From EconLog:
If you want to change behavior, the smartest approach is to change the price most directly relevant to that behavior. If you want to cut carbon dioxide emissions, the smartest approach is not to start spending money like a drunken sailor on anything vaguely related to carbon dioxide. The smartest approach is to raise the price of emitting carbon dioxide.
This is why I always vote against subsidies for the alternative energy industry. It’s not because I wouldn’t love a hydrogen/solar/zero-point utopia, it’s because giving politicians power to pick technology winners is a fantastically bad idea.
Why? It’s because instead of getting a variety of emergent solutions, you get a permanent, one size fits all solution that inevitably benefits established players.
Here’s a real world example: even though Honda cars exceeded emissions requirements without catalytic converters, they still had to bolt them on when catalytic converters were mandated. It was in the interest of U.S. car makers to force higher compliance costs on Honda, and GM held patents on catalytic converters to boot. For details and more examples, listen to this excellent EconTalk podcast from 24:06 to 27:00.
So, instead of incurring huge compliance costs and giving politicians invasive powers to control our light bulbs and thermostats, we’d be better off taxing emissions and letting the effect of those taxes create broad incentives for everyone to pollute less and use energy efficiently.
