Carbon pricing is a better way to reduce emissions than green subsidies

The favourite way of reducing climate change emissions seem to be subsidies or regulation in favour of whatever pet project people think is best. This is unfortunately both an expensive and a dangerous way of reducing pollution.

Subsidies doesn’t incentivise reduced resource use
Firstly, promoting change of behaviour through subsidies (for instance for wind power, or electric cars) doesn’t reduce people’s desire to consume the good in question – since it doesn’t get more expensive (actually, it gets cheaper!). But in fact, wind generated electric power is more expensive than conventionally produced electricity – if not we would have used wind power already. We are just paying for the power through taxes, but receives no incentives to reduce our consumption through higher prices.

Subsidies do not tend to prioritize the cheapest emissions reductions
Subsidies or regulations are also very bad at ranking different emissions reducing schemes against each other and picking the method that gives most reductions at lowest cost. Using price mechanisms such as taxes or tradeable CO2 quotas as a regulating tool will quickly focus resources on the most effective emissions reduction techniques since this is where the profits will be. And emissions reduction schemes may be many things: changing your firm’s organization to reduce the need for international travel, delivering groceries to shops in trucks that are full and not half empty or designing an effective way of cleaning CO2 from a power station’s exhaust. It doesn’t have to be windmills. Price mechanisms will enable people to be creative, and for the creative people to be successful.

Subsidies don’t go away easily
Lastly, subsidies and regulations are dangerous because they will have a strong tendency to stick, even after they are obsolete. Subsidies create industries that are dependant on them to survive, and there is no automatic way of removing them when they are no longer needed. On the contrary – lobby groups will emerge to preserve status quo. With price mechanisms green industries that are bypassed by technology will die out by themselves.

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