<p>The justification goes back to the work of Pigou in the early 20th century. The essence is this: the burning of fossil fuels creates a negative externality: a cost that is incurred, but not by that consumer, but by the general population, and for a century or so.</p>

<p>This in essence creates a kind of <a href="https://skeptics.stackexchange.com/a/39965/6236">"social subsidy"</a>: the price does not fully reflect the costs. This means that fossil fuels are over-consumed, relative to the economically efficient quantity.</p>

<p>As I wrote on that other answer: the <a href="https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/" rel="noreferrer">"Economics Help" site explains the issue</a></p>

<p><a href="https://i.sstatic.net/dRZuY.jpg" rel="noreferrer"><img src="https://i.sstatic.net/dRZuY.jpg" alt="enter image description here"></a></p>

<p>The deadweight loss from fossil fuel consumption is the red striped triangle: this comes about because fossil fuel producers do not have to pay for their pollution, leading to a competitive advantage, and an artificially high quantity sold Q1 at price P1.</p>

<p>This inefficiency can be corrected (in long-run equilibrium) if the externality is priced back in - which is what the carbon price is intended to do.</p>

<p>Given the presence of fossil-fuel incumbents, their lobbying power, and their decades of direct and indirect subsidies, it is highly likely that a carbon price set at the marginal social cost of carbon would be an insufficient signal. A very helpful one, but insufficient on its own.</p>

CC BY-SA 3.0
2018-04-30T16:21:25.843Z
Price mechanisms can be contrasted with command and control approaches. For example, a $10 a tonne tax to reclaim some subsidy amount implicit in a do nothing approach, as compared to a quota system with prison/gulags for CEOs of companies that breach a quota. 'Do nothing' is also a useful point of reference.
nathanwww
CC BY-SA 4.0
2018-09-22T10:35:26.247Z
@energyNumbers thanks for the response. I suppose that the question I am interested in is not "why does a carbon price drive climate mitigation", which you have argued above, but "why is a carbon price the most efficient way to drive climate mitigation"? . So take for example the power sector that you have referenced. I see a lot of papers/pieces where economists argue that what is required is a carbon price, and this will drive fossil generation off the system and incentivise low-carbon generation. However, there are alternatives to this, the government could just directly....
hmmmm
CC BY-SA 4.0
2018-09-22T10:37:58.583Z
(ctd) procure the low-carbon generation required, or run competitive auctions for it to be delivered - as is done in many countries today. It seems to me that economists always assume the former (carbon price) would be more efficient than the later (procurement/auctions), but I struggle to see why this is necessarily the case?
hmmmm
CC BY-SA 3.0
2018-04-30T15:59:45.603Z
2018-04-30T15:59:45.603Z
410 gone
<p>To pre-face this, I am not an economist by education. Recently I have read a significant number of policy papers concerning climate change that make the claim, a priori, that a universal carbon price is the most efficient method for decarbonising the economy. </p>

<p>I am looking for a justification of this claim? </p>

CC BY-SA 3.0
2018-04-29T22:12:41.617Z
What justification did they offer in those papers? What shortcomings do you see about their justifications, or what else might be missing from their analysis?
nathanwww
<environmental-economics><climate-change>
Universal carbon price
hmmmm
# Universal carbon price

(Asked by: username_0 on 2018-04-29)

To pre-face this, I am not an economist by education. Recently I have read a significant number of policy papers concerning climate change that make the claim, a priori, that a universal carbon price is the most efficient method for decarbonising the economy.

I am looking for a justification of this claim?

**Tags:** environmental-economics, climate-change
> **Comments:**
> **username_1**: What justification did they offer in those papers? What shortcomings do you see about their justifications, or what else might be missing from their analysis?  

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## 1 answers

### Answer by username_2 on 2018-04-30. Score: 5

The justification goes back to the work of Pigou in the early 20th century. The essence is this: the burning of fossil fuels creates a negative externality: a cost that is incurred, but not by that consumer, but by the general population, and for a century or so.

This in essence creates a kind of ["social subsidy"](https://skeptics.stackexchange.com/a/39965/6236): the price does not fully reflect the costs. This means that fossil fuels are over-consumed, relative to the economically efficient quantity.

As I wrote on that other answer: the ["Economics Help" site explains the issue](https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/)

[![enter image description here](https://i.sstatic.net/dRZuY.jpg)](https://i.sstatic.net/dRZuY.jpg)

The deadweight loss from fossil fuel consumption is the red striped triangle: this comes about because fossil fuel producers do not have to pay for their pollution, leading to a competitive advantage, and an artificially high quantity sold Q1 at price P1.

This inefficiency can be corrected (in long-run equilibrium) if the externality is priced back in - which is what the carbon price is intended to do.

Given the presence of fossil-fuel incumbents, their lobbying power, and their decades of direct and indirect subsidies, it is highly likely that a carbon price set at the marginal social cost of carbon would be an insufficient signal. A very helpful one, but insufficient on its own.

> **Comments:**
> **username_1**: Price mechanisms can be contrasted with command and control approaches. For example, a $10 a tonne tax to reclaim some subsidy amount implicit in a do nothing approach, as compared to a quota system with prison/gulags for CEOs of companies that breach a quota. 'Do nothing' is also a useful point of reference.  
> **username_0**: @energyNumbers thanks for the response. I suppose that the question I am interested in is not "why does a carbon price drive climate mitigation", which you have argued above, but "why is a carbon price the most efficient way to drive climate mitigation"? . So take for example the power sector that you have referenced. I see a lot of papers/pieces where economists argue that what is required is a carbon price, and this will drive fossil generation off the system and incentivise low-carbon generation. However, there are alternatives to this, the government could just directly....  
> **username_0**: (ctd) procure the low-carbon generation required, or run competitive auctions for it to be delivered - as is done in many countries today. It seems to me that economists always assume the former (carbon price) would be more efficient than the later (procurement/auctions), but I struggle to see why this is necessarily the case?  

---

