Economics and the ‘greenhouse effect’

There is growing scientific and public concern that increasing concentrations of greenhouse gases in the atmosphere will produce global warming and other climatic changes. Although economic activity is the main source of greenhouse gas emissions, information and incentive problems make it difficult to translate concern about global warming into economic behaviour and policy conducive to reducing emissions. The paper considers a set of near term (carbon tax), intermediate term (afforestation, energy efficiency) and long term (new non-fossil fuel technologies) strategies for reducing CO2 in the atmosphere. Each strategy has useful attributes, but shortcomings or limitations too. While the near term and intermediate term strategies can slow and perhaps reverse the growth of CO2 emissions, only a successful long term strategy of fostering the development of some promising non-fossil fuel technologies, such as solar and solar-hydrogen, can eventually halt the build-up of CO2 in the atmosphere. Moreover, public investment in the development of new non-fossil fuel technologies would largely obviate the information and incentive problems that currently stand in the way of an economically viable greenhouse policy.