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1 See William D. Nordhaus, Economic Issues in Designing a Global Agreement on Global Warming 3 (March 10, 2009), http://www.econ.yale.edu/~nordhaus/homepage/documents/Copenhagen_052909.pdf (describing the lesson that all people must “face a market price for the use of carbon” as the economists’ “bottom line for policy”); Andrew E. Dessler and Edward A. Parson, The Science and Politics of Global Climate Change: A Guide to the Debate 108 (2006) (describing both emission fees and cap-and-trade as putting a price on each ton of greenhouse gases emitted). I have questioned the characterization of cap-and-trade as a pricing mechanism elsewhere. See David M. Driesen, Putting a Price on Carbon: The Metaphor, 44 Envtl. L. (2014) (forthcoming). I put aside questions about whether analysts should characterize cap-and-trade programs as pricing mechanisms for purposes of this Article.

The Limits of Pricing Carbon

David M. DriesenSyracuse University

ddriesen@law.syr.edu

Abstract

Many analysts agree that we need to put a price on carbon through either a carbon tax or a cap-and-trade program. And yet, some of the most dramatic successes in carbon abatement have come from policies that do not put a price on carbon. This article considers some of the limits to price as an effective mechanism for transformation of the fossil fuel economy.

Keywords

carbon tax – cap-and-trade – emission trading – carbon price – technological change – technological transformation – economic incentives – free market ideology – Kyoto Protocol – European Union Emission Trading Scheme

Many analysts agree that we need to put a price on carbon through either a carbon tax or a cap-and-trade program.1 And yet, our actual experience with reduction of greenhouse gas emissions points in another direction.

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2 Nuclear Energy Agency and Org. for Econ. Co-Operation and Dev., Nuclear Energy Data 43 (2013) (showing that France gets only 8.8% of its energy from fossil fuels).

3 See id. (showing that France gets 74.8% of its power production from nuclear energy); Dieter Helm, Nuclear Power, Climate Change, and Energy Policy, in The Economics and Politics of Climate Change 249 (Dieter Helm and Cameron Hepburn eds. 2009) Climate Change Economics (discussing France’s ownership of the entire technology chain for nuclear energy and state training of the nuclear workforce).

4 See Greg A. Hart and Dominic Marcellino, Subsidies or Free Markets to Promote Renewables, 3 Renewable Energy L. and Pol’y Rev., 196, 203 (2012) (showing a 20,000 fold increase in solar energy and 20% market share for renewables in 2011).

5 Samantha Booth, Community Solar: Reviving California’s Commitment to a Bright Energy Future, 43 Envtl. L. Rep. (Envtl. L. Inst.) 10585, 10590–91 (2013) (noting that Germany has become the first country to exceed 30 gigawatts of solar capacity because of its feed-in tariff).

6 Marc Ringel, Fostering the Use of Renewable Energies in the European Union: the Race between Feed-in Tariffs and Green Certificates, 31 Renewable Energy 1, 6 (2006) (explaining that a feed-in tariff pays renewable energy providers an above market price for the power they produce).

7 See Corporate Responses to eu Emissions Trading: Resistance, Innovation, or Responsibility 10–11 (Jon Birger Skjaerseth and Per Ove Eikeland eds. 2013).

When one looks around the world at great accomplishments in moving toward phasing out fossil fuels, pricing policies do not always figure promi-nently as causal factors. France’s entire utility sector, for example, burns very little fossil fuel and hence produces much less greenhouse gas than compara-ble industrialized countries.2 This achievement comes not from any pricing policy but from rigid state control of a program to design and build nuclear power plants and then to train plant operators in order to maximize safety.3 Germany, of all places, has become a leading user of solar power, with almost a third of its energy coming from renewable sources.4 In the process, zero-car-bon energy, including solar energy, has become much cheaper than it used to be. How has Germany achieved this? Not by putting a price on carbon that makes fossil-fuel burning more expensive, but by using a positive economic-incentive program called a feed-in tariff.5 This mechanism offers an above-market price for renewable energy, which encourages efforts to maximize renewable-energy production and reduce its cost.6 By contrast, the world has put environmental benefit-trading at the symbolic heart of its efforts to address climate disruption, but has realized only relatively modest emission reduc-tions through trading programs.7

This article considers the lessons we should learn from this juxtaposition. I do not reject the economists’ suggestion that pricing carbon is desirable, but

