Extract

When considering technological options in a world where restricting emissions is increasingly the policy response to climate change, firms must choose between lower present-cost/lower future-benefit carbon-friendly production and higher present-cost/higher future-benefit carbon-efficient production. This chapter argues that firms will increasingly favor the latter over time, whether they are based in carbon-restricting nations or whether they intend to continue selling goods and services in those markets. That is the case because one of the effects of carbon-restricting policies is the creation of a market price for carbon, which turns carbon into a factor of production, thus affecting firms’ cost-minimization strategies. This chapter explains in detail the economic dynamics that support this technological switch both at the firm and inter-firm levels in carbon-restricting countries and how this trend to carbon efficiency will extend to producers in carbon-friendly nations. The mere possibility that carbon-restricting governments might resort to adopting level-the-playing field measures, such as border carbon adjustments (‘BCAs’), increases regulatory uncertainty for carbon-friendly producers and, thus, steers their decisions toward more carbon-efficient production.