enough to promote investment in alternatives to fossil fuels, and invest-
ment in efficiency measures. Notice this is exactly the same policy as was
suggested in the previous section. So, whether our motivation is fixing
climate change, or ensuring security of supply, the policy outcome is the
same: we need a carbon price that is stable and high. Figure 29.2 indicates
very roughly the various carbon prices that are required to bring about
various behaviour changes and investments; and the much lower prices
charged by organizations that claim to “offset” greenhouse-gas emissions.
How best to arrange a high carbon price? Is the European emissions trading
scheme (figure 29.1) the way to go? This question lies in the domain
of economists and international policy experts. The view of Cambridge
economists Michael Grubb and David Newbery is that the European emis-
sions trading scheme is not up to the job – “current instruments will not
deliver an adequate investment response.”

The Economist recommends a carbon tax as the primary mechanism for
government support of clean energy sources. The Conservative Party’s
Quality of Life Policy Group also recommends increasing environmental
taxes and reducing other taxes – “a shift from pay as you earn to pay as
you burn
.” The Royal Commission on Environmental Pollution also says
that the UK should introduce a carbon tax. “It should apply upstream and
cover all sectors.”

So, there’s clear support for a big carbon tax, accompanied by reductions
in employment taxes, corporation taxes, and value-added taxes. But
taxes and markets alone are not going to bring about all the actions needed.
The tax-and-market approach fails if consumers sometimes choose irrat-
ionally, if consumers value short-term cash more highly than long-term
savings, or if the person choosing what to buy doesn’t pay all the costs
associated with their choice.

Indeed many brands are “reassuringly expensive.” Consumer choice is
not determined solely by price signals. Many consumers care more about
image and perception, and some deliberately buy expensive.

Once an inefficient thing is bought, it’s too late. It’s essential that inefficient
things should not be manufactured in the first place; or that the consumer,
when buying, should feel influenced not to buy inefficient things.

Here are some further examples of failures of the free market.

The admission barrier

Imagine that carbon taxes are sufficiently high that a new super-duper low-
carbon gizmo would cost 5% less than its long-standing high-carbon rival,
the Dino-gizmo, if it were mass-produced in the same quantities. Thanks
to clever technology, the Eco-gizmo’s carbon emissions are a fantastic 90%
lower than the Dino-gizmo’s. It’s clear that it would be good for society
if everyone bought Eco-gizmos now. But at the moment, sales of the new
Eco-gizmo are low, so the per-unit economic costs are higher than the