Dick Schmalensee: Handicapping the Highstakes Race to Net-Zero: "Economists argue that a broadly applicable incentive-based system... could reduce emissions at a much lower total cost than any alternative regime. Incentives to reduce emissions could be produced directly by a tax on emissions or through... cap-and-trade system. But the argument for relying primarily on financial incentives has historically not been very persuasive.... Even in California and the European Union, where cap-and-trade systems for CO₂ have been established, so-called “ancillary” or “belt-and-suspenders” policies that target particular sectors or sources have also been deployed...
...Both jurisdictions subsidize renewables: the EU subsidizes energy efficiency, while California has a low-carbon fuel standard. To the extent that such policies affect behavior, they distort the patterns of investment and emissions abatement and so raise the total cost of abatement. Moreover, they reduce the carbon price implicit in the cap and trade systems, and thereby discourage productive investment and innovation in abatement technologies. If it persists, this neither-fish-nor-fowl policy architecture will make the path to net-zero both longer and more expensive. A clear focus on incentives will not be easy to obtain as a political matter, but if the heavy lifting is left to the future, it will only become more difficult to achieve.
It’s no accident that significant direct emission regulation has been adopted even in jurisdictions that have embraced the use of cap-and-trade systems. A high carbon price is a visible irritant to the body politic, so keeping the price low and using carrots rather than sticks to reduce emissions is the path of least resistance. Nonetheless, moving away from direct regulation and toward greater reliance on carbon pricing is essential to reduce the cost of getting to net-zero...
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