Markets to reduce pollution: cheaper than expected

15 Dec 2010

Technology innovation is the key to reducing carbon emissions cheaply, according to this report based on the experience of six pollution pricing schemes in Australia and overseas.

In each case, costs to reduce pollution, and actual prices, were much lower than governments and their experts expected. Governments consistently got it wrong when picking in advance which technologies would deliver the cheapest reductions. Environmental markets routinely led to innovation to reduce emissions at lower cost in practice than in forecasts.

This analysis suggests that markets, enabled by pollution prices, deliver more emissions more cheaply than government selecting specific actions or projects to reduce emissions. Markets unlock ingenuity across the community to find reductions cheaper than governments expect.

The analysis also suggests that any pollution pricing scheme should have a floor price to provide certainty for investors. Floor prices effectively reduce the total amount of pollution permitted if it turns out to be easier than expected to reduce pollution.

Technology innovation is the key to reducing carbon emissions. Experience shows that markets may not be perfect, but they are consistently effective at identifying lower cost opportunities, promoting innovation, and responding flexibly to changes.

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