Business School Professor Argues for 'Decarbonized' Economy

Though decarbonizing the world economy may be costly, it may prove cheaper than failure to act on climate change, according to Harvard Business School professor Rebecca M. Henderson.

“Building an energy efficient, decarbonized economy is a massive shift,” Henderson wrote in her article recently published in Forbes magazine.

“This won’t be easy, but it will be easier than we expect,” she wrote.

To effectively mobilize the private sector, Henderson wrote that taxing carbon emissions at their externality costs, or the “real cost of dumping them into the atmosphere,” is the most effective policy option.

Governments around the world continue to debate whether non-subsidy approaches to climate change—including cap-and-trade laws and carbon taxes—will promote decarbonization innovation in the private sector.

Henderson noted in her article that key energy technologies suffer from significant learning curves, and other professors suggested that these difficulties can be counteracted by financial incentives.

“Environmental regulation has long accepted that ‘technology-forcing’ laws produce innovation at lower costs than industry often estimates at the outset,” said Sheila S. Jasanoff ’64, professor of science and technology at the Kennedy School of Government.

Experts suggested that only a holistic consideration of the situation will help reduce carbon emissions in the short term and promote renewable energy in the long term.

“The most cost-effective approach will be to incorporate into the price of all energy sources their external, climate-related social costs of generation and use,” said Robert N. Stavins, professor of business and government at the Kennedy School.

Economists agreed that carbon pricing represents a more efficient allocation of resources than subsidy policies.

“The market with the fossil fuel tax would efficiently pick winners and losers at least overall cost,” said Martin L. Weitzman, an economics professor.

“Subsidies force the government to pick winners and losers, a task at which it is not particularly adept,” Weitzman added.

Moving beyond subsidy approaches may also provide the key for energy-efficient innovation in the private sector.

Despite some early road bumps, including Australia’s repeal of a carbon tax in July, there is hope that carbon pricing laws are catching on. California has recently attempted the cap-and-trade approach with passage of Assembly Bill 32.

“It is ambitious, cost-effective, and from what we have seen so far, quite successful,” said Stavins of the bill.