Carbon tax triggers lock-in to established business models, which trades off with fundamental system-change

By increasing the relative price of carbon-intensive goods and services, carbon pricing is understood to incentivize the adoption of existing low-carbon technologies and (indirectly) stimulate the development of low-carbon innovations (). Investments in low-carbon alternatives are not only encouraged through present carbon prices but also through expectations about future carbon price increases. It is, however, unclear how strong such innovation effects actually are and whether carbon pricing can generate more than incremental changes. Tvinnereim and Mehling (), for instance, review the record of several prominent carbon pricing strategies and find that they have, to date, helped realize limited opportunities for innovation and system-wide transformation. Rather, current trajectories and emission reductions deviate little from business-as-usual scenarios, even in the case of Sweden’s $140 (USD) carbon price for the transport and building sectors. Others have observed similar patterns (–). This suggests that, in practice, carbon pricing strategies tend to promote the optimization of established business models and technologies but neglect more fundamental system change necessary for deep decarbonization. While optimization remains important, it does little to confront carbon lock-in, encourage radical innovation, or avoid dead-end paths (). Indeed, research indicates that investments in long-lived, carbon-intensive infrastructures, such as natural gas, are still ongoing, even in jurisdictions with prominent carbon pricing regimes (, ). Retiring these investments prematurely in order to align with deep decarbonization pathways will be politically difficult and costly (i.e., due to compensation for affected firms and communities). In contrast, we argue that incremental change alone is insufficient to pursue low-carbon pathways at the required pace. Established systems are characterized by deep lock-ins (e.g., large sunk costs in infrastructure and cultural conventions underpinning user practices) that encourage movement along established development trajectories (, ). Deliberately accelerating transitions, therefore, involves weakening lock-ins (e.g., removing fossil fuel subsidies and banning carbon-intensive technologies) and supporting system building for low-carbon alternatives (e.g., stimulating new innovations, business models, and markets).