In response to my Avent/Krugman/Gayer post the other day and the subsequent comments, a post on energy efficiency investments wrote itself (you can find it at Energy Collective).
The summary: Gayer's original piece makes sense and is being misinterpreted by the critics. He is not saying energy efficiency investments don't make sense from a social point of view. He is saying that the casual claim of negative net costs is not quite right. To illustrate this I extend the sidewalk dollar bill analogy to a more complicated transaction focusing on the discount rate.
Here is how I conclude:
So, I think the criticism made by Avent and Krugman is a bit unfair. It seems that all three players in the spat reach the same conclusion about the economics of climate change: that government action is necessary to provide incentives to firms to adopt energy efficiency investments. The best government action could be cap-and-trade or a carbon tax. I’m always surprised at the intensity of the debate among economists who basically agree over their disagreements about the minutiae of the issue.
And with that, I wish you a happy new year!
