Energy, Governance, and Market Mechanisms

Abstract

As climate modelers’ projections materialize through intense storms, catastrophic flooding, unprecedented heat waves, and more, the need for substantial decarbonization within the next few decades has become increasingly clear. Transitioning to clean energy will bring benefits and drawbacks and will create winners and losers. Who will decide how we transition? Our choice of policy tools will have significant implications for who controls the transition and how it unfolds.

Many economists promote the role of market-based mechanisms like carbon taxes or cap-and-trade, mechanisms that rely largely on private actors to make crucial decisions. Under this view, government measures would fill in as necessary; they would complement market-based decarbonization mechanisms.

Although market advocates treat the autonomy of private decisions as one of the market’s central virtues, I argue that that approach could shortchange collective deliberation on critical questions about our future path. I argue that government-driven climate action planning and prescriptive strategies should play a central role. Governmental institutions have the capacity to engage in expansive deliberation over the many values and tradeoffs at stake, the capacity for long-term planning, and a greater capacity for public engagement and democratic accountability than atomized decision-making in the energy marketplace. In this view, a carbon pricing mechanism could play an important role—but one that complements governance rather than the other way around.

Keywords: climate change, global warming, democracy, cap-and-trade, carbon tax, carbon pricing, climate justice, environmental justice

JEL Classification: K32, Q54, Q52, Q48, Q42