Would a carbon tax boost clean energy?

The carbon tax can be a useful tool for nudging near-competitive low-carbon technologies into the market and spurring modest carbon cuts, Stepp writes, but it’s at best a complementary climate policy. That changes if we use a carbon tax as a revenue-raiser to support additional policies aimed at making clean energy cost and performance competitive with fossil fuels.

New York Times columnist Thomas Friedman is nothing but consistent: he wants a carbon tax and he wants it bad. Since 2005, he’s mentioned “carbon tax” 41 times in his column. Yet, while his support for a carbon tax hasn’t waned, the characteristics of his preferred carbon tax policy have.

As ITIF argues in Inducing Innovation: What a Carbon Price Can and Can’t Do, pricing carbon by itself does little to support clean energy and carbon reductions. It can be a useful tool for nudging near-competitive low-carbon technologies into the market and spurring modest carbon cuts, but it’s at best a complementary climate policy. That changes if we use a carbon tax as a revenue-raiser to support additional policies aimed at making clean energy cost and performance competitive with fossil fuels. In other words, tying a carbon tax to aggressive energy innovation policy can get us better climate mitigation “bang” for our climate policy “buck.” It’s why I proposed an “Innovation Carbon Price” that ties 20 percent of carbon tax revenue to public energy innovation investments and 80 percent to strengthening corporate tax incentives for training, research, and capital equipment investments.

Friedman most often takes a simpler – albeit misguided – view: a carbon tax is the panacea for U.S. climate policy. In March 2006 he argued that a high enough carbon tax (or fuel tax) that ensures gasoline never falls below $3.50 to $4 a gallon would “make a host of new technologies competitive.” His basic premise is that a carbon tax provides a long-term price signal strong enough to raise the price of fossil fuels, which sparks consumer demand and private sector investment in clean energy alternatives. Recent history tells us this isn’t correct. Gas prices in March 2005 averaged $2.35 per gallon. Today, they’re hovering right around the $3.50 to $4 range Friedman yearned for, or for argument’s sake, a back-of-the envelope de facto ~$115 carbon tax.

Yet, zero-carbon electric cars aren’t competitive, but smaller gasoline cars and hybrids are. The amount of CO₂ emitted for each unit of energy supplied is nearly the same as it was in 1990. In fact, U.S. carbon emissions have modestly fallen in part because of the recession, which cut energy demand, and because of increased use of slightly cleaner natural gas at the expense of coal. Higher energy prices are helping near-competitive technologies expand into the market, but spurring a full transformation of our energy system to mitigate climate change will take much more policy than price signals. 

To be fair, Friedman often caveats his support for a carbon tax by mentioning what the United States should do with the revenue it would raise. In March 2005, he proposed using a carbon tax to pay down the deficit. In June 2010, he argued we should use carbon tax revenue to cut payroll and corporate taxes as part of a plan to heal the Administration’s strained relationship with the business community. The following month, he combined the two proposals into a grand energy policy bargain that he suggested Congress could make in the hours before cap-and-trade failed in the Senate. In September 2011 he wanted to use a carbon tax to “balance the budget” in an effort to get budget-hawks onboard. In January 2013, he doubled down on a carbon tax as the solution to reduce the deficit. In March he suggested 45 percent of carbon tax revenue should go to deficit reduction, 45 percent to tax cuts, and 10 percent to low-income households to offset higher energy prices.

For the most part, Friedman’s view is to use carbon tax revenue as a political bargaining chip. His neoclassicaleconomic worldview dictates that the carbon tax price signal is most important. Everything else is expendable. The market will spur all the innovation we need.

But it’s on this point that Friedman has shown the potential for policy evolution. In June 2011, he inherentlyrecognized the limits of price signals, arguing for a carbon tax to pay for “new infrastructure and stimulate clean-power innovation” and a gasoline tax to support a “massive increase in government supported scientific research.” And this month, Friedman upped his support for a more innovation-oriented carbon tax, calling for 50 percent of tax revenue to go towards corporate and income tax cuts, 25 percent into deficit reduction, and 25 percent into new investments in research, education, and infrastructure. Implementing a version of his plan would provide $20-25 billion per year in new funding for innovation – without a doubt a serious jolt to saggingfederal support caused by sequestration and budget cuts.

While it’s a stretch to say that Friedman has thrown aside his faulty neoclassical proclivities on the role of price signals and energy innovation, his potential evolution is important nonetheless. Friedman has been one of the most vocal supporters of climate policy and innovation (while often not at the same time). Bringing both together to create a cohesive carbon tax proposal moves the needle towards the type of innovation-based climate policies America needs to be debating and ultimately implementing. It reframes U.S. climate advocates’ near-myopic focus on carbon pricing, mandates, and subsidies and expands the discussion on how we can use those tools to spur innovation. It’s certainly a step in the right direction.

Source: Thomas Friedman’s Evolving Support for an Innovation Carbon Tax