The Energy Innovation Imperative

If Carbon Pricing Is Primary Solution, Climate Change Won’t Be Solved

The following article first appeared in Christian Science Monitor and is reproduced with the authors’ permission.

Carbon pricing has been the go-to solution for economists and environmentalists alike since climate change was identified as one of the foremost social and environmental challenges of our time.

Want a climate rescue plan? Carbon pricing. Want to raise revenue for clean energy deployment? Carbon pricing. It's the "silver bullet" for other things, too. Want to reduce reliance on foreign oil? Or raise revenue to correct other tax inefficiencies? Carbon pricing.

This approach appeals to many because of its strong roots in neoclassical economics, which suggests that higher prices will reduce consumption and lead to a big shift to renewable energy. But as long as nations use carbon pricing as their primary solution, climate change will never be addressed – for two reasons:

First, it takes a high carbon price to realistically change consumer habits. (Experts suggest around $30 per ton of carbon dioxide to start.) And no one wants to pay it.

The Australian government is fighting to repeal its national carbon price, set to reach $25.40 per ton in 2014-15, to reduce consumers’ cost of living and, as its Department of the Environment puts it, “boost economic growth, increase jobs, and enhance international competitiveness.” South Africa is the latest nation to pull back on its carbon pricing plan because of economic concerns. In early 2014, the EU Emissions Trading System carbon price was only $5 per ton, effectively the equivalent of raising the price of gasoline by five cents a gallon.

Politically feasible carbon prices are too low to shift consumer behavior away from fossil fuels. Adequately high carbon prices are tried and reversed, or are never tried.

Second, carbon prices, whether large or small, only raise the cost of fossil energy – they do not lower the cost of alternatives. They are unable to stimulate the multitude of technology breakthroughs in energy generation and storage needed to lower the cost and improve the performance of clean energy. With the Intergovernmental Panel on Climate Change’s (IPCC) recent – and effectively desperate – declaration that Earth’s warming trend is both “unprecedented” and “unequivocal,” it is a good idea to start thinking about a broader climate rescue plan.

The primary goal of both national and international climate policy should be to make the unsubsidized cost of clean energy cheaper than fossil fuels so that all countries deploy clean energy because it makes economic sense. This means a fundamental focus on innovation, including substantially more public investment in clean energy research, development, and demonstration (RD&D), and reforms of clean energy deployment policies so that subsidies incentivize the development of better technologies. International climate negotiations should also address innovation by offering high-income and emerging economies the option to gradually increase clean energy RD&D investment as a complement to an emissions reduction target. To start, a modest 0.065 percent target would increase global investment by $26 billion per year.

This is not to say that carbon pricing and innovation policy are mutually exclusive – a carbon price can be used at the national level to support a clean energy innovation strategy. For example, a modest $15 per ton carbon tax in the United States would provide enough revenue to offset some tax reductions as well as triple investment in clean energy RD&D. This so-called “innovation carbon price” discourages fossil fuel consumption while providing direct support for affordable low-carbon alternatives.

It is time to recognize that carbon taxes alone will not address global climate change. The fixation on carbon pricing within the climate debate has distracted the world from adopting a more effective and comprehensive set of climate policies that make economic sense. The debate needs to change for more viable, pragmatic, and high-impact solutions to emerge.

Matthew Stepp is executive director of the Center for Clean Energy Innovation (CCEI) and Megan Nicholson is a policy analyst with the center. CCEI is an affiliated research institute of the Information Technology and Innovation Foundation.

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