Wednesday, April 6, 2011

Carbon prices will not drive innovations

Cap and trade or carbon taxes may be useful to make us save energy but it will not drive the kinds of innovations that are needed according to a new study.

It is commonly argued that a high carbon price will drive innovations. e.g the EU Climate Commissioner said that last year and famed Harvard University professor Michael Porter says "A carbon tax would lead to a rethinking of energy use, drive innovation in the green economy and yield profits for "first movers," 

This conventional wisdom is now contradicted:
A carbon price can be a useful tool to nudge the adoption of mature technologies, but it does little to pull forth disruptive new technology or stimulate the advance of basic knowledge upon which new technology is built."
Says a recent report from the ITIF . The report shows by many examples that innovations of the kind and scale we need to cope with climate change, are beyond what markets can sort out.
In the current energy and climate debate, most advocates argue that putting a price on carbon emissions through either a carbon tax or a cap-and-trade program is the key to spurring breakthrough energy innovation. This conventional wisdom is based on the notion that higher dirty energy prices will provide the right market signals to entrepreneurs, who will then develop breakthrough clean alternatives. But advocates of the price approach provide little to no evidence for this notion, for the simple reason that there is little to no evidence for it. In fact, over the past century, in major innovation after major innovation, the pursuit of research and public support for early-stage technology and markets, and not price signals, have driven breakthrough innovation.
Real break-through innovations originate in research-driven technological development. Markets drives innovations in mature technologies where market barriers apart from price are minimal. Apart from being valuable in developing strategies for climate change, and play down the value of carbon pricing for driving innovation, I think the research is also challenging the frequent claims of how superior markets are to drive innovations. Antibiotics, internet, most progress in aviation and nuclear industries have been results of public funded research, and certainly not by entrepreneurs.

The study does recognize that carbon pricing, whether cap and trade or tax or something else, can encourage saving by consumers and drive technologies oriented to that. Also uptake of existing technologies that are close to being competitive can be speed up by carbon pricing. Critically, the authors note that a carbon price could also be used to generate needed revenue for targeted investments in clean energy innovation.

Other articles on similar topic: the Greens in Australia

Australia should be spending $2.5 billion a year on new low-emissions technologies by 2017, a doubling of current expected expenditure, climate change adviser Ross Garnaut says.  Prof Garnaut argues there's a case for "exceptionally large fiscal support for firms that invest in research, development and commercialisation of new low-emissions technologies" over the next decade. He says pricing carbon will drive innovation but "on its own it will not increase it by enough". reports thewest in Australia
Putting a price on carbon emissions will have limited environmental benefits and will not drive the level of technical innovation required to tackle climate change.That was the message for delegates at the close of the Tyndall Centre's inaugural conference on financing green technology earlier this week as Dr Jonathan "Jack" Frost of Johnson Matthey Fuel Cells argued that, regardless of more recent difficulties with emission trading schemes, carbon pricing initiatives had a history of failing to deliver environmental benefits.writes Businessgreen.
A recent report about the EU carbon trading scheme confirms that the scheme is not sufficient to drive innovations.

But what of complimentary instruments such as performance or regulatory standards and carbon finance mechanisms which aim to create economic incentives? These instruments, while they have been shown to be effective at producing favorable environmental outcomes, do not necessarily drive innovation in the marketplace. For example, as in the prior cases of sulphur dioxide emissions and leaded gasoline, emitters were simply able to invest in “off-the-shelf” technologies to deal with the externalities. It is important to remember that regulatory certainty around these environmental pollutants did not result in new innovation because the technological alternatives were already in existence. Furthermore, the cost of removing sulfur or lead as an environmental practice was virtually invisible to consumers; a move that seems unlikely in the case of CO2 and manmade greenhouse gas. For greenhouse gas emissions, which can conceptually be treated as an environmental pollutant, the required off-the-shelf alternatives (for existing infrastructure) arguably do not yet exist or are not yet cost competitive ! Case in point: it is not yet possible to retrofit a coal burning power plant with a carbon capture and storage unit. writes carboninsights.

Putting a price on carbon dioxide emissions will not be enough to drive the innovation needed to clean up dirty energy systems, according to Bruegel, a think tank based in Brussels, and Harvard economists.Reinhilde Veugelers, a senior research fellow at Bruegel, warned on Monday that a “private green innovation machine has not yet taken off” and that private companies still were not making environmental innovations their core goal.Ms. Veugelers cited figures from the World Intellectual Property Organization showing that just 2.2 percent of all patent applications between 2000 and 2006 were for environmental applications. She said the global electricity sector “was almost absent” in terms of green innovation. Reported The New York Times in 2009.

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