John,I appreciated your recent post in reply to mine on carbon taxes. I've written a reply here where I've tried to make my point more explicitly and clearly, because I think there was some misunderstanding in terms of the case I was trying to make:Thanks,Adam Ozimek
Thanks for the clarification. I tried to post a comment at your blog but I haven't gotten email permission in 30 minutes.
The big problem, I think, is that you said "In this way, a carbon tax could make global warming worse." This statement is misleading. If you actually meant to say that a carbon tax could make climate change worse relative to solar innovation grants then it would be more accurate to say that a carbon tax might be less effective at arresting climate change than solar innovation subsidies. Taken out of context, like Tyler Cowen did at MR, the statement can be interpreted to make the case that "free market environmentalism" (for lack of a better term) would be a much more effective non-policy than an actual government policy like a carbon tax. There are many readers out there who would rejoice at this interpretation. Everyone likes a free lunch.
I'm not convinced that solar innovation grants would be more effective than a carbon tax for several (largely uniformed) reasons: how does government pick these winners? Would the innovations affect fixed costs or variable costs? If fixed costs, then that would have less of an effect on price (is that right?). I still think any solar subsidy (per unit or innovation grants) lowers the price path and so we're still talking about reaching the switch point sooner or later. Looking at your graphs, it really matters how elastic vs inelastic those supply curves are. You picked the extremes to make the point but the relative elasticities are not that extreme, are they? And it seems like your model suggests that firms try to maximize market share instead of maximizing profit. If the industry is competitive then in the long run they will earn zero economic profits and then it doesn't really matter how much market share you might have.
Finally, it is hard for me to get past the notion that government should tax a bad thing and not tax a good thing in order to increase the efficiency of the economy. A revenue neutral carbon tax seems like it does just that.
Here is the original post: http://www.env-econ.net/2015/03/new-arguments-on-a-carbon-tax.html