Market solutions don’t try to change preferences that are “fundamentally culturally shaped”. They work within them. If you want to criticise economics for that, I think the onus is on you to suggest how one might fundamentally re-shape culture

A naive, positivist vision of ‘emissions units’ supposedly detached from any kind of underlying value judgements (idealist vs. consequentialist etc. etc.) is undoubtedly the basis for emissions trading and the neoclassical models of growth and equilibrium that underpin it.

What I’m really trying to say is that this kind of epistemological framework is in many ways outdated for the challenge of climate change. The likes of Michael Grubb, ironically cited with enthusiasm by the Productivity Commission, have as good as acknowledged as much: we need broad agreement about where we’d like to go with energy policy and put the right incentives in place to that effect.

There are, of course, two massive problems with this: (1) the Neoliberal paradigm that has come to underpin Western Governments in recent times from Norway to South Africa, and (2) our sense of right and wrong about our energy and waste needs is inherently embodied and subjective. Hawkins Ethics of Waste captures the complexities around this second problem beautifully.

Ok, I concede the point that price alone does not shift our preferences (as defined by a demand curve), at least not in the short term.

I still think – again, only on an intuitive level – that the structure of markets and the presence or absence of various products in those markets influences our preferences (i.e. shifts the various demand curves) over time. But perhaps, as you say, economics doesn’t have the tools to explain this.

As for the options you give, I would also like to know how to achieve b). But dare I also suggest -
c) Personal carbon trading. There are all sorts of political and administrative obstacles to overcome, but it has some attractive elements. It’s an idea that has been gaining ground here in the UK, and I was recently turned on to the idea by this article. It’s fairer, more flexible and more progressive than either rationing or a carbon tax. Just because it is an idea which is “ahead of its time” (as concluded by a recent UK Treasury study), does not mean we should not be considering it in the Australian context. Quoting from the linked article:

each year everyone gets equal carbon credits to spend on petrol, home heating or air travel. People exceeding their quota can buy more credits. People who use less can sell credits. It encourages home insulation, energy saving and less driving or flying. Since low earners use less – 20% have no car, 50% don’t fly – they can profit by selling to those with big houses, foreign holidays and gas-guzzling cars. It would be a powerful but voluntary agent for redistribution.

I’m planning a blog post on this soon.

p.s. Stiglitz presented a similar set of arguments to Sachs in Making Globalization Work, a book I highly recommend.

Incidentally, rather than Joe Stiglitz, you possibly mean Jeffrey Sachs, the famous economist who recently weighed into the carbon debate in Australia with advocacy of a carbon tax.
http://www.theage.com.au/environment/alarm-on-carbon-trading-scheme-20080714-3f3w.html

I agree with that. The ETS is prone to being gamed, to political pressure, and to the possible mis-pricing of carbon permits causing all sorts of wonky stuff.

A carbon tax, applied uniformly, would be so much simpler and more transparent. But, as you say, the debate is now over.

The basic theory has demand (for anything) as a function of price. So at $3 per apple, you might choose to purchase 100 apples/year. At $2.50/apple, you purchase 150 apples. And so on.

Plot these on a graph, with price on the Y-axis and quantity demanded on the X-axis, and, hey presto, you have the famous demand curve:
http://en.wikipedia.org/wiki/Demand_curve

So it is not a case of “demand destruction due to high prices” — rather, a higher price simply puts you on a different point on the curve.

You may ask, where does this desire to eat 100 apples per year (at $3/apple) come from? Is it a biological predilection for sweet, pleasant-tasting fruit? Some cultural factors at play? The latest advertising jingle used by the apple industry? The Hand of God?

Well, economics doesn’t know, and has no tools to find out. It just takes your preferences as a given. (Disclaimer: I’ve only taken econ theory to 3rd year undergrad, so possibly the factors underlying consumer preference are analysed at higher levels. But I don’t think they are.)

Coming back to AGW, an ETS (or for that matter a carbon tax), are both good policy options because they still allow people to carry on their normal consumption and production activity, but with a financial incentive to reduce the emission of carbon as much as possible. They are better options than:

a) a command-and-control system (such as rationing), which tend to be clumsy and harsh, and cause unintended consequences, or

b) changing consumer preferences somehow (shifting the demand curve for carbon to the left). The problem is that I just don’t know how you’d do this, and dk’s article didn’t offer any detailed suggestions, apart from urban consolidation — which will take a very long time to have effect.

The market can shape not just the short-term outcome, but also our short and long-term preferences. Smart business people discovered long ago that the key to success is not just to respond to demand, but to create demand. Rampant consumerism is the perfect example to illustrate that.

To be more specific, I would argue that our cultural and social norms – underpinned by our actual preferences, wants, desires, and demands – is shaped, over time, by the market. Ergo, a well-designed ETS can also shape our underlying preferences in a positive way.

Apart from that point (which I think is more important than just a semantic disagreement), I agree with Paulus.

The preferences are the demand and the outcome is the balance between that and supply. Changing supply doesn’t change your preferences, but it will change what you do.

The sociologist Zygmunt Bauman who wrote a lot about postmodernism, globalisation and modern identities pointed out, as I recall, that capitalism tends to promote wants that are shallow and inherently unsatisfying so that the consumer is always ready for further consumption.

With listed companies in particular there is a growth imperative.

So one way or another commercial activity needs to be constrained in absolute quantitative terms in the amount of carbon they produce. Growth opportunities are still available in carbon-free areas of the economy. How this is best done is the question.

But culture and social arrangements determine the framework within which we seek to attain our goals. Culture is not something that just sits on top of economic activity, it determines how we interact with each other and the external world in satisfying the most basic needs. Further, it is is involved in shaping our inner world and how we perceive ourselves, our identity and everything nominally external to us. Capital seeks to shape our inner world so that we act in a way that will increase profits.

If left unconstrained or if left to act within any given set of constraints for a period of time, it is not surprising that outcomes will be produced that we regard as pernicious either individually or when considered against the public good.

I’m no economist, but on an intuitive level I have to strongly disagree with that statement. Surely our preferences are constantly shaped by the market? The choices I make in what I want, and how much I want of it, are always influenced by price and availability.

Isn’t that what markets are all about – finding a balance between people’s preferences (i.e. demand) and what can be produced (i.e. supply)? I would argue that many of our current cultural and social norms have been shaped, fundamentally, by markets; with influences flowing both ways.

A market-based solution to reducing carbon emissions certainly has a role to play in shaping our energy consumption preferences. However, as dk points out in his paper, markets are flawed – they can be manipulated and they often fail. That’s why we need other, complementary measures to sit along side them. It’s also one reason why Nobel Prize winning economist Joseph Stiglitz advocates a carbon tax rather than emissions trading. But that argument was fought and lost long ago…

Is that what that song was about?

You need to find more examples than just urban consolidation to convince me that policies other than pricing externalities are useful.