The Need for Carbon Pricing

Yesterday we saw a presentation from the Danish company Rockwool International A/S that makes a high-end insulation product. It’s not only a good insulator, but it offers excellent fire protection and sound insulation. Basically asbestos without the cancer. And in their presentation they did a good job of making the case that efficiency-emphasizing building codes and incentives for retrofitting of houses is an absolutely essential complement to carbon pricing. You don’t need to make any strong assumptions about rationality to see that things like the long-term energy costs of slight drafts are the sort of things consumers tend to overlook. In this regard, people don’t live up to a neoclassical definition of “rationality” but rather than say people are being irrational, I prefer to say that it would actually be totally irrational for people to waste their time becoming extremely well-informed about the decades-long financial costs of living in a house that’s not as well-insulated as it could be.
One way or another, surveys indicate that people massively overrate the proportion of their energy usage that goes to appliances and gadgets and underrate the amount going to heating and cooling the home. Mandates and incentives for better insulation can save tons of energy and tons of money to boot.
That said, the presentation also brought home to me the vital importance of pricing. Rockwool says a form of mineral wool—it’s something they make by melting rocks at extremely high temperatures and then “spinning” the molten rock into wool-like substances of various density. This is a pretty energy intensive process. And there are other kinds of insulators out there. But energy is involved in producing all of them as well. And then you also need to factor in transportation of raw materials, the lifespan of the product, and a million other things. In fact, you probably need to factor in more things than anyone really can factor in. But if you put a price on carbon emissions, then that price will be reflected in the end-price of the product. If the result is some large relative change in the price of fiberglass versus mineral wool, that will tell us something important. Alternatively, it might remain the case that both products cost a similar amount, in which case people will choose on the basis of other things.