Innovation Is Not Enough: Why Polluters Must Pay

An economist argues we must cap emissions or put a price on carbon in order to avoid the worst impacts of climate change

by Gernot Wagner, reposted from Yale Environment 360

Steven Chu, the Secretary of Energy and a Nobel laureate, has argued that what the world needs is a handful of Nobel-level breakthroughs in energy technology. They sure would come in handy in the fight to avoid the worst consequences of global warming. But counting on breakthroughs is a crapshoot. We cannot rely on a miracle to navigate away from our current head-on collision with the planet.

That hasn’t stopped Breakthrough Institute co-founders Ted Nordhaus and Michael Shellenberger from arguing — as they did in a recent article for Yale Environment 360 — that technology research will stop the runaway train of climate change. You don’t have to bother limiting emissions through a carbon price or cap, they say, because energy innovation will come to the rescue.

Frankly, this is bunk. Reasonable people may disagree about what policies will best fight climate change. But climate science makes one thing clear: The planet must limit carbon emissions, or face a bleak future. And we will never get there unless we make policy changes that align market incentives with this goal. It’s economics 101. There’s no way to avoid making polluters pay for the damage they cause, or they’ll keep causing it. That either starts with a price on carbon or, ideally, a cap on carbon emissions.

Nordhaus and Shellenberger argue that taxing or capping carbon pollution is tough, so better to invest in new pollution control technologies instead (though they don’t say where those investments would come from —the deficit-obsessed U.S. Congress doesn’t seem poised to provide major new funding for clean-energy R & D). Certainly, it’s true that it will be tough to keep polluters from passing on the costs of their pollution to the rest of us, as they always have. It’s also true that innovation in governance has never been easy. Ask Niccolò Machiavelli, who wrote in The Prince, back in 1505: “The innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.”

And, yes, greater investment in clean energy R&D will likely produce important advances, especially if government takes a more active role, as urged by the American Energy Innovation Council, whose leaders include hardheaded business types like John Doerr, Bill Gates, Chad Holliday, and Jeff Immelt.

But no one, including the American Energy Innovation Council, would seriously suggest — as Nordhaus and Shellenberger do — that we just focus on innovation and dismiss the hard but all-important task of capping or pricing pollution.

R & D alone just isn’t enough. There’s an all-important second “D”: deployment. And clean energy deployment won’t happen by itself. The world already has a $5 trillion-a-year energy industry that makes lots of money for lots of people, and does so while forcing the rest of us to pay enormous socialized costs of its pollution.

That’s O.K., say Nordhaus and Shellenberger. All we need to do is subsidize new technologies to bring down their price. They aren’t the first to make this claim. Ted Nordhaus’s uncle, the Yale University economist William D. Nordhaus, has written eloquently on the topic. Companies don’t care that their inventions may set the stage for others to create profitable new products, he says, and as a result, they don’t invest enough in research. The logical prescription: spend public money on research.

But the elder Nordhaus, like any good economist, also understands that the only way to make these subsidies effective is “directed technical change” — that is, subsidize in order to generate needed innovation, but also put a cap or a price on pollution to make sure the innovation does what we want it to do.

This is what the European Union does. It subsidizes R&D (&D) through a variety of direct and indirect means, while employing a cap-and-trade system that covers almost half of EU emissions. It’s difficult to determine the portion of emissions reductions achieved by each of these policies, especially given the economic downturn and other external factors. What is clear is that total emissions in the sectors covered by the EU’s Emissions Trading System have declined by 4 percent from 2007 to 2010, the last year for which comprehensive data is available. The decline is expected to continue in the years ahead. (View a graphic).

Nordhaus and Shellenberger try to argue that Europe’s cap has been counterproductive. To support their claim, they focus on emissions intensity — emissions per unit of economic output. That is fundamentally the wrong metric. The planet doesn’t care about emissions per dollar . It’s absolute emissions that count. Moreover, Nordhaus and Shellenberger are forced to cherry pick data to make their case.

