At any moment in time, you can ride a bike with least effort by cycling in first gear. But if you want to ride around the block with least effort, first gear will not be ideal. By failing to distinguish between these two different situations, economists have recommended the worst possible climate change policy to governments. Contrary to their belief, emissions trading will achieve decarbonisation at maximum cost, and minimum speed.

Governments may impose a carbon emission charge to address environmental externalities. If implemented, this will drive up the cost of energy-intensive production. To level the playing field, domestic carbon pricing can be extended to carbon-embedding imports. The recent legislative movements in the EU and elsewhere show that the issue of adjusting carbon prices at the border is entering the mainstream of climate policymaking. At the same time, carbon is not the only target of energy-affecting trade control measures. Other typical examples of such measures include air quality regulations with import-restrictive impacts and the localization of clean energy production, which some States may portray as environmentally necessary. Products with health-threatening content associated with unsafe energy use can face market access barriers as well. When energy production causes ecological or public health problems at home or depletes natural resources, export restrictions are usually among candidate measures that governments consider for mitigating such adverse effects. Therefore, it is imperative to examine trade rules and case law to check the legality of these energy–environment measures.

To get to a net-zero-carbon economy, we will need a new generation of sustainable technologies and the financing infrastructure to channel novel ideas into viable products and companies.

Drawing on abundant fossil fuels endowments, Canada has built one of the most carbon-intensive economies in the world. Within the Canadian federation, provincial governments control the vast majority of natural resources, including both hydro-electric potential and fossil fuels. However, the uneven distribution of those resources has yielded tremendous variation in the carbon intensity of provincial economies, and equally great variation in provincial governments’ climate ambitions. In this chapter, I identify three phases in Canadian climate federalism. From 1990 to 2006 a ‘joint decision trap’ prevailed in which the most fossil fuel-dependent provinces vetoed national solutions. From 2007 to 2015 a truncated innovation and diffusion dynamic emerged in which provincial leaders adopted ambitious and sometimes innovative climate policies. However, fossil fuel-dependent provinces did not follow their lead. Emissions reductions hard won by provincial leaders were undone by emissions growth by their recalcitrant neighbours. The third phase, since 2016, is characterised by federal unilateralism. While the mere threat of federal action initially yielded provincial collaboration in an ambitious pan-Canadian climate plan, successful implementation ultimately turned on the federal government’s willingness to follow on that threat. I conclude that, on balance, federalism has exacerbated the challenge of climate action in Canada.

At any moment in time, you can ride a bike with least effort by cycling in first gear. But if you want to ride around the block with least effort, first gear will not be ideal. By failing to distinguish between these two different situations, economists have recommended the worst possible climate change policy to governments. Contrary to their belief, emissions trading will achieve decarbonisation at maximum cost, and minimum speed.

Chapter 8 argues that any steps or program can be effective only if they adopt a justice lens and reject proposed technical and market fixes that threaten to perpetuate the same inequities, corporate agendas, and extractivist mentality that created the climate and ecological crisis in the first place.

The top priority in addressing climate change is to reduce net emissions of greenhouse gases to zero as swiftly as possible. Among the policy instruments for achieving this goal: carbon markets and carbon taxes; subsidies and incentives for energy conservation and for developing renewable energy technologies; building a new network of advanced nuclear reactors to provide carbon-free energy; imposing restraints on deforestation and planting large numbers of new trees; developing powerful new technologies for removing carbon dioxide from the atmosphere; incentivizing private citizens to reduce the carbon footprint of their lifestyles; and introducing new governmental policies for decarbonizing national economies. By combining all these strategies, humankind could realistically reach net zero emissions by the middle years of this century. From that point forward, it can start actively removing existing accumulations of carbon dioxide, eventually bringing global warming to a halt and reversing some of the damage that’s already been done.