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8 See Myles Allen et al., The Exit Strategy, Nature Reports Climate Change (Apr. 30, 2009), http://www.nature.com/climate/2009/0905/full/climate.2009.38.html (calling for phasing out net carbon dioxide emissions altogether and leaving substantial fossil fuel resources in the ground); Michael Le Page, ipcc Digested: Just Leave the Fossil Fuels Underground, New Scientist (Oct. 1, 2013, 3:24 pm), http://www.newscientist.com/article/dn24299-ipcc-digested -just-leave-the-fossil-fuels-underground.html#.Utmzh_Qo4nK (interpreting the latest ipcc draft as a call to leave recoverable fossil fuels in the ground); James Hansen et al., Target Atmospheric CO2: Where Should Humanity Aim, 2 The Open Atmospheric Sci. J. 228 (2008) (concluding that “remaining fossil fuel reserves should not be exploited without a plan for retrieval and disposal of resulting atmospheric CO2”); Alex Morales, Fossil Fuels Need to Stay Unburned to Meet Climate Target, Bloomberg.com (Sept. 27, 2013, 9:48 am), http://www .bloomberg.com/news/2013-09-27/fossil-fuels-need-to-stay-unburned-to-meet-climate -target.html (same);Veerabhadran Ramanathan and Yangyang Xu, The Copenhagen Accord for Limiting Global Warming: Criteria, Constraints, and Available Avenues, 107 Proc. of the Nat’l Acad. of Sci. of the u.s. 8055, 8057 (2010) (including the replacement of fossil fuels with renewables as things we must do in order to halve emissions by 2050 while calling for 80% reductions by 2100); see also Henry Shue, Climate Hope: Implementing the Exit Strategy, 13 Chi. J. Int’l L. 381, 389 (2013) (pointing out that many of the studies cited above may understate the need for aggressive action because they focus only on carbon dioxide, ignoring other greenhouse gases).

9 Veerabhadran Ramanathan and Yangyang Xu, The Copenhagen Accord for limiting global warming: Criteria, constraints, and available avenues, 107 pnas 8055, 8056 (2010) (pointing out that the residence time for carbon dioxide is 1000 years); Thomas F. Stocker et al., Climate Change 2013: The Physical Science Basis, Summary for Policymakers, Working Group I Contribution to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change 25 (2013) [hereinafter ipcc 2013] (noting that “a large fraction of … climate”

argue that this juxtaposition points toward some underappreciated limits of price as a method to transform industrialized economies.

1 Climate Policy’s Task

Many analysts tend to define the policy aims of climate policy in conventional terms: We need to reduce greenhouse gas emissions. Although this is certainly true, putting climate policy in those terms suggests an incrementalism incon-sistent with climate science. Climate scientists remind us that we need to do more than simply reduce emissions; we need to phase out fossil fuels, reducing emissions to practically zero.8 This is necessary because most greenhouse gases remain in the atmosphere for centuries, so that new emissions add irreversibly to increased cumulative greenhouse gas concentrations in the atmosphere.9 The total atmospheric concentration of greenhouse gases, not

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disruption is irreversible and that even with “cessation” of emissions temperature will remain constant at elevated levels).

10 Howard A. Latin, Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed 20–21 (2012).

11 See id. at 20–21 (pointing out that a 10% cut in emissions implies continued additions to greenhouse gas concentrations in the atmosphere).

12 Elmar Kriegler et al., Imprecise Probability Assessment of Tipping Points in the Climate System, 106 pnas 5041, 5041 (2009) (discussing tipping points and our inability to accurately gauge the probabilities of triggering them).

13 See John C. Dernbach, Robert B. McKinistry, Jr. and Darin Lowder, Energy Efficiency and Conservation: New Legal Tools and Opportunities, 25 Nat. Res. and Env’t 7, 7 (2011) (characterizing energy efficiency as “low hanging fruit”).

14 See, e.g., Christian Azar and Bjorn A. Sanden, The Elusive Quest for Technology-Neutral Policies, 1 Envtl. Innovation and Soc. Transitions 135, 136 (2011) (discussing the problems of biofuels’ induced food shortages and nuclear waste disposal as reasons to doubt the desirability of pricing mechanisms’ technological neutrality).

the emissions of any one year, determines the magnitude of climate disrup-tion.10 Any year in which we reduce, rather than zero-out, emissions involves increasing atmospheric concentrations above current levels and hence an exacerbation of climate disruption.11 Furthermore, climate scientists warn us that the climate system may contain tipping points, which once crossed, may lead to catastrophic and irreversible changes. They do not know, however, how much warming might trigger one of the tipping points.12

All of this might suggest that we should get rid of fossil fuels immediately. But that is probably impossible. The science does remind us, however, that the ultimate goal involves eliminating, not merely reducing, emissions. And furthermore, it suggests that we should achieve this goal as rapidly as we can.

