Innovation Economics Can Fight Global Warming

Robert Atkinson, one of the leading experts on technology policy and President of the Information Technology and Innovation Foundation, published an article in BusinessWeek yesterday explaining how conventional economic doctrines led to the Waxman-Markey climate bill and why innovation economics offers a better climate strategy:

While the so-called cap-and-trade mechanism (or some kind of carbon pricing) is needed, it isn't enough. To really avert climate change, the government needs to adopt an explicitly green innovation policy. Unfortunately, green innovation is getting short shrift in this bill and in Washington generally...

Both conservative and liberal neoclassicists oppose any government allocation of scarce goods and services. They prefer a market tool such as emissions trading that would set a price for carbon pollution, believing -- incorrectly -- that companies seeing potential profits would then develop needed technologies. The two camps differ slightly in how to determine a carbon price. In line with their faith in markets, most supply siders who worry about global warming favor carbon taxes, while liberal neoclassicists favor cap and trade...

Innovation economists see efforts to reduce emissions of carbon dioxide and other greenhouse gases as fundamentally an innovation challenge. They are less sanguine than neoclassicists about the power of price signals alone to bring about a solution, believing that the profit motive works only when there are adequate alternatives to shift to. Without viable electric cars, for example, people will still drive gasoline-powered cars, no matter how much fuel costs, although they might switch to more fuel-efficient models.

Moreover, they believe that even if the price signal is "correct," the innovation that's needed is often delayed because of market failures such as externalities -- situations where innovators can't get the full reward from their innovations. Consequently, adherents of innovation economics say that the government must spend more on research and development to develop cost-effective noncarbon or low-carbon energy alternatives.

Atkinson concludes that carbon pricing will help, but the front-and-center strategy for creating a clean energy economy and reducing emissions should be large public investments in clean energy innovation (Note: Breakthrough Institute calls for $30-80 billion per year of public investment in clean energy RDD&D).

So who is right? Putting a price on carbon emissions would certainly help. But it's wishful thinking to believe that raising the price by $20 to $40 a ton would make a big difference... If we are to halve global carbon emissions by 2050--the minimum reduction needed, according to many scientists--we will need radically cleaner technologies such as fully electric cars, affordable solar cells, and large-scale electricity storage devices.

To make this happen, the federal government should develop a broader approach, including spending more money on clean energy R&D. The government can afford it. In 1980, about 10% of federal research went to energy--down to less than 2% today. Getting back to 1980 levels would lift energy R&D expenditures by $11.4 billion a year...

In the end, differences over climate change go to the heart of most economic policy debates in Washington. Neoclassicists give short shrift to innovation (and innovation policy), and believe innovation is best left to the invisible hand of the marketplace. Likewise, neo-Keynesians don't give innovation its due, arguing that government can simply mandate the results it needs. In contrast, innovation economists put innovation at the center and argue that advances require bold public-private partnerships. We can't afford to do less.

Comments

Despite the questionable science around global warming or climate change, we are likely to replace most of our fossil fuels with fuels from agricultural products in the next century. As a result, these fuels will be carbon neutral.

For the Natural Laws of Innovation see http://hallingblog.com/2009/07/15/natural-laws-of-innovation-1/

By Dale B. Halling on 2009 07 16

"But it's wishful thinking to believe that raising the price by $20 to $40 a ton would make a big difference ..."

How much of a difference would $100 a ton make?

Suppose, for example, that a carbon fee is applied to electricity generation, with fee revenue used exclusively to subsidize new-source renewable energy. The fee formula is determined to create a price incentive for clean-energy commercialization equivalent to $100 per ton. But since there would initially be no "new sources", fees would be zero at the outset of the program. Fees would become significant only when new renewables gain significant market share, by which time market competition from an expanding, subsidized clean-energy sector would deter fossil-fuel energy producers from passing the cost of carbon fees on to ratepayers.

We need to change our thinking about carbon pricing. "Price" does not equate to "cost". A high price does not even preclude zero cost.

By Ken Johnson on 2009 06 19