Why A Price on Carbon is Not Enough to Solve Climate Change

David Leonhardt of the New York Times posted an interesting blog "The Fight Among Environmentalists"  which discussed how some environmentalists and neoclassical economists defend the idea that putting a price on carbon is the key to solving climate change.  My posted comment is here:

The real issue is if one had to pick which would do more to solve climate change - a price on GHG emissions or a clean innovation policy - the answer is clear: the latter. As we stated in a recent ITIF report, "Ten Myths of Addressing Global Warming" one key myth of the climate change debate is that “Higher prices on greenhouse gases are enough to drive the transition to a clean economy.” The reality is that while price signals are helpful, but are not sufficient in significantly reducing GHG.

There are at least 3 reasons why. First, for many clean energy technologies to be competitive with fossil fuels, governments would have to set very high prices for carbon pollution, and typically governments face stiff political resistance to doing so.

Second, even if it were feasible to hike carbon prices radically, we still cannot assume it would drive reductions. If higher carbon prices are really the key, then more Europeans would be driving electric cars. In many European nations the price on carbon for transportation fuels is around $400 per ton. Yet, while the high tax induces Europeans to drive smaller cars and drive less, it has not induced them to switch to electric cars. The reason is simple. Price signals only lead to behavior change when there is a viable substitute. If beef suddenly tripled in price, Americans would be consume more chicken. There is a less expensive substitute for beef. This is not the case when it comes to energy. Electric cars are still not real substitutes for internal combustion cars and are priced well out of reach for most consumers. Europeans (and the rest of us) will drive electric cars when we have significantly better batteries (and the infrastructure that supports electric vehicles).

Third, a high carbon price does not solve the problem that companies who innovate aren’t able to keep all of the knowledge from that innovation and the long-term risks associated with large private investments in technology development and deployment. Nor does it facilitate the establishment of critical infrastructure, such as new transmission lines, grid upgrades, or storage for intermittent sources like wind and solar.

A price on carbon can make some existing cleaner technologies (including efficiency) more price competitive with dirty energy. But existing technologies are not enough to drive the change in the global energy system needed to address climate change. Given population and economic growth, to cut GHG emissions by 50 percent by 2050 we need an 84 percent reduction in “dirtiness” for every unit of energy we utilize. This level of improvement cannot occur without dramatically breakthroughs in clean energy innovation, something price alone will not achieve and has never achieved.

So why do many people, including economists like Rob Stavin, see a price on carbon as the answer. As ITIF noted in our new report, Economic Doctrines and Approaches to Climate Change Policy, differences over climate change policy stem in large part from competing “economic doctrines”. Neoclassical economists, Keynesians and Innovation economists all hold different views of how economies work, and what climate change policy should look like.

In particular, the prevailing neo-classical economics view sees climate change (and virtually every other economic issue) in terms of price-mediated markets. As we note, “Holders of the neoclassical economics doctrine see climate change as a relatively straightforward problem attributable to a simple error of not charging emitters of greenhouse gases (GHG) for the full costs of their emissions.” For most of them, a clean energy innovation agenda is tantamount to the dreaded “industrial policy,” where the state substitutes it’s wisdom for that of market. That’s the real reason they favor carbon taxes and dismiss or even downright oppose a clean energy innovation agenda.

To be clear, their view is not based on empirical research or some regression model that finds that price is the key variable. It is based first and foremost on doctrine. In contrast, holders of the innovation economics doctrine (which include ITIF and the Breakthrough Institute) argue that price signals alone are insufficient to drive clean energy transformation and clean energy innovation policies to spur research, development, and deployment of next generation alternatives are the preferable solution, ideally supplemented by a price on carbon.