Policy Forum: designing a carbon price policy: using market-based mechanisms for emission abatement: are the assumptions plausible?
Support for using market-based mechanisms (carbon taxes or emission-trading systems) to deal with climate change is based on a number of premises. This article discusses those premises, focusing on the claim that the promise of ever-rising implied carbon prices under such market-based mechanisms will support induced innovation in low- or no-carbon technologies. It notes that this claim assumes that promise to be credible and sufficient to induce the innovations required. It argues that the assumed credibility of such very long commitments is questionable, and hence, even in the best of worlds, the implied benefits are unlikely to arise. For a small country like Australia, the problems are then compounded by the absence of a credible, global agreement on emission reduction. Given that, the marginal benefits of investing in carbon abatement are likely to be very low or negative.
Ergas, H. (2012). Policy Forum: Designing a carbon price policy: using market-based mechanisms for emission abatement: are the assumptions plausible?. Australian Economic Review, 45 (1), 86-95.