They pick 2008-2009 and argue that energy intensity in the power sector increased despite cap and trade. It’s true, EU energy intensity did increase slightly by around 0.3 percent that year. More to the point, however, Europe’s overall energy intensity — much like the United States and most everywhere else on the planet — has declined consistently over time. Even in 2008-2009, absolute power sector emissions decreased, and that wasn’t a fluke. The latest (partial) data show fossil generation in large EU states fell 3 percent in 2011.

Switching from coal to natural gas was responsible for some of the EU’s emissions reductions. A natural gas boom in the United States may have a similar effect. This boom, Nordhaus and Shellenberger argue, was the result of basic research on shale gas extraction technologies. They may be right about the role of government funding here, but that has little to do with the need for controlling pollution through caps or prices.

It’s true that natural gas may prove to be a lower-carbon fuel than coal for generating electricity, but only if leaks in the natural gas system, from production to use, are strictly limited. It’s also true that even if the U.S. shifted entirely to gas from coal, we would still not meet the long-term emissions reduction goals science tells us are necessary.

In short, we need to ramp up and be able to sustain R&D (&D) — and that is nearly impossible when all market forces are pointing in the opposite direction. We need to guide private research efforts, and we need to pay for public ones. The American Energy Innovation Council lists five ways for government to come up with the necessary funds, four of which point to increasing the price of fossil energy.

The best policy instruments toward that end are pricing or, ideally, capping greenhouse gas emissions. Already, Europe’s Emissions Trading System has helped give the EU the global lead in green technology deployment, and similar policies are being put in place from California to Australia and New Zealand. India has a coal tax. Brazil has placed an absolute limit on emissions and has significantly decreased emissions due to deforestation. China is starting seven regional cap-and-trade pilot programs.

Policies like these can change market incentives, which, despite the contentions of Nordhaus and Shellenberger, are key to fighting climate change. Only by getting the incentives right can we create the conditions for development and — most crucially — deployment of new technologies.

Ultimately, the world needs both new technologies and proper market incentives. Neither can go it alone.

Gernot Wagner is an economist at the Environmental Defense Fund, where he works on market-based solutions to a wide range of environmental problems. He is author of the book But Will the Planet Notice? How Smart Economics Can Save the World.

This piece was originally published at Yale Environment 360 and was re-printed with permission.

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11 Responses to Innovation Is Not Enough: Why Polluters Must Pay

  1. Tim says:

    the deficit-obsessed U.S. Congress

    Since when? Federal taxes are at their lowest share of GDP in 60 years. Don’t buy into right-wing talking points by confusing deficit posturing with genuine concern over deficits (even unintentionally).

  2. Gernot (and by extension Climate Progress) –

    I think we’re talking in circles here. Here’s the main issue: we need to drastically cut carbon emissions. How do we do it? We need to transform the entire global energy system from using fossil fuels to using low-to-zero carbon technologies. How do we get those technologies? This question is the heart of the policy debate.

    As ITIF has studied (and Breakthrough Institute, as well as others), a carbon price alone won’t get us the transformational clean technologies that are cost and performance competitive. Neither would a cap on emissions. New technologies don’t just appear like “manna from heaven.” The market won’t start suddenly producing EV batteries or solar panels that are super cheap and of higher performance without subsidies by market signals alone. There is a very well recognized ecosystem of investments, policy support, partnerships, and institutions that research, develop, and deploy transformational new technologies. And that’s why examples like shale gas technologies, the Internet, GSP, etc. are important in this debate. They show the types of support necessary to get the clean technologies we need.

    So our policy goals should be to strengthen that ecosystem. You rightfully point out the need for R&D. We are critically under-supporting clean tech R&D and we need more of it. But our current approach is spending the lion’s share of public $$’s on deploying existing technologies. But those deployment policies aren’t aligned with any innovation goals or with federal R&D institutions and emerging technologies. At the end of the day, this approach won’t work. Today’s technologies won’t deploy worldwide to get us to near-zero carbon emissions. They may reduce emission intensities some (like in the EU), but they don’t come anywhere close to meeting our significant climate goals. This is not to say that deployment isn’t part of an innovation agenda – it is – but what we’re doing today has nothing to do with innovation, and that’s troubling.

