Publications Published in Human Induced Climate Change: An Interdisciplinary Assessment
Price, Quantity, and Technology Strategies for Climate Change Policy. Montgomery, W. David; Smith, Anne E..
Cambridge University Press Human Induced Climate Change: An Interdisciplinary Assessment:
This paper demonstrates that the standard market-based environmental policy tools of cap-and-trade and emissions taxes cannot provide credible incentives for the technological change needed to enable stabilizing atmospheric concentrations of greenhouse gases at any level, because there is a problem of dynamic inconsistency between what governments will announce as a future policy and what governments will subsequently be motivated to adopt as a policy. As a result of this dynamic inconsistency, efforts to address climate change by imposing caps or taxes in the near-term will fail to provide an adequate credible incentive for the research and development (R&D) necessary to lower the cost of long-term reductions. Additionally, even if the R&D externality is being effectively addressed, implementation today of a cap or tax that will not become stringent until a later date will provide little or no supplemental benefit in the form of an “announcement effect.” The only role for near-term greenhouse gas caps or taxes would be to achieve emissions reductions that are justifiable immediately because their cost per ton removed is less than the present value of the cost of avoided future emission reductions that would come from the future technologies, once they become available. Any other degree of stringency is unwarranted before R&D is successful, and unnecessary to supplement policies that will address the fundamental market failures associated with R&D.