Carbon Tax Could Support Innovation and Economic Growth While Lowering Cost to Reduce Carbon Emissions, New ITIF Report Finds

June 25, 2018

WASHINGTON—As countries consider policies to reduce carbon dioxide emissions, a new report released today by the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, highlights the positive impact carbon taxes can have on productivity and economic growth, as well as global warming. The report shows that a carbon tax would induce innovation in less carbon-intensive technology, thereby lowering the economic cost of reducing emissions. Additionally, using the revenues to lower the after-tax cost of research and capital investment would further reduce or even eliminate any negative effect on GDP.

“Innovation plays a key role in mitigating global warming, as well as boosting productivity and economic growth,” said ITIF Senior Fellow Joe Kennedy, author of the report. “Raising the cost of carbon-intensive activity will give firms stronger incentives to innovate and develop more carbon-efficient technologies.”

A carbon tax addresses the demand side of the carbon emissions market by imposing a tax on upstream fuels containing carbon. This cost is then passed on to downstream users of products derived from burning those fuels, forcing both firms and consumers to incorporate the social cost of higher carbon emissions into their economic decisions.

By raising the price of carbon-intensive technologies, a carbon tax would lead to more investment in clean technology innovation beyond what would otherwise occur. New carbon-efficient technologies will become cheaper and, as a result, more widely adopted. By inducing innovation in new technologies, the cost of achieving a given amount of emission reductions will be reduced.

Just as important, using carbon tax revenues to lower the after-tax cost on research and capital investment would further boost the economy, dramatically reducing the total cost of lowering emissions.

“The social benefits of research and investment in carbon-efficient technologies are greater than the benefits a company receives,” Kennedy said. “As the clean energy economy continues to evolve, society will be better off if companies conduct more R&D and invest in more machinery and equipment than is strictly profitable for them to do. A moderate carbon tax will deliver environmental benefits, induce innovation in the technologies of the future, and, if accompanied by tax incentives to invest, could even lead to faster economic growth.”

Read the report.