Carbon tax isn’t efficient enough to solve and is unpopular OR existing measures solve (good for innovation cp versus carbon tax)

It is time to give up on the . Putting a price on carbon has not been  with the public (although a 2021 global poll  increasing support), and few politicians are eager to attach their name to a policy with the word “tax” in it. I, , have been a long-time supporter of carbon taxes. But there are two important reasons for a rethink.

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Focusing on market failures

First, major advances in ,  and  technologies have radically reshaped the policy environment over the past ten years in ways that many have been slow to recognise. Second, while carbon taxes are part of the optimal  to fight climate change, they are not the most important part. We can better target policies to fight climate change by identifying underlying market failures that make climate change a problem. These are:

Firms and consumers generally don’t pay for the damage caused by the greenhouse gases they emit.

Those who innovate are generally undercompensated for the value of what they create.

Existing infrastructure is designed around a fossil-fuel energy system.

Each of these three failures constitutes a different externality. The problem with carbon taxes is that they address only the first. Economists like the idea of a carbon tax because it forces firms and consumers to pay for the damage they cause, creating incentives for them to seek out more eco-friendly alternatives. While shifting consumption is good, innovation, when it works, is better. The benefits of innovation can spread to others across the globe and create lasting change that does not need perpetual government regulation to maintain. While carbon taxes can encourage innovation, policies like prizes, research grants and  do more to prioritise it.

“New technologies will require new grid and charging infrastructure, which only become viable when enough people make the switch. Subsidies can move the economy over that hump. Markets will then take care of the rest.”

Subsidising the solutions

One common critique of subsidies is that they involve bureaucrats or legislators making guesses about which innovations will matter when they decide how to spend taxpayer money. Advocates of a carbon tax believe that it is better to tax what you know to be bad, rather than subsidise what you think might one day be good. You never know where innovation might come from. Case in point: the world has spent billions of dollars each year subsidising technologies like  and , with the hope that they could one day replace fossil fuels, to no avail. 

Spurred on by a mix of pre-existing carbon-pricing policies, renewable-electricity mandates, government grants and tax  in  and , renewables are now  than fossil fuels. At the same time, innovation in electric-powered engines and battery technologies makes electric cars  with conventional ones. It is easy to pick winners when you already know who won.

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Markets chase lower costs. Forcing them to adopt higher-cost renewable technology is like pushing a boulder up a hill. It requires taxes and heavy-handed regulation. But now that renewables are getting cheaper, we just need to get that boulder over the transition-cost hump. New technologies will require new grid and charging infrastructure, which only become viable when enough people make the switch. Subsidies can move the economy over that hump. Markets will then take care of the rest.

Many believe carbon taxes are  because subsidies must still be paid for via taxes. But that efficiency presumes that governments use carbon-tax revenues effectively. It is not only unclear what counts as “”—economists’ preferred idea of returning money to people via a dividend has not  with US voters. Many also fear that  would be spent on things they care little about or actively resist. Furthermore, a case can be made that increasing income taxes (which primarily fall on the relatively well-off) to pay for subsidies is better than a carbon tax, which is paid by everybody, even if a carbon tax is ostensibly more efficient.

Finally, the efficiency case for the carbon tax rests on the assumption that energy markets are otherwise operating efficiently. But  from UC Berkeley and the University of Chicago  that because energy markets are often mispriced (because of technological limitations and a mess of regulations) carbon taxes can indeed be less efficient than other policies.

An international perspective

Perhaps the most important benefit of a climate policy focused on innovation is its ability to spread to the developing world. Most emissions going forward are expected to come from places like China, India and Africa.

It took just 12 years for most of the world to , because people saw the inherent value in personal mobile-communications technology. Innovative, lower-cost renewable-power technologies can follow the same path. It is likely far easier to convince voters in  to adopt money-saving technologies than it is to convince them to support a costly carbon tax.

If I could turn back time to the Industrial Revolution—when historical greenhouse gases began to surge—a carbon tax would undoubtedly be the centrepiece of my climate agenda. But we do not live that world. Existing regulations, carbon prices and subsidies have already done a lot of the work towards achieving the innovation we need to meet global environmental goals. In that world—our world—a focus on innovation and infrastructure are the policies with the highest chance of success.