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The True Price of Carbon

For decades, economists have been wrestling with how best to weigh the current cost of emissions reductions against costs that will come years or even centuries from now. But a consensus has proved to be elusive, because traditional economic models don't treat atmospheric carbon like an asset.

NEW YORK – At the center of many policy challenges is a contest between “realists” and “radicals.” That’s true of the ongoing Democratic primary race in the United States, for example, and it has long defined the climate-change debate. Will incremental policies such as a modest carbon price save us from disaster, or does climate change call for a more revolutionary approach?

Attempts to answer this question typically rely more on gut feelings and political instincts than on rigorous analysis. The debate also often features a generational divide between youthful idealists and seasoned moderates. Just recently, US Secretary of the Treasury Steven Mnuchin dismissed criticism from 17-year-old Swedish climate activist Greta Thunberg by suggesting that she take a class in economics.

As the science of navigating tradeoffs, economics can indeed help one make decisions under circumstances defined by binding constraints and pervasive uncertainty. In theory, at least, economists have the tools to determine the costs and benefits of cutting carbon emissions. Yet getting that calculation right has haunted the profession for decades.

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