Save the environment, rescue the economy. What if you could do both? Nobel prize winning economist Krugman argues for cap-and-trade to reduce emissions while boosting investment.
Krugman won the nobel prize for economics in 2008. His basic argument here is that a gradual emissions limitation program would give private investors a reason to invest even in a contracting economy running under-capacity.
The boom of the nineties was based on the internet, a technology born out of government funding (DARPAnet). Is energy the next boom-creator, and is a gentle government nudge needed?
Interestingly, Krugman does not advocate government subsidies, but a cap-and-trade system. A fixed number of carbon permits are sold and traded in a market - you have to buy a permit if you want to emit carbon.
Basic rent theory would say that the price of permits would settle at the unit cost of carbon emission reduction. In simpler terms, how much would you pay for a permit to emit one unit of carbon? About as much as it costs you to reduce your carbon emission by that amount. This gives you an incentive to invest in technologies that reduce your carbon emission, one that does not involve the taxpayer spending on subsidies.
So far, it's "all goodness", as someone I knew used to say. Will it work in practice?
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