Carbon prices won't drive the level of energy innovation required to mitigate climate change and fuel sustainable global development, according to a new report by the Information Technology and Innovation Foundation (ITIF).

One of the most influential pieces of conventional wisdom in the energy and climate debate is that a price on carbon is the key to unleashing the breakthrough innovation required to make clean energy technologies much cheaper. Venture capitalist John Doerr captures this view well, saying in 2009 that "no long-term signal means no serious innovation at scale."

But the new ITIF paper, co-authored by Research Analyst Matt Hourihan and ITIF President Rob Atkinson, finds that the idea that carbon prices can spur breakthrough innovation is built on flawed assumptions about the nature of technological change and wholly inconsistent with real-world evidence of the sources of breakthrough technology innovation.

According to the paper, many economists rely on models that simply assume that the pace of technical change accelerates in response to higher carbon prices:

The way many climate models treat technological change is illustrative. In many models, technical change is a central variable used to determine climate mitigation costs; thus any assumptions made about the sources and rate of change have major consequences in determining the costs and benefits of action. Unfortunately, due in part to technical limitations within the latest models, the approach that neoclassical models use to assess induced technical change may be suspect. For example, many models treat technical change as arbitrarily responsive to changes in the price of carbon; still others treat technical change and learning rates as monolithic across the entire economy, ignoring major observed differences in learning rates across technologies and sectors.

Perhaps the most egregious example of such reasoning is found in the modeling of the Intergovernmental Panel on Climate Change (IPCC) itself. In modeling various scenarios to estimate the magnitude and costs associated with necessary emissions reductions, the authors built in significant automatic emissions reductions due to assumed levels of technological change -- without explaining where these reductions would come from. Such a practice significantly underestimates the magnitude of the challenge.


To be sure, price changes can help make incremental improvements to existing technologies. Carbon prices can boost the diffusion of mature, commercially available alternative energy technologies, as well as economize the use of energy as it becomes incrementally more expensive. However, it will not lead to innovative breakthrough energy technologies, as carbon price proponents often claim.

Hourihan and Atkinson present case studies for nearly a dozen breakthrough technology innovations--many of which are listed by the National Academies as among the greatest engineering achievements of the twentieth century--and find that price incentives and changes in relative prices played little or no role in the creation of those technologies.

Rather, it is investment (often by the public sector) in focused, strategic research and technology development that have resulted in some of the great innovations of our time, from electrification to automobiles, airplanes and computing.

Overall, the report does a great service to the energy and climate debate by refuting the myth that a carbon price is the end-all, be-all of energy innovation, and places carbon pricing in its proper context. Critically, the authors note that a carbon price could also be used to generate needed revenue for targeted investments in clean energy innovation--something that the Breakthrough Institute and our colleagues discuss in "Post-Partisan Power."

A copy of the ITIF report can be downloaded here.


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