Calculating the cost of changing demand for emission reductions

The price of something is, in economics, established as a point where the demand curve meets the supply curve. So, too is the quantity of that thing that is traded.

Most climate policy has been, to date, about changing the shape of the supply curve for carbon dioxide emissions so that the price of carbon dioxide emissions rises and the quantity falls. Emission trading schemes, policies to tax fossil fuels, to prescribe emission limits to technologies, policies to subsidise clean technology – all are ways of making good things cheaper and bad things more expensive; that is, they try and shift the supply curve.

The demand curve reflects how much we are all prepared to pay for things. This is the aggregation of everyone’s utility function: the value to individuals of things. The demand curve changes with population size and shifts in tastes, aspirations and customs.

Policy-makers are generally uncomfortable with measures which try and change the shape of the demand curve – it is seen as an unacceptable intrusion or social engineering to try and meddle with someone’s tastes or aspirations. Of course, we do this all the time – what is advertising if not that – but still, there is political discomfort with the idea.

Notwithstanding political discomfort, it would be useful to have an idea of the cost of changing the shape of the demand curve. Perhaps the cost of moving the demand curve is actually lower than moving the supply curve. Perhaps if you move both at the same time, you get an even bigger effect?

So scientists, engineers and economists, who today are very focussed on the technology and economics of supply-curve changing policies, should also turn their attention to the technology and economics of demand-changing policies. Perhaps there are unexploited, undiscovered ways of tweaking people’s utility functions which turn out cheaper per ton of CO2 thereby reduced, than marginal improvements in renewable technology or the strugglesome attempts to constrain industrial greenhouse gas emissions.

We will have to examine distasteful things – how did bad people persuade large numbers of people to do bad things – and more positive things – how did good people persuade large numbers of people to do good things – in order to understand the technology of cultural change as well as we understand the transformation of sunlight into electricity. But academics at least should not shirk from examining the distasteful, even if politically incorrect, if the prize is an effective and painless way of preserving liveable life on the planet.

The marginal abatement cost curves which show to policymakers the costs of different ways of cutting emissions are generally flawed since they only include supply-side measures. Demand-side measures are harder, more difficult to measure and predict. But that does not mean they are more expensive. If our aim is to cut emissions cheaply, then more work is needed to understand them and calculate their costs.

This is a non-humorous revision of an earlier blog posts: http://www.thebustard.com/?p=1448 and http://www.thebustard.com/?p=1616 . Related posts are here: http://www.thebustard.com/?p=837  http://www.thebustard.com/?p=1525   http://www.thebustard.com/?p=1190  http://www.thebustard.com/?p=1210

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