Five Characteristics of an Economically Efficient LCS
Jae Edmonds and Leon Clarke
Reductions in emissions associated with a Low Carbon Society (LCS) will require
dramatic changes to the global energy and land-use systems. Carbon emissions reductions
needed to achieve that goal globally could be 50 percent or more by 2050 and emissions
reductions could be greater in developed nations. The challenge of affecting such changes
cannot be overestimated.
Economics offers several important insights that can help minimize the cost of achieving
such dramatic transformations. Here we articulate five.
1. Carbon emissions should be priced. The global climate is a public good.
Anthropogenic climate change is therefore a public goods problem in which privatedecisions taken in the context of private markets will not achieve a socially optimal
solution. The anthropogenic climate change problem cannot be adequately addressedby simply asking individuals to make better private decisions. Better and moreenvironmentally aware private decision making helps, but public intervention isrequired to create a market consistent with the public interest in the climate that inturn reflects the social value of carbon. Until carbon is valued, emissions will always
exceed the socially desirable level and key technologies, such as CO2 capture andstorage, that directly address climate change but at additional cost, will remain on theshelf.
2. All carbon emissions count the same to the atmosphere. All carbon affects the Earth’s
climate and the introduction of an additional ton of carbon from any source has
exactly the same effect regardless of the activity that produced it or the location of theemissions. Whenever the marginal cost of emissions reductions varies from one
activity to another or one place to another, there is room for society to have more
reductions and at lower total cost. This means that costs are higher every time anexemption is granted to an individual economic sector or particular regions orcountries undertake emissions reductions while others do not. This also means that allof the carbon in the terrestrial biosphere needs to carry the same value as fossil fueland industrial carbon emissions. Leaving that carbon unvalued creates the potential
for ancillary environmental consequences from over-deployment of bioenergy in thecontext of a LCS.
3. Expectations should be that the price of carbon will rise at a regular rate. Unlike
other airborne pollutants, such as NOX and SOX, CO2 is a stock pollutant. To stabilize
CO2 concentrations at any level, emissions must eventually be driven to zero,requiring increasingly stringent emissions reductions over time and, therefore, anincreasing price of carbon. Cost minimization over time calls for a price path thatrises at roughly the rate of interest adjusted by the rate of ocean carbon uptake. This
does not mean that future prices can be set today at this rate and be entirelypredictable for a century. Uncertainty about a range of factors, including
improvements to technology and the damages from climate change, will necessitate1

regular review of the adequacy of policies and measures; however, it does mean that
subsequent to each time the price is revised that the price rate of change of the priceover time should return to its upward trajectory roughly consistent with cost-effective
reductions over time.
4. Climate policy should be predictable. Many elements of energy and related
infrastructure have lifetimes in excess of 50 years. Decisions regarding investment inthis infrastructure are based primarily on expectations about future economic
conditions, including the price of carbon. If decision makers anticipate substantial
uncertainty in the viability or character of future carbon policy, it will retard criticalinvestments needed to address climate change. If decision makers can anticipate thatprices will rise at a regular rate, the date at which emissions reducing technologies
will be selected will be earlier and the present price of carbon and other GHG's can belower and still induce investment consistent with an economically-efficient path
towards stabilization. A succession of a dozen emissions limitation regimes that eachlast five years without a meaningful expectation about the consistency between
regimes is a recipe for high cost and delayed introduction of technologies associatedwith capital stocks living longer than five years.
5. Technology instruments are fundamental to a climate policy portfolio. The role oftechnology is to help control the cost of achieving an LCS. While it is always feasible
to stabilize concentrations of CO2 at any level with any technology, the cost societybears will depend to a large extent on the suite of available technologies. Near termemissions mitigation must inevitably rely on existing technology, but in the mid- andlong-term, better technologies could potentially be made available. Policies areneeded to establish the conditions that encourage the creation of improved versions ofexisting technologies and completely new technologies can come into being. Bothpublic and private sector investments will be needed. This includes public sector
investments in the basic sciences. Basic science is a field of human endeavor in whichthe private sector classically under-invests because no individual firm can fully
appropriate the benefits of its investments. More than two thirds of all emissions
mitigation in an LCS occurring after 2050, more than enough time for investments inscience and technology to lay down the foundations for lower cost, better
technologies of the future—and not simply improved versions of today’s technologies,
but also potentially completely new technologies for which there are as yet be nonames.
In addition to the characteristics noted above, technology will never deploy absent
facilitating institutional infrastructure. Large-scale deployment of any technology will be
mediated by institutions. And, while the particular institutional requirements will bedifferent for such technologies as bioenergy, hydrogen systems, CO2 capture and storage,
nuclear power, wind, solar and end-use energy technologies, institutions will play a
critical role in shaping deployment. The choice of institutional mechanism will vary bothfrom place to place and over time.

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