Inducing Innovation: What a Carbon Price Can and Can’t Do

March 23, 2011
A carbon price is unlikely to yield sufficient levels of innovation if we don’t also invest in clean technology development.

In the current energy and climate debate, most advocates argue that putting a price on carbon is the key to spurring breakthrough energy innovation. But this conventional wisdom is flawed. Over the past century, in major innovation after major innovation, the pursuit of research and public support for early-stage technology and markets, and not price signals, have driven breakthrough innovation. As we argue, there is no reason to believe it will be any different for future clean energy innovation.

Indeed, while a carbon price can be a useful tool in helping to nudge the adoption and diffusion of nearly competitive technologies, it does little to pull forth early-stage, disruptive technology or stimulate the advance of basic knowledge upon which new technology is built. This is because the innovation process varies across industries and technologies, and is responsive to price signals only to a limited extent and in certain contexts. Existing technology has a role to play, but without breakthrough advances, it will not be possible to fully address climate change and displace fossil fuels, and the United States will miss out on an enormous opportunity to lead the clean economy.

This report documents the underlying assumptions about carbon pricing and innovation inherent to the debate about climate and energy policy and examines how, if at all, these assumptions square with real-world evidence of the sources of breakthrough innovation and general technical change. We trace the histories of several key breakthrough innovations, and find a minimal role for price changes in spurring their development. The implications of the findings for crafting policies to accelerate innovation in clean energy technology are discussed.