Editor’s Note: This is the second of two posts. Yesterday’s examined the need for a carbon tax as a way to reduce carbon emissions.
Real-time pricing of electricity is a logical complement to a carbon tax. Economists are fond of saying: “First, get the price right.” What they mean is, if we can take the actions needed to price a good or service at its full social cost, including externalities, we will have much less need to use crude and blunt instruments, like command and control regulation, to get results that maximize social welfare. By placing an appropriate price on carbon, we will take a major step in the direction of getting the price of electricity right by reflecting the social cost of the GHGs used to generate electricity in the price of electricity. We can complete the process of getting the price of electricity right by encouraging electric utilities to charge prices that reflect the highly variable social cost of electricity at different times.
The demand for electricity varies over a wide range depending on factors like weather. The demand on a hot summer day can be many times the demand on a cool fall day. We …
Editor’s Note: This is the first of two posts on market-based approaches to reducing carbon emissions. Today’s focuses on a carbon tax; tomorrow’s on real-time pricing of electricity.
There is a broad consensus among economists that we will not be able to mitigate climate change efficiently and effectively unless we place a price on carbon. Placing a price on carbon of $40 per ton or more would discourage use of carbon-based fuels. That, in turn, would reduce significantly the quantity of carbon dioxide, the most important greenhouse gas (GHG), that is emitted into the atmosphere.
Placing a price on carbon creates powerful incentives of two types. First, it encourages consumers to devise and implement methods of reducing their use of products and services that account for large emissions of GHGs. Second, it encourages tens of thousands of companies to increase significantly their research and …