This is a response to Joseph Romm’s post “Happy thoughts and fairy dust.”

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Nothing like some good, old-fashioned back-and-forth to keep bloggers — and blog readers? — engaged. EDF is organizing a video/graphics competition to ask for help in explaining, “What is a carbon cap and how will it cure our oil addiction?”

Joe Romm critiqued the competition, calling it “bizarre” to ask others to help us “explain something that isn’t true.” I responded that MIT’s climate model supports us, which prompted another response titled “Happy thoughts and fairy dust: EDF’s and MIT’s magical thinking on carbon caps and oil.”

Phew, still here? Well, reading between the wizard pictures, Joe (can I call you Joe?) makes some good points. I just attended the latest MIT Global Change Forum. MIT modelers are the first ones to admit shortcomings in their own models. Chatham house rules prevent me from disclosing who has said what, but suffice it to say that, Joe, you made a good point about highlighting the biofuels assumptions in the MIT model. In the end, estimating “technological progress” in these academic models is one huge guessing game.

Many of these assumptions rely on expert opinions. That’s a good start, but clearly imperfect. (How many experts predicted mobile phones 20 years ago? How many predicted that the Segway would revolutionize transport?)

Still, if anything, many of these assumptions about technologies are conservative estimates. The simple reason is that no one can predict as of yet undiscovered technologies. If they could, they wouldn’t be in the prediction business, but they would be busy filing patents. Let entrepreneurs loose, and they find solutions to the darndest things. Cherry Chocolate Diet Dr. Pepper anyone?

Government clearly needs to set the rules to guide markets in the right direction (internalize externalities in wonk-speak), but markets fund innovation. That’s where cap-and-trade comes in: Government and science set the target; markets race to find the best way to achieve it. That’s a pretty good division of labor in my book.

And it’s worked for both environmental policies and for prizes for a long time. The British Parliament passed an Act way back in 1714 to pay the princely sum of ₤20,000 for a method that could determine longitude within 30 nautical miles on the high sea. No one predicted that the solution would have been a better chronometer that would also help jump-start the watch industry.

Back to the question at hand: Will a cap cure our oil addiction? It won’t do so immediately. Nothing will. But it will help us make large strides towards that goal in the long run. Should we have additional measures? Sure. California looks pretty good right now with its energy efficiency program that has helped keep electricity consumption flat since the 1970s, while the rest of the U.S. has gulped up more and more energy. Green or greener transit and infrastructure investments can’t hurt. And many other measures can help our necessary transition to a green collar economy.

Yet none of this will be enough without a clear set of rules to guide market-driven innovation and reward the most creative solutions with the big prize. In the real world, it’ll be a piece of the $5 trillion a year energy sector. In this case, it’s $10,000 for a smart way to explain how cap-and-trade works.