Climate Change -- Beyond "the-market-will-fix-it" approaches

It's fashionable these days to replace sound government policy with "market-based tools." This is particularly true for the conundrum of our time--how to avert full-blown climate change. Sure, it appears more simple and workable to get people to act on their narrow self-interest than to engage in the difficult process of public policy formation. So, the argument usually goes, just impose a carbon tax or establish a "cap-and-trade" system, and voila, the market solves the problem in an efficient and elegant manner.

Well, not so fast! Experience with cap and trade suggests that we still need intelligent public policy after all--otherwise, the whole thing either doesn't work or ends up enriching those who know how to play the carbon markets. Carbon taxes are needed to ensure that environmental costs are properly accounted for in prices. But they also need to be accompanied by other measures, otherwise the whole exercise is one of Environmental Darwinism. If you are rich or reasonably well off, you can afford to buy goods and services no matter how pricey they become, but if you barely make ends meet, then you'll have to tighten the belt...

Another problem is highlighted by a recent Washington Post article ("Small-Scale Businesses Forestall a Green India") . The article explains how many such businesses cannot afford the steep upfront costs of more efficient production equipment.

A carbon tax wouldn't make the situation any easier, it would just simply kill off these businesses. So, other policies are needed. They might include assistance in having several businesses pool their investments. They might subsidize the purchase of more efficient equipment. Clearly the specifics of such policies depend strongly on the particular circumstances of different industries, companies, countries, and regions. But let's not fool ourselves that "the market" will resolve these problems. The challenge of climate change requires more (and more intelligent) government action, not less.