The visible hand in economics


Posted on: October 29, 2008

Greenpeace’s environmental plan has just been released and it says pretty much what you’d expect: be more sustainable. The thing about it that intrigues me is the presence of an emissions trading system, efficiency standards for all energy consuming appliances and legally binding targets for renewable energy usage.

The point of trading systems is to internalise the costs of emissions in the most efficient way by allocating the costs through a market mechanism. Why would you then try to second guess the market by forcing emissions standards and renewable energy targets on people?

If the standards are too high then they won’t bind and will just be useless and expensive to enforce. If the standards do bind then they distort the efficient allocation of the costs of emissions reduction. Governments who think they have better information than the marketplace should just regulate directly and not bother with emissions trading. Those which don’t – which is all or most – are simply regulating in a costly, needless fashion which reduces efficiency.

Is there something big that I’m missing?


4 Responses to "Franken-regulation"

[…] The visible hand in economics created an interesting post today on Franken-regulationHere’s a short outline […]

We cannot even set the standards until we arrive at a conclusion about what temperature we want.

Oooh, we get to decide what temperature to set the national themostat at!? Exciting 🙂

Putting the sarcasm to one side I think it is important to discuss why NZ wants to price carbon – externalities.

The fundamental external cost comes from the Kyoto liability – setting an ETS or a tax on carbon pays for this in the most efficient manner. It is not about “setting the national temperature” which is something NZ can’t do – it is about paying off a liability we have committed to in the most efficient manner.

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