Krugman Still Doesn’t Get It

July 20, 2011 | Alex Trembath, Devon Swezey,

By Alex Trembath and Devon Swezey

Yesterday, New York Times columnist Paul Krugman published a blog post repeating his insistence that a carbon price is the key (if not the only) incentive needed to unleash "the magic of the marketplace" and drive innovation in clean energy technology. It was reminiscent of the conventional wisdom of the climate community over the past decade, and reflective of Mr. Krugman's own typically neoclassical views on the economics of climate change. Unfortunately, Mr. Krugman (and most climate policy advocates) continues to get the story wrong on clean energy innovation.


In the spring of 2010, Krugman wrote a widely-read piece in the New York Times Magazine called "Building a Green Economy," which pondered why, if anti-environmentalists are so adamant in their free-market faith, do they not support a price on carbon dioxide emissions. A carbon price, in Krugman's estimation, would serve as a signal to the market, driving innovation in cleaner technologies to the point where they achieved price parity with fossil fuels.

Since publishing his original article, cap-and-trade has crashed and burned. The prospect of pricing carbon emissions in the United States is effectively zero for the foreseeable future, but Mr. Krugman is still pushing a carbon price as the key to unlocking a clean energy future. On his blog, he noted the successful innovation in fossil-burning energy technology over the past century, and suggested that the only thing standing in the way of renewables achieving the same innovation path is the lack of a carbon price.

"The point is that renewable energy like wind and solar has not gone through a comparable process of improvement -- yet -- because the incentives haven't been there. But once we get to the point where a carbon price makes these commercially viable, there's every reason to expect huge improvement over time through, yes, the magic of the marketplace."

But Mr. Krugman neglects the substantial obstacles to a large-scale shift to renewable energy technologies, stemming from technical challenges related to intermittency of electricity generation, energy storage, and materials constraints. Contrary to what Krugman implies in his article, fundamental scientific breakthroughs are required to fully replace our fossil fuel infrastructure with clean energy technologies, a view shared by Nobel physicist and current Secretary of Energy Steven Chu.

To his credit, Krugman acknowledges the need for new innovation in clean energy technology, a view that would place him outside of the mainstream climate advocate's mantra that "we have all the technology we need and lack only political will." Yet in expressing his zeal for a carbon price, Krugman ignores the actual history of technological innovation. As research from the Breakthrough Institute has shown, the emergence of key technologies has much more often been the product of directed and sustained government investment than the result of price signals. Breakthrough's report, "Where Good Technologies Come From," demonstrates that most game-changing technological developments--from interchangeable parts to railroads to jet engines to microchips to the iPhone, GPS and the Internet--resulted from direct federal investments in research, procurement, and deployment, often in active partnership with private industry.

Krugman falls victim to an ignorance of technological history and the relative roles for technological "push" policies, like research and development, and demand "pull" policies, like a carbon price. As Robert Atkinson and Matt Hourihan of the Information Technology and Innovation Foundation explain in their report on carbon pricing, "truly disruptive innovation comes, not from price-based demand-pull, but from focused (and occasionally, not-so-focused) technology supply-push, in the form of research-driven technological development."

Indeed, if our goal is driving innovation in maturing clean energy technologies, a carbon price is not even the most effective demand-pull mechanism in our policy toolbox. To be sure, pricing carbon can increase demand for clean energy technologies, but it is not optimized to drive innovation in energy technologies. Krugman writes that aviation technology steadily improved through "experience and practical innovation," and that clean energy must do the same. But innovation in aviation and jet engines did not happen because the price of sea travel (the main substitute) increased. Rather, military procurement created a demanding customer relationship that constantly pushed the private sector to innovate and improve technology for military application.

Despite his enduring affection for a price on carbon emissions, there is no indication that Mr. Krugman's sensibilities would prevent him from embracing an energy agenda founded on government research and investment. Indeed, Krugman's New York Times colleague David Leonhardt has embraced a technology-first energy innovation agenda, recognizing that a carbon price will be more politically difficult and less effective in the absence of cheaper, more reliable clean energy technologies.

As the Breakthrough Institute has consistently advocated, there are multiple policies and institutions with great potential to drive investment and innovation in clean energy technology. Some, like the Advanced Research Projects Agency - Energy, are already in existence (if underfunded). Others, like a Clean Energy Deployment Administration (CEDA), are not. Overcoming the challenges presented by market lock-in of fossil energy infrastructure, engineering challenges of clean energy technology, and climate change demands a broad suite of policies, of which a carbon price is only a small (and not even the most important) part.

Mr. Krugman is no technologist, by his own admission. In yesterday's blog post, he referred to the engineering of wind technology as "not my field of expertise, to say the least." But if a political economist as influential as Krugman is to continue weighing in on the energy technology challenge, it would be appropriate for him to develop a literacy in the history of technological innovation. Ever the champion of publicly funded health care, Krugman should have great affection for the government policies and institutions that can more effectively build a green economy.

After the failure of the carbon-price-centric American Power Act last summer, and with austerity measures increasingly dominating federal policy, the prospects for a carbon tax in the United States remain very low. Without one, the case for an energy innovation agenda not only remains, it has grown stronger.

Alex Trembath is a Breakthrough Generation Fellow and Devon Swezey is Project Director at the Breakthrough Institute.

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