The Breakthrough Journal (Blog) rips the notion of efficient allocation of scare resources (and Gernot Wagner). Ted Nordhaus and Michael Shellenberger:
Out of real-world evidence, Wagner falls back on economic theory. "[C]arbon is a pollutant; we need make polluters pay... Price goes up, demand goes down. Economists typically call it the 'law of demand'--one of the very few laws we've got."
But no exceptions to the law of demand are required to acknowledge that it is the pace and scale of innovation, not the efficient allocation of existing emissions mitigation options, which will most determine the overall cost of mitigating and adapting to climate change.
In the end, Gernot summed up our disagreement well:
It is, in fact, economics 101 that tells us to cap or tax pollution. It's economics 102 that teaches us about the process of technical progress, a place where Breakthrough could serve a very useful purpose. Denying economics 101 while trying to make an economics 102 point, though, isn't the way to go.
But when economics 101 was created in the 18th Century, there were one billion humans on the planet, mostly living on farms, using animals, wood, and dung for energy -- about 20 exajoules of it a year. Today, there are seven billion humans, mostly living in cities using electricity and liquid fuels, consuming 430 exajoules of energy annually.
Over the next century, global energy demand will double, and perhaps triple. But even were energy consumption to stay flat, significantly reducing emissions from today's levels will require the creation of disruptive new technologies. It's a task for which a doctrine focused on the efficient allocation of scarce resources could hardly be more ill-suited.
I tend to agree, that economic incentives can't solely solve the potential climate change problem -- society is going to need some significant technological breakthroughs. But, I also tend to disagaree because a carbon tax or cap-and-trade seem to be a wonderful way to creat incentives for technological change. In order to avoid those additional costs business firms are likely to innovate.
Also, economics 101 wasn't created in the 18th Century. It was born then (Smith), developed in the 19th Century (Marshall) and the idea to tax pollution was 20th Century (Pigou). And that is my version of the history of economic thought in 30 or so words.