    Lastly, you correctly point out that folks – like ITIF and Breakthrough – have proposed setting a carbon price and using that revenue to fund innovation. It’s a great idea and aligns market signals to innovation and is representative of the types of cohesive innovation policies we need. But arguing solely for one part of an innovation agenda (a market signal) is self-defeating and misses the whole point about energy innovation and technology development.

    Matthew Stepp
    Senior Analyst
    Information Technology and Innovation Foundation

  3. thomasrodd says:

    Thanks for writing this response. Predictably, the “Breakthrough” Institute BS is now finding its intended way to the political sphere, where there are many who need credentialed malarkey to help excuse not doing what needs to be done.

  4. Joe Romm says:

    Uhh, Matthew. I’ve been arguing for more federal R&D longer than almost anyone else. It is you guys who repeatedly diss a real carbon price, which must be a component of climate action. We need both, but the price is the sine qua non.

  5. Joe – Read my response. It agrees with what you said. Price, R&D, etc. are part of a bigger innovation strategy. The key is making each geared towards innovation. My point (and I’m not the only one), is that by itself and without aligning it to drive innovation, a price on carbon alone is a weak driver of innovation (if high enough, great at pushing some incremental improvements, but not at getting us the transformations we need).

    That’s not dissing nor is it aimed at delaying climate action. It’s trying to figure out the best methods so we actually accomplish what we all want to accomplish. Simply put, a carbon price absent or disconnected from an innovation strategy (and support) doesn’t get us deep emission cuts.

    But it seems like advocates like yourself don’t want to have that discussion.


  6. Joe Romm says:

    MS: If you can find someone on this planet who has argued more, argued longer, and written more calling for far higher R&D in clean energy than me, please let me know who it is. I testified repeatedly on that in the 1990s, wrote the cover story of a 1996 Atlantic monthly article on it, and of course, oversaw the largest clean energy R&D program of its kind in the world at the time, where I worked overtime to keep the R&D budget from being trashed by the Gingrich Congress — and with my colleagues we were able to succeed.

    So I’ll not be lectured by you or anyone else on support for R&D.

    The problem is that while the advocates for carbon price have always urged a big increase in clean energy R&D, the advocates for a big increase in clean energy R&D, have devoted an incomprehensible amount of time and effort to trashing a CO2 price, most especially the Breakthrough bunch, but I think we both know some other folks who do that too.

  7. Dick Smith says:

    In a recent post you showed a fossil-fuel chart of CO2 reserves (2,795 GtCO2 = 761 GtC)valued at $28 trillion, and that $22 trillion of it has to stay in the ground. That means we can burn $6 trillion of it.

    Here you say the globe has a $5 trillion a year energy industry.

    I’m not an economist. Do you have a simple way of explaining the difference. Since the cost of extracting the raw material is (as I understand it) 75% of the price of the product, I would have assumed that the “value” of the known reserves of fossil fuels that you say we can burn ($6T) would be a lot more than ONE-year’s worth of the “global energy system” ($5T).

    Can you help me better understand what you mean by “global fossil fuel industry”. Obviously, it’s a lot more than the value of the known reserves.


  8. Dick Smith says:

    Excuse me, not “global fossil fuel industry”. You used the term “global energy system.”

  9. Mulga Mumblebrain says:

    ‘Cornutopian’ techno-optimism is part a niche denialist market and part a Rightwing ego-trip usually associated with the ‘libertarian’ asylum and its inmates. A great problem with technological innovation is that, under capitalism, profit-maximisation is paramount, and unintended consequences are ‘externalities’ which are usually suppressed and denied.

  10. Mulga Mumblebrain says:

    I agree that a price on carbon and vastly expanded, Manhattan Project type, research, are both absolutely required, but, please Gaia, don’t make the carbon price another venue for market trading, speculation, fraud and malfeasance. Make it a set price, rising at a transparent rate, a tax the proceeds of which to be hypothecated to research, development and installation and income compensation and redistribution.

  11. Mulga Mumblebrain says:

    Denialist entrepreneurs.