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We Can't Rely On Market Forces Alone To Fix Climate Change

We need a carbon tax, or we are going to keep using cheap fossil fuels until they kill us all.

Photos: EB via Shutterstock

In discussions about climate change, there's a certain constituency of economists and business leaders who say the market will fix the problem. If we let technology work its wonders, they say, eventually clean energy will prove sufficiently cheap and plentiful enough to make burning fossil fuels a thing of the past.

There's just one problem: The market won't. We have enormous remaining supplies of oil, gas, and coal because the technology of exploration and extraction has advanced along with solar and wind technology. We're nowhere near Peak Oil or Peak Gas—despite what some people were predicting a few years ago—and prices continue to plummet.

Meanwhile, prices for solar and batteries, while decreasing, aren't falling fast enough (batteries are a particular roadblock to more renewables). Putting aside environmental considerations, in many cases and places, there's no inherent rationale to switch away from fossil fuels—not yet.

This overwhelming conclusion is brought home by a new paper from three economists: MIT’s Christopher Knittel and the University of Chicago's Michael Greenstone and Thomas Covert. They look at trends in fossil fuel production and pricing versus cost trends in renewables and batteries, and find that, absent market interventions, fossil fuels are likely to continue to be burned for many years yet.

"If the past 35 years is any guide, not only should we not expect to run out of fossil fuels any time soon, we should not expect to have less fossil fuels in the future than we do now. In short, the world is likely to be awash in fossil fuels for decades and perhaps even centuries to come," the paper says.

We have all the ammunition we need to warm the world far beyond its livable limits. "Our headline finding is that the combustion of currently known fossil fuels would increase global average temperatures by 10 degrees F to 15 degrees F," the economists say. "Such scenarios imply difficult-to-imagine change in the planet and dramatic threats to human well-being in many parts of the world."

About three quarters of global greenhouse emissions come from burning fossil fuels, with coal making up 45% of that, oil 35%, and natural gas 20%. They are not the whole ballgame of climate change, but a very important part. In the U.S., most fossil fuels are used for electricity production (e.g., 90% of coal) and transport (60% of oil consumption).

The terrific availability of fossil fuels is driven by new drilling and extraction techniques, such as fracking, and high success rates for wells. Addressable U.S. gas reserves, for instance, grew by close to 100% between 2000 and 2014. This means that, while the world has been consuming more fossil fuels in the last couple of decades, the ratio of reserves-to-consumption has remained more or less constant. It also means we still have about 50 years of reserves in the ground, assuming continued technological progress.

Like many economists, Knittel supports a carbon tax to make fossil fuels more expensive and less attractive for consumption. This would help deal with the "externalities" that burning fossil fuels brings, including the social cost of having to adapt to climate change. "Taxes on externalities are not inconsistent with the free-market system," Knittel says in a press release. "In fact, they’re required to make the free-market system achieve the efficient outcome. This idea that a pure free-market economy never has taxes is wrong."

If you think about it, the let-the-market-fix-it climate argument makes no sense. There's no inherent reason why prices of fossil fuels, solar, and other technologies should align in such a way that allow us to meet our carbon goals. They are separate things with their own dynamics. It's only by intervening in the market that we can get the prices to where we need them to be.

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