The Breakthrough Institute

A recently released Environmental Defense Fund report, "What Will it Cost to Protect Ourselves from Global Warming?" concludes that achieving deep emissions reduction targets in the United States is feasible with a cap-and-trade system. The study looks at 5 reports finding that cap-and-trade will result in lower economic growth, and the study concludes that the economic sacrifice is so little that cap-and-trade is an ideal climate policy. According to the study, the elements of well-designed climate policy are as follows:

• Predictable requirements for emission reductions, with a long time horizon, winding up at 70-80% below current levels.
• A transparent, fairly enforced, economy-wide cap-and-trade system that rewards innovation and punishes inefficiency in the marketplace and permits a wide range of offsets to drive the price of reducing emissions down.
• Removal of barriers and subsidies that artificially choke off the flow of investment in new technologies and processes.

All five reports showed cap-and-trade policy resulted in lower economic growth.

The report highlights the importance of technological innovation - "the engine of progress in the American economy is technological innovation" - and asserts that a carbon price is the best way to achieve developments in clean energy:

"A hard, long-term cap on carbon emissions will provide the market signals necessary to spark innovation and unleash the kinds of powerful market forces that propelled our economy in the postwar period. A failure to stimulate innovation through a carbon cap will cede leadership in the low-carbon economy to others.

A hard cap on carbon emissions will guarantee demand for cutting-edge technologies, harnessing the same forces of innovation and change that propelled the semiconductor industry half a century ago."

But what about public investments? The study fails to recognize the role of strategic federal investment in technological innovation and infrastructure in post-war growth. It cites the examples of semiconductor development and the Apollo Project, and the lesson it takes is that we simply need a hard cap on carbon:

"The military provided the market boost to help the industry develop in the 1950s and 1960s, giving it an early lead it never relinquished. In the case of low-carbon technologies, the government has a different but equally important role to play. A hard cap on carbon emissions will guarantee demand for cutting-edge technologies, harnessing the same forces of innovation and change that propelled the semiconductor industry half a century ago.

The moonshot proposed by President Kennedy in 1961 is equally instructive..."

We provided a longer history of these and other projects in our essay, "Fast, Clean Cheap," in the Harvard Law & Policy Review, and we concluded that major public investment in clean energy technology and infrastructure is vital for achieving domestic and international emissions reduction targets:

"The efficacy of this kind of public investment is well-documented. For instance, in the roughly five years that the federal government guaranteed the market for microchips in the 1960s, the price of a microchip came down from $1000 per chip to between $20 and $30 per chip. According to Stern and the IPCC, "extensive and prolonged public support and private markets were both instrumental in the development of all generating technologies. Military R&D, the US space programme and learning from other markets have also been crucial to the process of innovation in the energy sector." The IPCC further explains that "government support through financial contributions, tax credits, standard setting and market creation is important for effective technology development, innovation and deployment."

The dramatic price and performance improvements in wind technology occurred because Denmark guaranteed its market for wind energy in the 1980s and 1990s. "Development of the Danish wind and Brazilian biofuels industries each required sustained government support over decades. The Danish subsidies totaled $1.3 billion, and Danish wind companies now earn more than that each year. At current oil prices, Brazil may soon similarly recoup its investment in biofuel technology." Similarly, the Japanese government saw breakthroughs in the price of solar panels as a result of its intervention in the solar market in the 1990s.

Large public investments in technology innovation and infrastructure are not new. Most of America's largest industries have benefited from strategic public investment in their development: agriculture, aerospace, transport, biotechnology, and energy. Farm land was granted to early American frontier farmers, and agriculture has been publicly subsidized since the early twentieth century. Before the Civil War, Abraham Lincoln was best known for his aggressive advocacy of publicly funded transit projects intended to modernize industry: canals, roads, and later, famously, railroads. The U.S. government created computer science, aerospace, and the modern highway system through investments that were designed to compete with the Soviets and were justified by national security concerns. And today's highly mature energy markets are the result of decades of subsidies for coal mining and oil drilling...

Many successful new technologies cannot become commercially viable without public investment in the form of government procurement. The Defense Department's procurement of microchips facilitated the technology's market penetration and helped decrease its cost. It is not just microchip companies like Intel that benefited from these public investments. All high tech firms that depend on microchips, the Internet, and computer science exist thanks to these "tech-push" strategies...

The programs would benefit industry as well. In contrast to a regulation-centered approach that seeks to impose costs on businesses, the investment-centered framework defines existing industries as potential allies rather than as likely opponents. History provides a useful guide. Private firms built the railroads, but American taxpayers paid the entire bill. Historians consider the first Transcontinental Railroad, built in the 1860s, to be the greatest American technological feat of the nineteenth century. Nearly one hundred years later, Congress passed and President Dwight D. Eisenhower signed the National Interstate and Defense Highways Act into law.

Innovation in science and technology may drive as much as 90% of overall economic growth. Investments in clean energy technology are particularly promising because they both drive economic growth and avoid (or reduce the cost of) the most expensive impacts of climate change. Using an economic model aimed at calculating both the economic costs of climate change and the costs of mitigation, Yale economist William Nordhaus estimates that clean energy alternatives have a net value of roughly $17 trillion in 2005 dollars."

Indeed, an analysis by the Perryman Group of the Apollo Alliance's original $300 federal investment plan found that it would stimulate $1.4 trillion in GDP growth, repay the $300 billion federal cost within 10 years from new tax revenues, and create 3.3 million new jobs.

Conclusion: Which climate policy would you prefer: a stringent cap-and-trade system that establishes a large price on carbon and results in lower economic growth, or a modest price on carbon that raises funds for strategic federal investment in clean energy technology and infrastructure that expands the economy and pays for itself in increased tax revenues?