Roger Peilke Jr. wrote an article in the Financial Times which argued that a government imposed cap on carbon emissions was logically impossible. He offered two reasons in support of his argument. He argued that there is a strong correlation between GDP and carbon emissions. Since governments do whatever they can to grow their economies, they are not likely to cap carbon emissions. Moreover, governments cannot provide the innovations that would enable a shift in our energy sources from fossil fuels to alternative sources. It follows from these two premises that a cap on carbon emissions is logically impossible.
Paul Krugman attacks Peilke's logic in this article. He points out that the link between carbon emissions and GDP is not as strong as Peilke assumes. The carbon intensity of GDP can be altered if the price is right. That is, the social cost of carbon emissions can be factored into the prices that we pay for the products that we consume. The market system will work to reduce the carbon intensity of GDP as long as we get the incentives right. He also argues that the two largest contributors to carbon emissions are electricity production and transportation. A shift from coal to natural gas or green technologies to produce electricity would reduce carbon emissions. Furthermore, there is not a strong correlation between the consumption of electric power and GDP. We can also produce more fuel efficient electrical appliances which reduce consumption without reducing appliance production. We can also reduce the carbon intensity of GDP by using mass transportation and by building less carbon intensive vehicles. He applauds recent US regulations which require the auto industry to build more fuel efficient vehicles. These requirements will force private industry to invest in innovations that reduce the carbon intensity of transportation.
Krugman understands that it will not be easy to reduce the carbon intensity of GDP but he argues that it is not logically impossible for governments to do so. Therefore, Peilke is wrong to claim that it is logically impossible for governments to reduce carbon emissions without limiting GDP growth. The content of GDP can, and should be made less carbon intensive. Of course, getting the incentives right requires governments to intervene in the economy in a serious way. For example, the sale of light trucks is more profitable than the sale of fuel efficient vehicles. US consumers also seem to prefer light trucks to fuel efficient cars. The fossil fuel industries are also threatened by government interventions that make fossil fuels more expensive. The unused reserves that they have on their balance sheets would become less valuable. Moreover, unless developing economies follow the lead of the US and other western countries, the problem becomes more difficult to solve. China, for example, has passed the US in carbon emissions.
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