Seen from an economist’s point of view, one key issue for governments to decide on is finding ways to make agents internalise climate externalities. Progress on this front, while undeniable, has only been partial.
Carbon taxation (the economic theorist’s favourite tool, as it makes fewer demands on the government’s information set and relies more on market decisions), covers just a tiny fraction of global emissions.6 Most existing carbon pricing systems rely on cap-and-trade, a framework that is prone to extreme price volatility and corner outcomes, and is therefore often regarded as second best.