The high oil prices of 2008 have lead to a similar result as in the 1970s: the notorious oil-burner Americans cut back on their carbon-dioxide emission habits. I think this shows that the main source of carbon emission (fossil fuel) is price and income sensitive, and if you raise the price, consumption and emission will fall. Correcting the market with a carbon tax would surely reduce emission.

Many observers have pointed out that Europeans have lower carbon-dioxide footprints because they drive less in significantly smaller cars. This is not just a good habit, this is the cause of very high taxes on European fuel, which does not let ordinary Europeans to burn any amount of gasoline. Now that oil prices have soared in America in such a significant way that families start to feel it and the Americans are responding like the Europeans: sale of gas-guzzlers is down, they cut back on oil consumption, and mass transit use is on a 50-year high level. (CC Image: Steffe)

The eminent Harvard economics professor, Greg Mankiw has a superb collection of other market reactions, namely substitution on high oil prices. His ongoing series on cross-elasticity of demand shows how people turn to less fuel-intensive (thus less carbon-intensive) alternatives.

• Passenger train ridership, residence near railways becomes more lucrative,and more people use urban mass transit.
• Instead of cars that eat a lot of gas even golf-carts appear on the roads, smaller and less fuel consuming cars are becoming more sought after both on the second-hand and the new car market, scooters are in demand, and so are bicycles and related services.
• In poorer countries cames are back in cargo transport and mules are appretiated again.
• It also turns out that sometimes you need not burn gas if you can get what you want on the internet.
• The Foreign Policy Blog also rightly points out that regulators and conservationist failed to stop Japanese fishermen from over-fishing tuna, but soaring oil prices might give the endangered populations some breathing time.

I guess this is what greens have always wanted. So why not give a permanent lift to the gas price? Kenneth Rogoff, the eminent former chief economist of IMF and a professor at Harvard makes a good argument in the January issue of Foreign Policy that correcting the price of fossil fuels, such as imposing a high VAT on fuels as a carbon tax is a much better solution to curb carbon emissions than the European ETS system. I think this argument has got several empirical underpinning since the publication of the interview: the response of Americans to the rising fuel prices and the confession of the European Commission that carbon-dioxide emission is actually rising under the EU regime are compelling cases for taxation.(CC image: niznoz)

I believe that European emission quota system, which is now embraced by both American presidential candidates, have proven to give too indirect and ineffective signals for burning carbon. The end-user price system is a much more robust and reliable means of giving the right incentives.

Update: Even tall ships may come back to business.