“Getting the prices right is necessary but not enough to solve climate change”. That was the main message from the World Bank’s Marianne Fay at a seminar organized in Geneva today by the Green Growth Knowledge Platform.
Launching a policy brief called “Decarbonizing Development: Three Steps to a Zero-Carbon Future” she expressed mild frustration with her profession (economics) that pricing is enough on its own and outlined why markets would still fail despite carbon pricing:
- there is a “principal agent” problem eg the landlord who does insulate a house because he know the tenant pays the bills;
- there is a lack of information to make informed consumer decisions for example on the most energy efficient household applicance
Given this market failure, there is therefore need to look at policy packages. These include for example:
- Subsidies for green energy R and D (most energy related R and D goes to fossil fuels).
- Targeted subsidies, eg. putting resources into solar than wind. Feed in tariffs currently benefit wind which has lower marginal prices today but there is greater low cost potential in solar.
- Use of performance standards – an instrument that is acceptable where pricing difficult to implement
Complementary policies are needed to increase “elasticity of response” i.e. the degree to which consumer response to price incentives. In the US, where there is little public transport, there will be “inelastic” responses to carbon pricing as there are few alternative forms of transport. There is therefore a need to build infrastructure. For example, the metro in Paris means there are alternatives to driving cars, so carbon pricing would result in elastic responses with people moving more easily than in the US to public transport and bikes.
Fay said solving climate change was essentially a political economy issues. ie. how to make policies politically palatable. To this end, it is necessary to avoid “concentrated losses”. For example, show how can the car industry benefit from decarbonization (eg. move to sell electric cars) and how direct investment be channeled to regions that stand to lose jobs with climate policies.
Finally, climate change policies need strong support on communication to reframe issues e.g. so the public understands about fossil fuel subsidies that divert resources from health and education.