Theory meets reality; wins
Krugman oversells the affordability claim by linking to a widely cited report by McKinsey & Company. The main point of the McKinsey study is provided in their Exhibit B, which illustrates a rather peculiar finding that there are a significant number of pollution abatement options that can be achieved at “negative cost.” This finding violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits.
That's from a Brookings Institution report on handling carbon emissions through the EPA. But it's more interesting for what it says about the state of economics than about the state of climate change policy. The authors argue that there literally can't be firms that could reduce pollution while enhancing profits because theory predicts those firms would already have done so. This is a bit like coming to a road that's not on your map and deciding the road is in the wrong.
Brad DeLong recommends the authors read "On the Impossibility of Information-Efficient Markets," a paper by Sanford Grossman and Joseph Stiglitz. I always like recommending Larry Summers' unpublished observation "THERE ARE IDIOTS. Look around." And you don't even need to believe in idiots to believe that some firms may not have perfect knowledge of all pollution-abatement technologies and their likely costs and benefits. Not every widget-maker employs a carbon-reductions specialist. Sheesh.
Anyway, the McKinsey report is here (pdf). The disputed exhibit is atop this post. Click on it for a larger version.
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