You can’t conduct an orchestra with an invisible hand

The Problem With Carbon Taxes

…Historically, large-scale infrastructure changes take place only via hands-on government involvement — involvement that not only subsidizes technology but helps shape its deployment. This can consist of public works, or grants of land and rights of way that help shape where infrastructure is placed. You can find examples in List 1 at the bottom of this post, ranging from canals and railroads to the internet.

J.S. cites Synfuels and the original Apollo project as counter-examples. I note that both these involved “picking winners,” not deploying mature technologies. List 2 at the bottom of this post offers examples of mature technologies we could subsidize and deploy through a combination of public works, subsidies, and regulations, ranging from railways to insulation to solar water heaters.

What’s wrong with price signals as the primary mechanism to induce change? In economic terms, certain kinds of energy infrastructure tend to have low long-term elasticities (PDF). In English, that means large price increases result in small reductions in energy use.

For example, price increases that produced (among other things) much greater levels of insulation would cost consumers more than a simple public works program that raised taxes and used the revenue to pay for insulation upgrades (among other things). That, basically, is the meaning of inelasticity — that prices must rise a great deal more than the cost of the behavior we are trying to change.

Gristmill