Without Carbon Pricing Any Green Energy Plan Is Fundamentally Incomplete

photo: Jeff DelViscio

Whether its in the form of a carbon tax or a cap-and-trade system, some form of carbon pricing is essential to stimulate development of the low carbon technologies which will reduce dependence on fossil fuels and stimulate economic growth, a new briefing from the Institute for Policy Integrity at the NYU School of Law says.

This may be preaching to the choir for regular TreeHugger readers, but here is their argument in favor of setting carbon prices to stimulate greentech growth:Carbon Pricing Essential to Green Energy Plans
The briefing (Unlocking the Green Economy: How Carbon Pricing Can Open the Floodgates of Private Investment in Clean Energy) argues that carbon pricing must be at the center of any green energy plan because "it acts across the entire economy, affecting large and small economic actors in various sectors and incentivizes smart choices."


Subsidies, changes in regulation, and incentives to states for policy development will all be useful. However, decision makers simply cannot anticipate all of the opportunities for efficient investment, and there is no political will for sufficient subsidies that would mimic the effect of carbon pricing on private investment. Without carbon pricing, any green energy plan will be fundamentally incomplete.

But Carbon Pricing Must Be Introduced Wisely
Given the economic recession, carbon pricing must be implemented wisely to maximize the potential stimulus effects and without causing unnecessary shocks to the economy. Targets for carbon prices can be set ahead of time—either directly through a tax, by identifying cap and trade levels, or through "safety value" mechanism—and publicized. This step will give the economy a chance to adjust, stimulating rapid investment and avoiding surprises. Prices can also start small and be ratcheted up automatically over time, so that change is incremental, and new technologies are given time to develop. Finally, the proceeds from carbon pricing can be reinvested directly into the economy either through rebates, tax reductions or spending.

As I said, I think in this audience most of us take the need to set a price on carbon so that the price of goods and services more accurately reflects the environmental costs associated with their production and transportation, but the report does provide some useful arguments for explaining the benefits of carbon pricing on stimulating energy efficiency improvements and alternative energy development.

Powerful Price Signals Will Make Carbon Intensive Methods Unattractive
After identifying several factors that have limited adoption of energy efficiency measures —"Misalignment of incentives between technology purchasers and electricity consumers, inadequate knowledge of efficiency opportunities, overly restrictive expected "pay back" periods for homeowners, and uncertainty of future electricity prices"—the report says,

A price mechanism would also send a powerful signal— both through the market and political/cultural channels—that could help overcome information barriers to optimal adoption. An increased price of electricity would provide incentives in the marketplace to structure transactions so that the end users of electricity had power to shape efficiency affecting purchasing decisions.

Which is an academic way of saying that as prices for carbon intensive fuels, goods and services rise, consumers and producers will have meaningful financial incentive to switch to less carbon-emitting methods of productions, goods, etc.

In terms of alternative energy development, though the report says that the effect of carbon pricing on this sector is analytically different than for energy efficiency improvements, at a different level the idea is the same: As prices rise for carbon intensive items, there will be a switch in research and development, deployment and adoption of less expensive alternatives.

Overall, the effect of carbon pricing on investment in the energy sector will be enormous. There is no politically feasible set of subsidies that could approach the level of private investment that will be spurred through a carbon pricing policy. Subsidies can only play a supporting role—without an effective mechanism to price carbon in the market, it will be simply impossible to unleash the massive investment potential of private markets for the green economy transition.

Read the full report: Unlocking the Green Economy: How Carbon Pricing Can Open the Floodgates of Private Investment in Clean Energy
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Tags: Economics | Energy Efficiency | Renewable Energy


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