by Megan Pillsbury
The 2006 Stern Review on the Economics of Climate
Change claimed that climate change “is the greatest and widest-ranging
market failure ever seen.”1
Leading
into Copenhagen, economists and politicians are debating the merits of two
market mechanisms to address this market failure: carbon tax and cap &
trade. Either will do what economists argue is needed, set a price for carbon.
However, I
would argue that they will in fact not ‘set a price for carbon.’ This is an
inaccurate phrase used by the business and economic communities who praise the
virtues of the market; it is even used in the Stern Review.
In fact,
carbon already has a de facto price: $0.
This may
seem an issue of semantics, but it has a significant impact on our mindsets. I
realized this while debating the merits of ‘setting a price for carbon’ with a
finance professor a couple of years ago. He argued that we shouldn’t set a
price for carbon because we don’t know what that price should be, the
implication being that the wrong price is worse than no price. Thus we should
wait until we have the right price before setting it.
But what we
have is a wrong price. And I can
pretty comfortably say that a price of $1 per tonne, even $10 per tonne and
probably even $100 per tonne, is more accurate than $0 per tonne of for carbon.
So let’s
stop talking about ‘setting a price for carbon’ and get on with correcting the
price for carbon, because realising that we have the wrong price now makes an
even stronger case for getting closer to the right price, even if it’s not the
exact right price, as soon as possible.
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