This need to eliminate emissions implies a radical change in the basic infra-structure underlying the economy. It suggests the need for drastic energy- efficiency enhancements and wholesale conversion of the remaining energy sources from fossil fuels to zero-carbon alternatives.13

The typical case for pricing policies rests on the observation that they provide an efficient means of reducing emissions. That is, they provide the least costly way to depart from the status-quo baseline. Some commentators have questioned the proposition that a technique designed to foster efficient incremental change works well enough for a problem that requires wholesale transformation of the economy.14 This question suggests that price may have some limits as an agent of transformative change.

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15 See David M. Driesen, Sustainable Development and Market Liberalism’s Shotgun Wedding, 83 Indiana L. J. 21, 35 (2008) [hereinafter Driesen, Market Liberalism] (listing the three trading mechanisms in the Kyoto Protocol); David M. Driesen, Free Lunch or Cheap Fix: Emissions Trading Under the Kyoto Protocol, 26 B. C. Envtl. Aff. L. Rev. 1, 28–30 (1998) (discussing trading under the “joint implementation” provisions of the Framework Convention);

16 See Blas Luis Pérez Henríquez, Environmental Commodities Markets and Emissions Trading: Towards a Low-Carbon Future (2013) (discussing the failure of the European ets to deliver substantial emission reductions); Stefan E. Weishaar, Emissions Trading Design, 87, 100–104 (2014) (discussing “over-allocation” of allowances in the European Emissions Trading Scheme and the Japanese program’s failure to deliver reductions); Regina Betz and Misato Sato, Emissions Trading: Lesson Learnt from the 1st Phase of the eu ets and Prospects for the Second Phase, 6 Climate Pol’y 351, 354–55 (2006) (finding that phase one allocation exceeded emissions and that as of 2005 phase II allocations were only 3% below phase I); rggi, rggi 2012 Program Review: A Summary of Recommendations to Accompany Model Rule Amendments (2012), www.rggi.org/docs/ProgramReview/ _FinalProgramReviewMaterials /Recommendations_Summary.pdf (acknowledging over-allocation of cap); Nathanial Gronewold, Consultants Say rggi Beats Emission Targets by Doing Nothing, Suggest Tighter Cap, Climate Wire (November 15, 2010), www.eenews.net/climatewire /2010/11/15/archive/4 (pointing out that rggi’s cap required no action); Emissions Trading Scheme Review Panel, Doing New Zealand’s Fair Share: Emissions Trading Scheme 2011/Final Report 17 (2011), http://www.climatechange.govt.nz (reporting that the New Zealand ets has not produced significant domestic emission reductions); Cal Code Regs Tit 17, Div 3, Ch 1, Subch 10, Art 5 (§ 95801 et seq.) (showing that California’s trading scheme only became effective in 2013); Alan Ramo, The California Offset Game: Who Wins and Who Loses, 20 Hastings W.-N.W. J. Envtl. L. and Pol’y 109, 113, 155 (2014) (pointing out that California’s cap and trade scheme is designed to deliver only 10% of the needed reductions and that many of these will likely be lost through a weak offset program).

2 Pricing’s Modest Record So Far

For almost two decades, the global climate regime has treated environmental benefit-trading at its centerpiece. The Kyoto Protocol envisions no less than three different types of environmental benefit-trading programs, and its prede-cessor, the Framework Convention on Climate Change calls for experiments with trading.15 Yet, in all this time emission-trading programs have yielded precious few emission reductions anywhere in the world.16

This failure does not prove that pricing cannot work to produce ambitious change, but it does prove that political commitment to pricing tools by itself does not necessarily produce significant progress in phasing out fossil fuels. After some two decades of very slow progress we need a closer look at this failure to realize ambitious goals.

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17 See Corporate Responses, supra note 7, at 11.18 See David M. Driesen, Capping Carbon, 40 Envtl. L. 1, 3–5 (2010) (explaining why the cap

is so important); Lesley K. McAllister, The Overallocation Problem in Cap-and-Trade: Moving Toward Stringency 34 Colum. J. Envtl. L. 395, 396 (2009) (pointing out that cap-and-trade’s environmental gains depend on the cap’s level).

19 Driesen, supra note 18, at 4 and n. 12.20 See Weishaar, supra note 16.21 See McAllister, supra note 18, at 410 (stating that “caps have not been very stringent”).

