Carbon pricing is not a silver bullet but faith endures in this market approach to climate action

Subscribe to enjoy similar stories. Market failure is a prickly idea in economics. It exists in theory, is acknowledged in textbooks and is occasionally invoked in policy debates, but it sits uneasily with the profession’s deeper instincts.

To question the centrality of markets too forcefully is to invite misgivings, especially in academic publishing, where faith in markets appears more durable than the evidence that challenges it. I recall asking my PhD supervisor Dennis C. Mueller in the 1990s why, despite empirical support to the contrary, articles in leading economics journals reflect an almost unquestioned belief in markets as efficient allocators of resources.

It felt to me almost theological. Perhaps the alternative in the form of government direction was more frightening? In any case, work challenging the orthodoxy was treated as heretical rather than debatable. Mueller’s response, characteristically measured, was that neoclassical models were elegant.

They allowed optimization and produced clean results. Profit maximizing firms and utility maximizing consumers, represented by rational agents, delivered tractable outcomes. The models worked, even if the world did not seem to cooperate.

This criticism is neither new nor profound. So, why revisit it now? Because another article of faith has quietly taken hold in global policy discourse: the belief that carbon pricing is the most efficient and therefore most appropriate way to address climate change. The regulation in question is the EU’s carbon pricing policy to control global emissions, known as its Carbon Border Adjustment Mechanism (CBAM).