The economic response to the growing scientific consensus on global warming seems naive and inconsidered. After reading a Robert Samuelson op-ed, I can think of many reasons why a global Pigouvian tax (or cap and trade system) is not going to happen:
- developing countries will not stand for it (and in any case economic growth is, rightly, much more important for them than global warming);
- governments are subject to a time inconsistency problem (there will be incentives to lower energy prices in the future) which investors can forecast and hence will be reluctant to invest in new technologies; and
- even if a global scheme is agreed upon I have not seen a convincing explanation of how you will measure how much carbon different firms are emitting.
In the face of this I think the simplistic arguments for cap-and-trade or a carbon tax are naive. Instead, governments have to rely on more direct and targeted interventions that do not rely on an unstable transmission mechanism. For example, governments could invest in clean-coal, nuclear or other carbon reducing technolgies (given the public good characteristics of innovation this could equally help 'correct' the behaviour of developing countries). For enforcement reasons, instead of putting an explicit tax on carbon it may have to tax products which use a lot of carbon (such as petrol, cetain metals, etc). I'm not really sure on the relative merits of such options but they seem much more attainable and realistic.