The European Union Emission Trading Scheme, the program in place the longest, has achieved so little primarily because the cap underlying the program has been very modest.17 This underscores an important point about so-called pricing policies. They do not automatically produce progress. The government designing the program must make difficult political decisions in order to get them to work well. In the case of a trading program, the most important decision involves determining the stringency of the cap.18 In the case of a carbon tax, the most important decision involves setting the amount of the tax. Modest caps and taxes will tend to produce very modest progress.

This may seem like an obvious point, but some of the rhetoric that pricing proponents use suggests that these programs “automatically” reduce emis-sions.19 There is nothing automatic about them. They depend on difficult government decision-making.

For this reason, in spite of the abysmal empirical record so far, pricing programs might prove capable of achieving significant changes. Governments can increase the stringency of the cap or the amount of a carbon tax. Indeed, the eu has increased the stringency of its cap and the Regional Greenhouse Gas Initiative, a trading program for electricity utilities in the northeastern United States, may well follow suit.20 Sweden and Denmark have made big strides in reducing carbon emissions in part because of high carbon taxes.

As it has taken some two decades for any country in the world to establish a reasonably demanding cap, one might wonder whether there is something about pricing policies that interferes with governments making hard decisions to adopt ambitious goals. Lesley McAllister, one of the few scholars to have studied cap-setting, argues that the problem of poor cap-setting is not unique to climate disruption, but has been a consistent feature of many trading pro-grams.21 Still, the question of whether there is something inherent in pricing policies that leads to weak goals does not yield an unequivocal answer.

One might think that pricing policies should make ambitious goals easier to set by lowering the cost of achieving them. The record suggests that the politi-cal economy of pricing is more complex than this simple observation would suggest. First of all, the success of Germany and France in using relatively

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22 David M. Driesen, Cap Without Trade: A Proposal for Resolving the Emissions Trading Problem Under caa § 111, 34 Envtl. L. Rep. (Entvl. Law Inst.) 10555, 10561 (2013).

23 See id.

costly methods that move toward phasing out fossil fuels suggests that some polities can take ambitious measures without using the least costly means of doing so. On the other hand, the failure of the United States to adopt meaning-ful federal climate legislation despite bipartisan support for trading suggests that in some polities the prospect of cost savings does not suffice to get good programs enacted. Perhaps ideology and values matter more than price.

This suggestion that ideology and values matter, raises some profound para-doxes for price as a mechanism. All pricing policies will fail unless citizens support governments enacting ambitious caps or taxes (along with other important design features requiring strong government, like a willingness to tax sectors using a lot of energy), yet the rhetoric supporting pricing policies tends to glorify markets at the expense of governments. In other words, the ideology supporting pricing as a mechanism undermines using price effec-tively to achieve environmental goals.

The history of the acid-rain program suggests that at least grandfathered trading programs can have political-economy advantages, but only in limited circumstances. In that case, the industry supported reasonably ambitious limits in order to obtain environmentalist and governmental support for the trading mechanism. Once governments commit themselves ideologically to trading, as many governments now have, industry does not need to support strict limits to get trading, and the political-economy advantages of trading with respect to industry cooperation may diminish or disappear. An example of this comes from current debates in the United States about carbon standards for power plants. In this case, some environmentalists support a trading mechanism because the added flexibility can facilitate setting stricter goals.22 For the same reason, industry opposes trading.23 Since the alternative to trading might be lax limits, rather than stringent limits without the flexibil-ity that trading offers regulated firms, they see little downside in opposing trading.

Furthermore, it has become customary to start carbon-trading programs off very slowly. The common excuse for this has been the need for “learning- by-doing”, but it has never been clear what exactly program designers expected to learn and whether they might learn more by using a more ambitious design at the outset. One might wonder whether the rhetoric about the magic of markets has persuaded governments that going slowly with ambitious limits will not matter.

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24 See David M. Driesen, Choosing Environmental Instruments in a Transnational Context, 27 Ecology L. Q. 1, 28–30–32 (2000) (explaining some of the reasons that capped programs can succeed and why program lacking comprehensive caps fail); David M. Driesen, Is Emissions Trading an Economic Incentive Program: Replacing the Command and Control/Economic Incentive Dichotomy, 55 Wash. and Lee L. Rev. 289, 314–322 (1998) [hereinafter, Driesen, Economic Incentive Programs] (contrasting the acid-rain program’s success with the failure of programs not relying on caps and good monitoring of all included sources).

