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.