Carbon pricing and the precautionary principle

Abstract

The problem of climate change has been described as ‘a unique challenge for economics: it is the greatest and. widest-ranging market failure ever seen’ (Stern 2007, p. i). Among the factors that make climate change a difficult, the most important, arguably, is uncertainty about the future course of climate change, and the effect of policies aimed at mitigating climate change. Although there is a large literature on the economic analysis of choice under uncertainty, many crucial issues are poorly understood by policymakers and the general public. In particular, uncertainty about climate change under ‘business as usual’ policies is commonly seen as a reason for inaction. On the other hand, the widely-used ‘precautionary principle’ is generally interpreted as suggesting that early action is desirable. To resolve the conflict between these intuitions, it is necessary to consider in more detail the principles for choice in the face of environmental uncertainty and, particularly, the interpretation of the precautionary principle.