Carbon Pricing Response

Although a relatively new policy mechanism, carbon pricing has shown some very promising potential. It has been known for quite some time that certain industrial outputs can be harmful to the environment, both on a global and regional scale, but it has taken quite some time for economists to catch on and develop policy around curbing emissions. This being such a new utensil in the economic tool kit, governments should be extremely cautious in its implementation.

Like any uncharted policy territory, one must always watch out for the law of unintended consequences. Incentives to discontinue or reduce certain industrial practices that lead to pollutants aren’t any good if it causes a switch from one environmental issue to another. For example, a policy aimed at taxing carbon outputs in the energy industry may break down if producers switch to use of natural gas, for which the mining of comes with its own share of pollutants.

The goals of such a policy should also be taken into consideration when determining the proper application. If the desire is to combat global warming, odds are such policies wont have much effect. It would be as if trying to get extra memory on a hard drive by deleting the text files. In that case, it becomes difficult to properly set the price of a tax. Teitenberg also mentions the possibility of a global carbon policy. This may inflict huge damages on developing countries that cannot keep up with the costs of production.

In theory such carbon policy strategies look highly promising and extremely beneficial. In practice they show signs of promise, but there is no real long-term evidence to show that carbon policies are totally effective. The next decade should prove to be the ultimate test to carbon policies. The concerns above may need to be addressed in that time span, and carbon policy may go through dramatic transformation in order for it to be successful.