Tuesday, February 13, 2007

Incentives for Private Sector Environmental Development

From Nicholas Stern:
Incentives. We have to be aware of these technological issues in order to think about the right kinds of incentives to put in place. There is a challenge in asking oneself how much of a role government or groups of governments should play in developing technologies. Technologies are ideas; they’re public goods. The global atmosphere is a public good, and the technologies to reduce emissions are also public good. So there’s a challenge there in determining how far the public sector should play its role. But I think it’s fairly clear that most of the action—choosing how to save energy, choosing how to reduce carbon—will be made by the private sector. The big question is how does a government set the right kind of incentives for the private sector.

Now, the private sector is actually quite specific on this point. Its slogan is that the incentive structure should be loud, long, and legal. But “loud, long, and legal” is actually the vulgar phrase for “clear, long, and credible.” If you’re thinking about investments in the kinds of infrastructure and durables that we’re talking about, the incentive structure needs to be clear, long-term, and credible. And putting those kinds of incentive structures together is actually quite difficult. You have to try to bind yourself going forward in a way that governments find it quite difficult to do—a problem the economists have studied right across the board in other areas, including monetary policy, competition, and so on. We have to try to put together those kinds of structures.

Clear, long-term, and credible incentives for the private sector to develop environmentally positive technologies are a great idea. Sounds like the incentives that heavy polluting industries have been working with for decades.

Daily Additional Reading:

***"The Changing Climate on Climate Change," By Jospeh Stiglitz
***"The Heat it On" from The Situationist, quoting a great LA Times article explaining that we'd all take global warming more seriously if global warming had a mustache.\
***Greg Mankiw, who pointed me towards a few of these stories.

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