The carbon pricing paradox

Carbon pricing, in varied forms, is an expression of economic theory known for close to 100 years, and has been proposed in climate policy analysis for 35 years. Yet global progress remains patchy and clearly inadequate, and in the US – the country in which economists most actively and persistently promoted the carbon pricing agenda – carbon pricing is generally considered “off the table” of any serious political debate.

To date, the IPCC has consistently failed to reach either consistency, between models and empirics, or consensus, between IPCC authors with conflicting world-views on carbon pricing. This talk would outline this background, arguing a missed opportunity in the Sixth Assessment.

Against this realpolitik empirical background, this talk would advance a paradox: that carbon pricing can only succeed if its proponents become more modest in what it can realistically deliver; more fundamentally aware of not just distributional but also of political and psychological determinants; and acknowledge the vital contribution of complementary policy instruments. Building upon a recent paper in the Oxford Journal of Economic Policy, the presentation will advance a broadened economic theory, as well as political basis, for regarding other instruments not as “second best”, but as part of a set of complementary actions necessarily required to foster deep decarbonisation.

At the same time, the presentation will warn against a growing tendency in some academic circles to diminish or disregard the contribution of carbon pricing entirely. Drawing upon empirical observations about the importance of energy prices over long periods, as well as more fundamental economic principles, the paper will argue that in the long run it will be impossible to secure deep decarbonisation without strong and robust carbon pricing.

The challenge is how to get there, and intersections of evidence, theory, and process we might need to do so.