The End of Carbon Price Orthodoxy

March 27, 2008 |

Among policy makers, environmentalists, and the general public, the syllogism goes that if you care about climate change, then you support a carbon price. Environmental groups devote their time and resources to achieving a price for carbon, either in the form of a direct carbon tax, or through cap-and-trade legislation. Investing in emerging technologies is seen as prudent complementary policy at best, and an unnecessary distraction at worst.

Then there are those of us who think technology development ought to be at the center of climate change policy. We think this problem is too big for our current energy system to handle, and we will need to devote tremendous resources to creating a new energy infrastructure that can one day support the aspirations of nine billion inhabitants of the planet. We believe that a carbon price can play a role in an R&D-driven agenda, but on it's own, it will not be near enough.

A slew of thoughtful articles this week questioned the central role cap-and-trade has played thus far in policy discussions. First there was Tony Blair, quoted in the New York Times, saying that he doubted cap-and-trade without a global carbon regime would work. Given that China and other developing nations have made perfectly clear that they're not interested in joining the Kyoto bandwagon, Blair is implying that emissions trading doesn't cut it as a solution to the carbon problem.

Then there was Monica Prasad's op-ed in the Times yesterday describing the failure of Norway's carbon tax, and the success of Denmark's. Denmark's carbon tax was effective only because the revenue subsidized technology R&D, rather than being snatched up by programs like Sky Trust, which would divert the money to things like health care or consumer rebates. The carbon price's raison d'ètat, Prasad argues, is to fund clean energy so that we can phase out carbon-based energy. Some amount of investment in clean energy must come before carbon pricing, because only when we have cheap and effective clean energy will we gain the political leverage necessary to implement a carbon price.

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Wind power in Denmark provides 18.5 % of the nation's electricity.

Finally, Jeffrey Sachs hit the nail on the head with his short but powerful piece in Scientific American this week. He acknowledged what energy experts have been trying to tell us for years: a price for carbon isn't enough. Even if we took advantage of every possible energy efficiency opportunity available to us, today's level of technology cannot support the dual aspirations of reducing emissions and increasing prosperity. If we try to meet these new-world aspirations using old-world technologies, we will stifle economic growth for ourselves and for billions in the developing world -- not to mention fail at curbing global warming.

To Sachs, global warming isn't about cutting back, and it isn't about each of us doing our own small part. Maximizing the efficiency of our outdated energy system won't be enough. What we need now is a complete overhaul of our energy system -- we need multiple breakthroughs at every level of development of a diverse array of alternative technologies.

Ask anyone from an environmentalist to an oil executive if they support clean energy, and you can bet the answer will be yes. But what we really need is support where it counts -- technology R&D should be the number one item on our agenda, and the recipient of the majority of our resources. As Sachs puts it,

It is difficult to see how coal-based developing economies such as China and India will subscribe to tight targets on emissions until they know whether CCS actually works. It is difficult to set highly restrictive emissions goals for major industries, such as automobiles, without knowing more about which low-cost technologies will actually work and at what cost. Confidence in the low-emission technologies will feed back into political acceptance of tighter permit systems or higher emissions taxes.

Sachs frames a daunting task, achievable if we devote immense resources to developing cheap, clean energy technology. Contrast Sachs' statement with what Grist's Dave Roberts wrote yesterday:

Why not cushion the blow of higher energy prices on low-income and working families? Why not use it to reduce the (regressive) payroll tax? Why not use it to help train workers laid off in fading industries? Why not use it to fund weatherization and retrofitting of existing buildings, to reduce energy use? Why shouldn't social and economic justice enter the picture?

Roberts misunderstands -- or simply chooses not to respond to -- the argument that a carbon price only makes sense if it is funding clean energy. If carbon price revenue goes to various worthy, but unrelated, causes, an incentive is created to keep the tax in place and keep funding those causes. This is backwards policy; the end game of the carbon price is to produce no revenue at all, because eventually there should be no carbon-based energy to tax.

A carbon price makes fine complementary policy to an investment-driven agenda, but it has its limits. The jury is still out on whether carbon trading will have any effect on emissions reductions in Europe, and there is a lot of reason to believe that it will not. But one thing it most definitely cannot do is to generate large-scale research, or develop, demonstrate, and deploy breakthrough technologies.

Let's hope that 2008 will mark the end of the carbon price orthodoxy, and the beginning of getting down to the real business of investing in a new energy system.


What's a distraction is the phony dichotomy. A carbon tax is essential and funding for R&D is essential. While the folks supporting carbon taxes (generally) also support massive R&D it is bewildering that the reverse isn't also true. What gives?

For all the talk of "breakthrough technologies" Jeffrey Sachs outlines a very ordinary set of technological innovations surely to be on the horizon: "Consider three potentially transformative low-emissions technologies: carbon capture and sequestration (CCS), plug-in hybrid automobiles and concentrated solar-thermal electricity generation."

Transformative perhaps, of course - but not out of the mainstream of historical innovation.

Like any national goal such as victory in WWII, the underlying R&D is essential but that is but one piece in a much larger puzzle. Carbon tax is another and immediate deployment of existing technologies is perhaps the most important. For just like saving for retirement - what you do in those "early years" has by far the greatest impact. The opportunity cost of even a few lost years at this point is practically incalculable.

Carbon tax mustn't undermine technical innovation - it should as you point out in Denmark, support it. So please, stop with the anti carbon tax rhetoric. Let's do EVERYTHING that is right and required.

PS - As for China, it's imperative to note that China went off the rails in response to our rejection of Kyoto. If America would stop talking and start acting on the problem (the next administration) it is not a fantasy to think China would climb back aboard and work like no other country toward solving the problem.

By kenlevenson on 2008 04 07

You assume that Dave Roberts primary goal is reducing carbon emissions and thus find his position illogical. My feeling is that, for many like Dave, the primary issue is reshaping society and fighting global warming is more of a means than an end. To Dave, for instance, the hypothetical invention of cheap, pollution free energy for cars/trucks would be bad since it would encourage driving (instead of mass transit), suburbs (instead of cities), and keep the SUV practical. From this point of view, Dave's position on spending huge new taxes on his social agenda is completely sensible.

By Robert L. on 2008 04 02

It will not surprise you that CO2 emitters in California are pushing for free distribution of carbon permits and high caps, setting us up for another failure like Europe's first try. As S&N say in their recent book, the chances of getting carbon prices high enough to produce the desired result are remote -- and perhaps not even desirable considering what they may do to the economy. We'll get more certain results by pouring the carbon price into a new energy economy. In my recent column in RenewableEnergyWorld I wrote about one productive way to spend the money: a government funded clean energy venture capital fund.

By Mark Braly on 2008 03 30