The Carbon Tax, Then and Now

September 19, 2011 | Devon Swezey,

In the debate over climate legislation in 2009 and 2010, it was conventional wisdom that a price on carbon was the sine qua non of effective climate policy. All Very Serious People knew that you could not reduce carbon emissions or drive clean energy innovation without a price on carbon, either through a carbon tax or a cap and trade system.

 

Indeed, leading venture capitalist John Doerr used to travel around the country hammering home the three top things that the government needed to do to catalyze a clean energy revolution. In order, they were: 1) put a price on carbon, 2) put a price on carbon and 3) put a price on carbon.

How the times have changed. In a piece posted over the weekend, Tyler Cowen, a prolific blogger and card- carrying economist at George Mason University, writes that there are a number of reasons--10, in fact--why the case for a carbon tax is not as airtight as its advocates claim:

1. Other countries won't follow suit and then we are doing something with almost zero effectiveness.
2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse. 3. There is Jim Manzi's point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers. Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they've done no better than stop the growth of carbon emissions; see Robert Bryce's Power Hungry, which is in any case a useful contrarian book for considering this topic. 4. Especially for large segments of the transportation sector, there simply aren't plausible substitutes for carbon on the horizon.
5. A tax on energy is a sectoral tax on the relatively productive sector of the economy -- making stuff -- and it will shift more talent into finance and other less productive sectors.

6. Oil in particular will become so expensive in any case that a politically plausible tax won't add much value (careful readers will note that this argument is in tension with some of those listed above).

7. A carbon tax won't work its magic until significant parts of the energy and alternative energy sector are deregulated. No more NIMBY! But in the meantime perhaps we can't proceed with the tax and expect to get anywhere. Had we had today's level of regulation and litigation from the get-go, we never could have built today's energy infrastructure, which I find a deeply troubling point.

8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.

9. Jim Hamilton's work suggests that oil price shocks have nastier economic consequences than many people realize.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax. Maybe we won't adopt green energy until it's really quite cheap, in which case let's just focus on the subsidies.

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage.

Economists like to say that a carbon tax would "maximize economic efficiency," but this is only true if we could somehow institute a harmonized global carbon price. Such an outcome was always a fantasy but is especially so today given the cantankerous state of international climate negotiations.

As readers of this blog know, the Breakthrough Institute has long argued that there are political limits to raising the price of carbon, especially in the developing world. Yet in order to have any significant effect on demand for low carbon energy technologies, the price of carbon would need to be higher than any political economy has been willing to bear. Moreover, a strictly price-based comparison between clean and dirty energy ignores many of the other non-market barriers that must be solved for clean energy to adopted on a meaningful scale, such as regulatory and infrastructure hurdles, issues with intermittency, technology risk, and other barriers. A carbon price may encourage a switch to already available mature technologies, but it won't do much to encourage the development of new innovations that will be necessary to displace fossil fuels.

What's the alternative? As Cowen notes, "maybe we won't adopt a green energy until it's really quite cheap." For the last seven years, the Breakthrough Institute has articulated, and continues to enhance, a strategy that is focused explicitly on making clean energy cheap by driving radical innovation in clean energy technologies. And that innovation, as history shows us, is catalyzed first and foremost by epic public investments.

Fortunately, energy innovation has moved into the mainstream. Even John Doerr, the carbon price devotee, has become a proselyte to the energy innovation agenda, and as part of the American Energy Innovation Council (AEIC) has called for a tripling of federal investment in energy innovation to $16 billion per year.

To be sure, the old guard will continue to clamor on about the immutable centrality of a carbon tax. Witness New York Times Columnist Tom Friedman's incoherent broadside against federal investment in clean energy in favor of carbon price fetishism.

Yet with leading economists and business leaders openly discussing the inadequacy of carbon pricing and the need for major investments in clean energy R&D, demonstration, and deployment, it's clear that while carbon pricing will undoubtedly be revived in the future, the energy innovation agenda is here to stay. After years of failed efforts with regulation-centered energy policy, many more groups are shifting their intellectual capital toward the difficult work of structuring energy innovation policies to catalyze a clean energy revolution. And that's something that any serious climate advocate should support.