In response to a NYTimes New Year's Day climate change and presidential politics editorial, the TerraPass blog deals with the concept of sacrifice and changes in relative prices.
Here is the meat:
Sacrifice implies giving up a bunch of stuff that you enjoy now and probably like a lot. Imagine lining up your 10 favorite toys and then picking three that you have to throw away. Isn’t that sad? In the real world, though, we make such choices all the time. Only we don’t call them sacrifices. Last night, for example, I opted to consume pizza rather than sushi, in part because pizza was cheaper. Yes, I nobly sacrificed my desire for yuppie food treats on the altar of caloric efficiency. Don’t call me a hero. I’m just a regular guy in extraordinary circumstances.
I’m not trying to be glib. Sushi is a luxury item, and energy is not. Increases in the price of energy are highly regressive. And, frankly, I am a little bit poorer in the technical sense for having to restrict my dinner options.
But let’s not exaggerate the situation. Reducing carbon emissions isn’t like living in war-time London. Every day we make consumption choices, based on the relative price of goods. Bike or drive? Steak or chicken? Insulate the attic or repave the driveway? If we put a price on carbon, millions of these decisions will start to break a different way. Consumers will look for substitute goods that provide similar benefits at lower costs. Producers will rush to meet this shift in demand by wringing carbon out of their supply chains.
Of course, not all of the climate change mitigation economic impacts will involve such stark changes in relative prices. Until the world relies less on carbon-based fuels, a cap-and-trade or carbon tax policy might lead to higher prices for goods throughout large sectors of the economy due to higher transportation and production costs.