Nordhaus, the Pope and the Market

William Nordhaus has criticized the hostility of Pope Francis to the market mechanism in his last encyclical, in an article in the New York Review of Books. This article explains to the Pope that markets are certainly not perfect, but they have more potential than that acknowledged by Francis. Markets and public intervention sometimes are complementary, as in cap and trade to fight climate change. A good aspect of the encyclical is that the Pope acknowledges the scientific reality of climate change. I had an interesting discussion of this article with my students at UAB's Master in Economics and Business Administration. One of them defended the attack of the Pope on consumerism, and said that he should accordingly recommend influencing the demand curve as a way to reduce negative externalities as well. A good point. Here's how Nordhaus' articles ends:
"Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. Permits for emissions are traded like other financial assets, and indeed they are often highly volatile; but there is no evidence that they are the favored instrument of financial speculators. Rather, they are volatile because future economic conditions (such as electricity demand or natural gas prices) are uncertain.
Perhaps no one will attend to Pope Francis’s attack on trade in permits and implicitly on carbon pricing. Perhaps his endorsement of climate science and the reality of warming and environmental damage will be effective in turning the tide toward strong actions.
But he has missed a unique opportunity to endorse one of the two crucial elements of an effective strategy for slowing climate change. He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause".