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Inducing Innovation

What a Carbon Price Can and Can't Do

Information Technology and Innovation Foundation | March 24, 2011

CREDIT: Frank Allan Hansen (CC).

By Matt Hourihan and Robert D. Atkinson

The development of breakthrough technologies has underpinned waves of economic transformation and created solutions to problems like hunger, disease, and pollution. Today, many are looking to innovations in energy technology to solve problems of global warming and fossil energy dependence. But the key question is how to get that innovation.

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. As we argue, there is no reason to believe it will be any different for future clean energy innovation.

Despite the lack of evidence that price changes drive disruptive innovation, the belief in price as the main driver persists thanks to a widely held "understanding" of technological change that is oversimplified at best and flawed at worst. While a carbon price can be a useful tool in helping to nudge the adoption and diffusion of nearly competitive technologies, it does little to pull forth early-stage, disruptive technology or stimulate the advance of basic knowledge upon which new technology is built. This is because the innovation process varies across industries and technologies, and is responsive to price signals only to a limited extent and in certain contexts. Existing technology has a role to play, but without breakthrough advances, it will not be possible to fully address climate change and displace fossil fuels, and the United States will miss out on an enormous opportunity to lead the clean economy.

This report documents the underlying assumptions about carbon pricing and innovation inherent to the debate about climate and energy policy and examines how, if at all, these assumptions square with real-world evidence of the sources of breakthrough innovation and general technical change. Where are they accurate and where do they fall short? The implications of the findings for crafting policies to accelerate innovation in clean energy technology are discussed.

External Link: Inducing Innovation: What a Carbon Price Can and Can’t Do

Read More: Economy, Energy, Environment, Governance, Innovation, Jobs, Sustainability, Tax, Technology, United States, Americas, Global

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