad at forecasting prices. Subsidizing renewables was more expensive than first thought, switching from coal to gas should have been a much more important part of the decarbonization process. 

There is a difference between gov & market forecasts. Private companies investment decisions reflect their assessment of present value of projects. Prices are outcomes of competition, revealed in wholesale and capacity markets. Not assumptions. This is not necessary for Gov.

Problem #2 Complexity of interventions and how they interact make cost-benefit analysis undoable

This is regulatory capture: Asymmetric info b/w gov and regulators on the one hand, and the vested interest on the other, is a big problem, the more complex the interventions.

Problem #3 “Carbon” assumes a market

There is no parity, no buyers. How could it be rationally priced when we have to eliminate carbon demand to “protect humanity”. Should a market appear, it’ll be profitable, will participants want to resolve carbon away from their interests?

Problem #4 Rent seekers will lobby to have their preferred energy sources subsidized.

Every main energy company and energy-consuming company has a regulatory team and lobbyists.

Problem #5 Does not resolve that demand is still met by a real lack of alternatives

If I am the Carbon soaking company hit with taxes, why would I promote my competition, the practical solution for them is to distort the market using ads, long term pricing contracts, etc.,

Problem #6 Carbon taxes are regressive

It will be a proportional tax on consumption, lower-income households tend to spend a larger proportion of their income than higher-income households, new costs put higher burdens, as a share of current income, on lower-income households.

Problem #7 is to remedy problem #6 requires even more gov interventions

Redistributions financed through new taxes and mechanisms

Is a reasonable solution a unified carbon price that includes emissions from agri, transport, electricity? Revenue can be used to eliminate the perniciousness of the tax system and boosting investment by letting biz deduct fulls cost from their tax bills. https://bit.ly/34JCA7I

Should we let the government pick winners and assemble cartels? Government isn’t very good at picking winners, losers are good at picking governments.

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