Some economists and policy advocates present a carbon tax (or its close sibling, cap and trade) as the singular answer to climate change, but it’s been clear all along that pricing carbon is not a complete solution. It does little to address innovation, which will be critical to tackling global emissions, particularly from lower-income countries. And it creates large income transfers that in some cases harm the least affluent, and in other cases harm politically powerful market participants who will throw their weight against it. Variations of these critiques can be leveled at alternative policies as well.
But until we wrote our recent paper, Carbon Pricing, Clean Electricity Standards, and Clean Electricity Subsidies on the Path to Zero Emissions, we at least thought that what sets a carbon tax apart is that it is the most economically efficient intervention for decarbonizing a market. Our new paper demonstrates that even this common belief about the benefits of a carbon tax doesn’t always hold, and may not hold in one of the most important industries, electricity.