Wednesday, July 1, 2015

Are carbon taxes a barrier to energy innovation?


Not intended as a rhetorical question.  Toward the end of this interesting Vox piece on new solar technologies, there's a claim by the policy expert that "Policies like renewable portfolio standards or carbon taxes might sound technology-neutral, but they tend to preference mature technologies that are already on the market."  I can see how portfolio standards might protect incumbents, if the portfolio requirements are written in a way that requires, say, wind or silicon-cell solar but omits the possibility of substituting other technologies that might do better on some weighted measure of cleanliness/cost.  But why would carbon taxes "preference mature technologies"?  

The best answer I can think of is that perhaps our expert is assuming that the government sets the price of a carbon tax at the optimal point based on current costs of compliance.  That is, usually the optimal price is the point where the marginal social damage curve crosses the average private marginal cost of mitigation curve (a more detailed explanation is in Part I here).  If we draw the latter curve using the cost of incumbent technologies, we might be allowing more pollution than would be optimal with a newer, cheaper technology.  This would tend to diminish the returns to cost innovation.

This assumes a regulator that does not dynamically adjust prices.  And maybe that's a realistic assumption.  But one can design a system that dynamically adjusts itself, with cap-and-trade being the most obvious example: if I invent a cleaner way of producing energy, I can sell it to folks who will now need fewer permits, allowing them to sell some of their existing supply.  I tend to think of cap-and-trade as just one version of a carbon tax, but maybe Vox's expert just meant to say  that he prefers cap-and-trade to other forms of carbon pricing?

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The effect of policies on innovation is a good topic. If somebody has a carbon-reducing innovation, though, wouldn't it be profitable in a carbon-tax regime too, because emitters could reduce their taxes? They'd also reduce their emissions, whereas under cap-and-trade, the amount of emissions would stay constant.

Posted by: Eric Rasmusen | Jul 11, 2015 8:07:40 AM

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