25 See Driesen, supra note 18, at 44–50 (discussing the advantages of auctions in avoiding administrative delays and litigation over allocation of the cap to individual sources); Driesen, Economic Incentive Programs, supra note 24, at 333 (explaining how emissions trading complicates monitoring to verify compliance).

26 See David M. Driesen, Neoliberal Instrument Choice, in Economic Thought and u.s. Climate Change Policy 129, 133–141 (David M. Driesen ed., 2010) [hereinafter Economic Thought] (explaining how free market ideology has led to poor design of trading programs).

Certainly, the values and arguments supporting pricing mechanisms have played a big role in poor design. We know exactly how to design a successful program. The government caps all relevant sources, imposes stringent moni-toring, and only allows trades among sources with caps. That design proved successful in the acid-rain program, but programs lacking caps for all sources of credits and including poorly monitored sources fail to achieve their goals with astonishing regularity.24 Efficiency arguments undergird pricing mecha-nisms. And, in theory, allowing more sources into a trading program increases efficiency. Yet, a good design requires exclusion of all sources not susceptible to reliable monitoring and imposition of caps. The trading programs addressing climate disruption universally reflect rejection of sound design in favour of the ideologically preferred approach of overly broad trading.

Some of the slowness in realizing significant reductions from trading comes from difficulties governments experience in making design choices once they have rejected the known principles of rock-solid design in favour of theoreti-cally efficient design. I have argued that auctioning should make program design simpler, but absent an embrace of auctioning, trading design becomes more complex than traditional regulation.25 Similarly, taxation in principle should be simple, but most pollution taxes become riddled with complex exemptions that take time to negotiate.

Hence, if pricing policies can spur significant progress in phasing out fossil fuels, they can do so only if government adopts good design, including, first and foremost, ambitious goals. Pricing mechanisms can facilitate the embrace of ambitious goals, but the ideas that come along with pricing often hinder good design.26

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27 Marvin M. Brandt Revocable Trust v. us, 82 u.s.l.w. 4187, 4187 (2014) (discussing us support for the transcontinental railroad).

28 See Joseph P. Tomain, Dirty Energy Policy, in Economic Thought, supra note 26, at 45, 53–54 (discussing subsidies and other government support for fossil fuels).

29 See Cameron Hepburn and Nicholas Stern, The Global Deal on Climate Change, in Climate Economics, supra note 3, at 49 (stating that because of energy efficiency invest-ment’s insensitivity to price “carbon pricing” will do little to increase deployment of energy efficiency); see, e.g., Veronika Czakó, Climate Change and Sustainable Energy Action at the City Level: The Hungarian Experience, in Opportunities and Drivers on the Way to a Low Carbon Society: Proceedings of the Summer Academy ‘Energy and the Environment’ 95, 99–101 (2013) (discussing subsidies funding energy efficiency improve-ments in Hungarian apartment buildings). Cf. Robert N. Stavins, Addressing Climate Change with a Comprehensive us Cap-and-Trade System, in The Economics and Politics

3 On the Limits of Price as a Coordinating Mechanism

Government action has played a key role in creating past infrastructure transformations. A good example comes from the creation of the us transcon-tinental railroad.27 Fossil fuels, too, reached industrial scale with significant support from government subsidies.28 Major infrastructure transformations sometimes require initial expenditures so vast that industry cannot manage them alone. When industry cannot afford the needed expenditures, putting a price on some harm that the transformation should avoid will not solve the funding problem.

Government has often played a leading role in creating infrastructure because of the complexity of the coordination required to create needed infra-structure. Examples include the Manhattan Project, where the us government brought together leading scientists and provided facilities to build an atomic bomb, and the space program. Markets work primarily through individual transactions, but the coordination power of markets has limits.

Some aspects of the climate problem require the kind of coordination and funding that only government can provide. Europe has much lower transporta-tion emissions than the United States in part because its governments have built much better mass transit systems than exist in the United States. Furthermore, European governments have proven much more willing to make land-use decisions favouring smart growth. Land-use and transportation planning require effective governments, not primarily prices.

In the climate context, pricing policies are not especially good at stimulat-ing energy-efficiency improvements, which often provide the cheapest way of reducing carbon emissions. Many economists have noted that energy users do not respond optimally to price in adopting energy-efficiency measures.29

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of Climate Change, supra at 198 (stating flatly that polluters will undertake “all reductions” that are less costly than the allowance price in a well-designed cap-and-trade system).

30 Driesen, Market Liberalism, supra n. 15, at 43 (describing the lev program as a fleet-wide averaging approach that allows trades confined to new vehicle emissions).

