In Balance makes bold accusation that IEA chief economist doesn’t understand demand elasticity

The IEA’s chief economist yesterday warned that cap-and-trade policy alone will not deliver the cuts in emissions desired by the EU. His concern is that energy consumption is inelastic – people may simply pay a higher carbon price rather than consuming less energy.

He is right, of course, that that the EU ETS alone is not sufficient. It only covers around 40% of the EU’s emissions, it must take more care of leakage (industries relocating beyond the EU and continuing to produce the same level of emissions) and it is unlikely to create a business case for long term investments like carbon capture and storage.

But demand elasticity is not a serious concern for the emissions within a cap-and-trade scheme. With cap-and-trade you effectively auction off a fixed number of rights to release GHGs into the atmosphere. If everyone is very reluctant to change their carbon intensive habits the price would be very high. No type of consumption is completely inelastic and the scheme discovers the price at which people are prepared to change.

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