On the correct prices of fuels…

Interesting blog entry from Lucas Davis at the Haas Energy Institute, on the “correct” prices for fossil fuels. He cites a new paper from Ian Parry that tries to account for the external costs as they vary around the world.
I notice two points:
1. At least for gasoline, they are measuring the externalities of driving, not of gasoline. Bad news for EV drivers intent on saving the world on mile at a time, because most of the associated externalities are still present.
2. The estimated cost of carbon / GHG is small compared to the other external costs like accidents and congestion. This is a common result among economic analyses of carbon costs, and I often wonder about it. If you use a value associated with the marginal cost of abatement, I can see it being quite low. But that’s in the current context of nobody abating much anything. I wonder what it would be if you projected the marginal cost of 80% or 90% abatement. That is, if we were actually to solve the climate problem.
Or, another way of thinking about it: if GHG emissions are potentially going to make the earth uninhabitable, it seems like maybe they’re underestimating the external cost of carbon. Because there is limited cost data available for “the end of the world as we know it,” economists can be forgiven for working with the data they have but we, the careful reader should bear in mind the limits.

2 thoughts on “On the correct prices of fuels…”

  1. I agree that there seems to a problem pricing climate change, versus pricing congestion and traffic accidents. You would think that a large event with a high probability of occurring would not have that problem. Surely a thoughtful economist could come up with something, although on such a politically fraught issue there may not be a lot of reason to go out on a limb.

  2. Why can’t we instead just admit that there are some problems that basic econ thinking does not solve very well.

    Econ is a discipline built on “the margin” — with rather successful results in most cases. In this case, the right approach is probably to consider the average cost of the total quantity of abatement that will stop the world from being reduced to a barren wasteland, but who wants to estimate that?

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