Using the Market to Address Climate Change: Insights from Theory & Experience

(*See endnotes for complete contributor biographies.) Virtually all aspects of economic activity–individual consumption, business investment, and government spending–affect greenhouse gas emissions and, hence, the global climate. An effective climate change policy would change the decision calculus for these activities to promote more ef1⁄2cient generation and use of energy, lower carbon-intensity of energy, and a more carbon-lean economy. There are three ways to accomplish this goal: (1) mandate that businesses and individuals change their technology and emissions performance; (2) subsidize business and individual investment in and use of lower-emitting goods and services; or (3) price the greenhouse gas externality commensurate with the harm that such emissions impose on society. Externality pricing can promote cost-effective abatement, deliver ef1⁄2cient innovation incentives, avoid picking technology winners, and ameliorate, not exacerbate, government 1⁄2scal conditions. When all businesses and households face a common price