Friday, March 06, 2009

Time Consistent Greenhouse Gas Mitigation Policy

The New York Times is reporting that the Governor of New York has unilaterally given a waiver to dirty power plants allowing them at zero cost to not have to comply with greenhouse gas mitigation measures; Evidence from New York .

Economists have a fancy word for this; "time inconsistent policy". If business people anticipate that politicians cannot credibly commit to keep certain policies in place and that lobbying can reverse these policies, then many dirty firms will not invest in costly "green" technology but instead will hire firms to lobby the political leaders.

The same issue will arise when President Obama enacts carbon regulation. If business leaders believe that future Republican Presidents will weaken such regulation, then they will invest less today to "be green" and this will keep their marginal abatement costs high. The net effect of such political business cycles is that we will have more trouble reducing our GHG emissions and the issue of adaptation will grow in importance.

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