I have been reading Sean Casten’s post on the economics of carbon pricing with interest. After some thought, here’s my take. A carbon tax or a cap-and-trade system will, without question, raise the price of energy, at least in the short term. In the long-term, it may well be that technological developments lead us to new energy sources that turn out to be cheaper than anything we have today. But that’s pure speculation.
But in the short term, the costs of a carbon tax or the costs of permits in a cap-and-trade system will follow the energy through the system and eventually raise prices at the consumer level. So prices will increase.
But that fact is a distraction. The real issues are, first, how much will prices rise, and second, what will happen if we do nothing?
The answer to the first question is that nobody really knows. Previous environmental problems are almost always cheaper to solve than predicted beforehand. Will that be true this time? Maybe. But we won’t really know until we actually implement a policy.
The second question is probably more interesting. While energy prices may rise in the short-term if we reduce greenhouse-gas emissions, doing nothing is likely to be disastrous in the long term. First, the risk of severe climate change by itself should motivate action. Second, it is now clear that we are running out of fossil fuels. As evidenced by the pain caused by the the present rise in energy cost, a true shortage of energy would be an unmitigated disaster, possibly comparable to the impacts of severe climate change.
The trade-off we face is consistent with many situations where short-term pain provides a long-term gain. For example, imagine a doctor tells his patient that the patient has cancer and can either do nothing and die in a year or undergo treatment and probably survive much longer. In this case, it should be clear that the short-term monetary costs and physical discomfort of treatment are well worth the long-term benefits.
We are in a similar situation now. There is clearly an upfront cost to reducing greenhouse-gases, but failure to pay that cost means that we will likely pay a much steeper long-term price.