Tax Carbon or Innovate to Save the Climate?



In Sunday's New York Times Bush administration Treasury Secretary Henry Paulson, Jr. published an op-ed advocating the adoption of a carbon tax as a way to cut greenhouse gas emissions from burning fossil fuels and stimulate low-carbon and no-carbon energy production technology innovations. Paulson has joined with former New York City major Michael Bloomberg and hedge fund mogul, now climate warrior, Tom Steyer to found the Risky Business Project that aims to quantify the costs of future climate change to the economy. Their report will be issued later this week. In his op-ed Paulson argues:

I'm a businessman, not a climatologist. But I've spent a considerable amount of time with climate scientists and economists who have devoted their careers to this issue. There is virtually no debate among them that the planet is warming and that the burning of fossil fuels is largely responsible…

We need to craft national policy that uses market forces to provide incentives for the technological advances required to address climate change. As I've said, we can do this by placing a tax on carbon dioxide emissions. Many respected economists, of all ideological persuasions, support this approach. We can debate the appropriate pricing and policy design and how to use the money generated. But a price on carbon would change the behavior of both individuals and businesses. At the same time, all fossil fuel — and renewable energy — subsidies should be phased out. Renewable energy can outcompete dirty fuels once pollution costs are accounted for.

But will a carbon tax actually stimulate the invention of new no-carbon energy technologies? Theory suggests yes, but high gasoline taxes in Europe that are nearly the equivalent of a $500 per ton tax on carbon dioxide emissions have not led to the invention of cars powered by electricity generated by nuclear power plants and solar panels.

A June 13 op-ed, "Carbon Pricing Won't Solve Climate Change. Innovation Will," in the Christian Science Monitor by analysts at the Information Technology and Innovation Foundation argue that directly subsidizing research and development aiming to make no-carbon energy technologies cheaper than fossil fuels is a better way to go. Why? First, because a carbon tax that would be sufficiently high to encourage no-carbon energy R&D is politically infeasible. Consequently, they argue:

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.

Points in favor of R&D subsidies: (1) they would be much cheaper for consumers and producers than imposing a broad carbon tax, and (2) if they do end up producing cheaper-than-fossil-fuel energy production technologies, the process of imposing costs on people would be replaced with one in which people enjoy benefits instead.