Google relies heavily on McKinsey’s US Low Carbon Economics Tool to write this optimistic report. It boils down to the claim that enacting carbon pricing will trigger a “free lunch” for our economy and the environment. I wish this could be true but is it true?
While the McKinsey team have all attended Ivy League schools, they are not Ivy League profs and there is a difference! They are a for profit business selling advice and information rather than merely being “truth seekers” (again there is a difference).
Without charge, McKinsey offers this overview of their vaunted software. As shown in exhibit 1, they have built an applied general equilibrium model. To make a long story short, there are dozens of behavioral elasticities (such as if the price of electricity goes up, how much will demand decline by) for which these guys must make up estimates to feed into their model. In the 50 page report, I can find no discussion of how they calibrate their model or whether their optimistic estimates are sensitive to which behavioral elasticities they choose. This is not science. This is wishful thinking. While I would love to see carbon pricing, this is economics at its worst as these “economists” make tight predictions without providing any true details about how they generated their predictions.