The reasons for this vary. In some cases, energy users simply lack information about the techniques available to improve energy efficiency, a problem that governments have sometimes addressed through informational programs. Another problem comes from disjunctions between the person receiving a pricing signal and the person in a position to make investments that improve energy efficiency. For example, renters paying utility bills may not be allowed to install insulation or new windows to reduce the bill. Owners may not invest in energy-efficiency improvements that would pay off over the long run and therefore be optimal for society because they do not know if they will live in the house they own long enough to realize the cost savings. Finally, people with terrific energy-efficiency opportunities may lack the funds to make capital improvements with high up-front costs, even if energy cost-savings pay them back reasonably quickly. For that reason, governments frequently subsidize low-income homeowners’ energy-efficiency improvements. Price signals can have some influence on energy efficiency, but problems of transac-tion cost, imperfect information, and the distribution of capital can cause the signal to weaken or be lost entirely.

Trading programs authorizing trades outside a cap have special problems in encouraging energy efficiency. Generally, energy-efficiency improvements pay for themselves. In a trading program, the energy-efficiency improvements that would occur without a carbon price can generate credits justifying foregoing otherwise required emission reductions. In order to prevent this, rules require that polluters only purchase credits representing “additional” emission reduc-tions. But determining additionality is complex and information-intensive, so this restraint works very poorly. There may be good reasons for governments to rely on informational programs and specific energy-efficiency standards instead of solely relying on taxes or trading to encourage energy-efficiency improvements.

Another example of the limits of price involves its failure to stimulate inno-vations as a priority. When the California Air Resources Board (carb) tried to insist on zero-emission vehicles, the industry fiercely resisted the requirement. carb postponed the zero-emissions mandate, but kept an overall average- pollution requirement, in effect authorizing a trading program confined to tail-pipe emissions from new cars.30 This structure allowed manufacturers to avoid the production of electric vehicles. This case illustrates an important feature

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31 See David M. Driesen, Design, Trading, and Innovation, in Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, 436, 441–447 (Jody Freeman and Charles D. Kostad eds. 2007).

32 See Driesen, supra note 30, at 49–50 (explaining that cars were initially expensive luxury goods that eventually became cheap enough to serve a mass market).

33 See id. (describing computers as an example of a mass-produced good that started out as an expensive luxury item).

34 See Driesen, supra note 31; Driesen, supra note 30.35 See Driesen, supra note 30, at 66 (discussing how giving polluters the right to choose

abatement technologies impedes government capacity to evaluate risk/risk tradeoffs effectively).

of trading. It encourages the cheapest options, not the most valuable techno-logical advances.31 In the long run, we will need zero-emission vehicles.

Technological advancement frequently requires initially expensive invest-ments that lead to technological advances gradually reducing prices over time. Thus, cars started out as luxury goods affordable only by the rich, but eventu-ally became a much cheaper mass-produced product purchased routinely by many people.32 Computers, at one time, were generally too expensive for individuals; only corporations and research institutions owned them. But the costly initial investments in computer technology eventually led to cost savings making the product more affordable for all.33

Pricing favours incremental improvements over investments in the most promising technologies for getting to zero emissions across the economy. Thus, pricing policies may prove better in the short run than in the long run. I have discussed this issue at length elsewhere, but the main point is simple: Short-term efficiency and long-term technological improvement (and efficiency) do not coincide.34 This constitutes an important limit on the efficacy of price.

Another limitation of pricing policy comes from risk/risk problems. Technologies reducing greenhouse emissions can produce other environmen-tal risks. Pricing policies leave technological choices to market actors. This institutional choice may have value in bringing private creativity and knowledge to bear on solving a problem. But private actors may lack adequate incentives to consider ancillary risks.35 For this reason, the European Union refuses to recognize credits from nuclear power projects for use in its trading program, because of concerns about safety and radioactive waste disposal. One might debate whether this exclusion of nuclear power was necessary or wise, but it illustrates that private autonomy in technological choices has some downsides. The French, as noted above, have chosen to embrace nuclear power, whilst the Germans have rejected it. If one thinks that technological

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choices should reflect public evaluation of ancillary risks then the pricing model has some important limitations.

4 Conclusion

None of the foregoing necessarily negates the case for pricing mechanisms; properly designed pricing programs can accomplish something significant. Yet, pricing has limits in encouraging economic transformations. Further study of these limits will aid design of pricing policies and wiser choices about other policies needed to bring about significant changes.