As we discuss “cap-and-steal” (aka “cap-and-trade”), “cap-and-sell” (aka “cap-and-auction”), and carbon taxes — three ways of putting prices on carbon — it is worth remembering that putting a price on greenhouse-gas emissions is not enough to bring them under control. Gristmill is full of posts showing ways to save carbon at a profit. David posted an interview on Recycled Energy today that points to something that has been known, but mostly ignored, for over thirty years.

I can, and have in the past, posted extensive theoretical musings on this. But the bottom line is that if we are ignoring available savings at current prices, it seems likely that we would continue to ignore savings at artificially higher prices.

This sometimes makes people jump to the opposite extreme; if (as I insist) we can cut emissions by 90 percent or more, at prices comparable to fossil fuel, why do we need to put a price on carbon alone?

The answer is while we can cut emissions at a total cost comparable to what we currently pay for fossil fuels, that does not mean that every component is individually cheaper. The existence of market imperfections does not mean that markets don’t have a role to play in solving the problem.

Let’s take green buildings as a concrete example. There are a fair number of green commercial buildings that consume 30 percent of the energy of the typical U.S. building, and pay back the costs of those savings in four years or less.

Let’s break down where paybacks from such green buildings come from. Typically, actual energy savings are the smallest part. Reduced maintenance costs (from changing light bulbs less often) and reduced capital costs (from things like smaller chillers) typically exceed energy savings. But both these savings are dwarfed by productivity as workers receive more sunlight, breathe more fresh air, and have better control over lighting level and temperature. Usually such increases in productivity are worth five or six times the value of energy, capital, and maintenance savings alone.

So why don’t all green buildings do this? Because the health and productivity benefits (which account for 80 percent of the return) can be gained just as well with a 30-percent energy savings, and sometimes with a 15-percent energy savings. In other words, a building that pushes all the way to a 70-percent savings in energy will save a great deal, but will get less of a return on its investment than a building that saves 15 or 30 percent. So if you really want green builders to save 70 percent of typical commercial consumption, you need to raise carbon prices to the point where it makes short-term economic sense to push the design past that 15- to 30-percent mark.

However, it is also worth noting that split incentives between builders, owners, and tenants often prevent most of these savings from being taken into consideration in the first place — energy savings, maintenance savings, or productivity increases. Builders routinely constructing commercial office buildings to a standard 70 percent more efficient than the current U.S. standard would require a combination of regulation and carbon pricing.

Okay. Why not simply regulate commercial office buildings, and put in a per-square-foot and per-employee standard?

Generally the success of laws and regulations depends on mostly voluntary compliance. If most people obey the rule or law, then enforcement can focus on the exceptions and not end up being overly intrusive; if the law is widely disobeyed, then it either becomes a dead letter or spawns a massive, horrible enforcement bureaucracy, as with our current war on [some] drugs. Put a price on carbon, in addition to reasonable quantity-based regulation, and compliance will actually save money — even if you don’t get caught breaking the rule. Yet you still need the rule in the first place, even with higher carbon prices, if you want actual savings anywhere close to the profitable private savings available.

To get real savings close to the 70 percent possible in commercial office buildings, you need both quantity-based regulation and a price on emissions.