Monday, February 25, 2008

Carbon Taxes and the IPAT equation

In class last friday, we were discussion the IPAT equation: Environmental Damage = Population * Affluence * Technology. Recall, that they way to offset, say, growing carbon emissions due to growing population and/or consumption per capita is with vastly improved technology.

One of the arguments for carbon pricing (e.g., a carbon tax) goes like this: carbon reducing technologies are subject to increasing returns to scale (as the market gets bigger it gets cheaper to produce them), imposing a carbon tax will dramatically increase the size of these markets leading to substantial declines in the price of these technologies leading to mass adoption of these technologies around the world.

Over at Marginal Revolution, Tyler Cowen is concerned that this process may not lead to a lower total amount of carbon emissions:

It was reading about the new $2500 car, from India, that got me worried. Let's say the new technology is more carbon-friendly than what we do now, but still generates some carbon. (That sounds reasonable, no?) The new energy technology is really cheap, so lots more people -- most of all in China and India and Africa -- enter carbon-using sectors of the economy. Even if the new technology is three times as carbon-efficient, if the world as a whole uses three times more energy, carbon emissions do not go down. The basic problem is the combination of low costs and many people standing on the verge of the carbon-using sector of the economy.

Or to put it another way, eventually gasoline costs become a very important part of the total cost of a car. Then say that cars become much more gasoline efficient. Lots more people can afford cars.

In brief, Cowen is concerned that technology also increases affluence (i.e., the amount consumed per capita), so simultaneously technology may be reducing the amount of carbon emitted per unit but increasing the number of units per person. It is not obvious that the net effect of such a change in lower total emissions.

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