Voluntary or local renunciation of fossil fuels will not keep us within a carbon budget, and direct control along the lines of wartime rationing would be overbearing and inefficient. This leaves either carbon taxes or carbon permits as the main instrument. At a first approximation these are mirror images of each other: raising the price to reduce emissions or vice versa. Under uncertainty, however, taxes make prices predictable but leave emissions unpredictable, while permit systems do the reverse, which should be an argument for permits. Moreover, quantity controls better manage interdependent (multiple equilibrium) economic structures than price controls. Real-world implementation has been poor, as seen in the European Trading System and California’s Cap-and-Trade program. The culprits are weak targets, widespread exemptions, handouts to business and abundant offsets. The dismal experience of the Clean Development Mechanism shows that such offsets function mainly as loopholes. Better would be a system of permits with universal coverage, auctioned rather than given away, and not exchangeable for offsets. It should be accompanied by other policies to mitigate the distortions caused by rapid carbon price increases and to accelerate the development of non-carbon energy sources and non-carbon-using goods and services.

Climate change is a time horizon problem. Economics proposes a carbon tax and leaving the rest to the market. Tax levels are calculated by combining an economic growth model with climate projections. Such models predict very little economic impact, at odds with the alarmist projections of climate science. Economic methodology and selective evidence combine to induce complacency. This was endorsed by a Nobel Prize for William Nordhaus, its leading exponent. Complacency was challenged within economics for not being predicted by extrapolation, disregarding future generations, and modelling the risks incorrectly. Economics bears some responsibility for the problem it tries to solve. It ignores non-rational forms of denial, and falls victim to them itself. With no guidance from economics on how to address climate change, the actual approach chosen is central government precommitment, in line with our own time-horizon model.

Chapter 4 focuses on addressing climate change. International action is failing to deliver on slowing greenhouse gas emissions to keep the planet from warming dangerously, yet considerable progress is occurring by some countries, companies, states or provinces, and even cities. The chapter argues that ending the underpricing of fossil fuels is essential to a low-carbon transition. Major economies must lead by removing fossil fuel subsidies and employing carbon taxes and other policies to further reduce the social cost of fossil fuel use, and allocate any resulting revenue to public support for green innovation and key infrastructure investments. Ending the underpricing of fossil fuels in low- and middle-income countries must occur through policies that are compatible with achieving immediate development objectives, such as ending poverty and especially the widespread “energy poverty” in rural areas. Climate policies need also to expand beyond actions by national governments and instead focus on a “bottom-up” strategy that supports and expands initiatives by corporations, local governments and other “subnational” entities that are pushing and innovating low-carbon strategies.

Our review of climate economics begins with the Kaya identity, which portrays our emissions pathway not as a smooth glideslope to net zero but as a tug of war between opposing forces. We then review the stunning impact that continued compounded economic growth could have on the ability of future generations to adapt to climate change, particularly in the Global South. The concepts of externalities and market failures are considered, along with the widely held view that a significant element in any climate solution will need to be some form of carbon tax. The recognition that mitigation comes at a cost leads to the question of climate cost/benefit analysis and the notion that the economically optimal quantum of further climate change that rational actors might prefer would not necessarily be zero. We close by pivoting to fat tails and the extent to which opting for some economically optimal amount of climate change may expose the future to small probabilities of utterly unacceptable outcomes and therefore unjustifiable risks.

This introduction summarizes the nine central chapters that make up this volume. Martin Feldstein examines the structural reasons for relatively high US growth rates, notes fiscal problems inhibiting future growth including in deficits in social insurance programs, and suggests reforms. Flávio Cunha examines how the development of human capital, especially at early ages, affects economic growth. George Borjas analyzes how increased immigration would affect economic growth in the United States. Glenn Hubbard explores the debate between “techno-optimists” and “techno-pessimists” on the growth effects of technological progress, while Timothy Bresnahan examines in detail the commercial applications of Artificial Intelligence Technologies (AITs). Robert Barro estimates the macroeconomic effects of the recently enacted Tax Cuts and Jobs Act, while John Diamond and George Zodrow examine the macroeconomic and distributional effects of a carbon tax. Ross Levine discusses the links between banking and economic prosperity, and Stephen Turnovsky examines the relationships among income, wealth inequality, and economic growth.