Monday, February 25, 2008

More on Carbon Taxes

The unvieling of BC's carbon tax plan last week has been echoing through the blogosphere. Here's Tyler Cowen:

I haven't figured this out yet, but I'm experiencing ongoing worries. Let me try to articulate them, maybe one of you can cure me. One story I hear is that the new, carbon-friendly energy technology will be subject to decreasing costs, or alternatively increasing returns to scale. In other words, there are high start-up costs, but once it is underway it will be pretty cheap and lots of countries will adopt it. So: 1) the U.S. levies a carbon tax, 2) the U.S. incurs the start-up costs and invents or improves the decreasing cost technology, and 3) lots of countries make the switch. Voila!

It was reading about the new $2500 car, from India, that got me worried. Let's say the new technology is more carbon-friendly than what we do now, but still generates some carbon. (That sounds reasonable, no?) The new energy technology is really cheap, so lots more people -- most of all in China and India and Africa -- enter carbon-using sectors of the economy. Even if the new technology is three times as carbon-efficient, if the world as a whole uses three times more energy, carbon emissions do not go down. The basic problem is the combination of low costs and many people standing on the verge of the carbon-using sector of the economy.

Get the full version here

--I haven't heard the argument that new technology could increase emissions in developing countries before. For me this magnifies that need for a strong international agreement. I've said before that nations have came together when faced with a common threat, and that we could do it again. China and India have incentives to implement environmental regulations as their dense countries become more polluted. The EU and North America have reached (I think) levels where it is politically acceptable for the government to implement real reforms.

Despite this, we don't seem close to getting an EFFECTIVE international agreement. A bummer. It seems we are heading in the direction though. Just think of where the debate about climate change was ten years ago. I think we have reason to be optimistic about the next ten years.

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