(Illustration by Adam McCauley)
Confronting climate change will require a large-scale reduction in the emission of carbon into the Earth’s atmosphere. In the field of economics, the textbook solution to that problem is to tax carbon. But a policy that relies primarily on taxes may not offer the best route toward a low-carbon future. “The key to reducing carbon emissions is to transform the way we produce energy,” says Daron Acemoglu, professor of economics at Massachusetts Institute of Technology. That transformation will depend on incentives that lead firms to invest in “clean” as opposed to carbonemitting “dirty” technologies.
Acemoglu and several colleagues developed an economic model in which clean technologies compete against dirty technologies at the level of both production and innovation under different policy arrangements. Their analysis led them to conclude that subsidies for research should play a prominent role in fostering the development of clean energy. Carbon taxes have a crucial role to play as well—they can hasten the move away from dirty energy sources—but subsidies to promote innovation in clean technology should come first. “In our estimate of optimal policy, we start with high subsidies that phase out over time and with carbon taxes that start low and increase over time,” Acemoglu explains. An approach that prioritizes high carbon taxes would also enable a transition to clean energy production, he notes, yet it would do so at the cost of lowering overall consumer welfare. (That’s because, at least at first, unsubsidized clean technologies will cost more to adopt than dirty technologies.)
To create an empirical foundation for their work, Acemoglu and his colleagues analyzed data for a sample of 1,576 US firms in the energy sector that were in operation between 1975 and 2004. The sample included a wide range of companies that develop or deliver energy inputs. The researchers studied (among other factors) research and development spending by these firms and the rate at which the firms engaged in energy-related patent activity that involved either clean or dirty technology. From this analysis, they derived a model for understanding the dynamics that cause firms to pursue innovation in clean energy instead of dirty energy.
Along with modeling the economic effects of their optimal policy, the researchers estimated the effect that it would have on climate change. The right combination of research subsidies and carbon taxes, they contend, would keep the Earth’s temperature from rising more than 2 degrees Celsius above the current baseline. Under this policy, they add, global temperatures would actually start to drop after about 40 years.
The researchers’ analysis also has important implications for the feasibility of shifting to clean energy. People generally assume that the cost of reducing carbon emissions is apt to be prohibitively high. Not so, according to Acemoglu and his colleagues. Switching to clean technology will be expensive and will require ambitious policy changes. Yet once that switch occurs, producers will be able to generate energy cheaply. So the long-run costs will be less onerous than many economists have assumed.
John Van Reenen, professor of applied economics at the MIT Sloan School of Management, agrees with that assessment. “Costs may seem high initially, but by building a stock of knowledge on green technology, we move down the learning cost curve rapidly,” he says. “A solution to climate change is feasible if enough [money] is invested in research.” (In the same journal issue that featured the study by Acemoglu and his colleagues, Van Reenan and other researchers published a related study that focused on the automotive industry. That study found that carmakers respond to gasoline price increases by boosting their investment in clean technologies.)
Daron Acemoglu, Ufuk Akcigit, Douglas Hanley, and William Kerr, “Transition to Clean Technology,” Journal of Political Economy, 124, 2016.
Read more stories by Corey Binns.