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Creating a Clean Energy Revolution: The Arguments For and Against Carbon Taxation

In the debate over climate legislation in 2009 and 2010, it was conventional wisdom that a price on carbon was the sine qua non of effective climate policy. All Very Serious People knew that you could not reduce carbon emissions or drive clean energy innovation without a price on carbon, either through a carbon tax or a cap and trade system.

Textbook Economics
Textbook Economics: Increase the tax, reduce the quantity. See how simple it is?

Indeed, leading venture capitalist John Doerr used to travel around the country hammering home the three top things that the government needed to do to catalyze a clean energy revolution. In order, they were: 1) put a price on carbon, 2) put a price on carbon and 3) put a price on carbon.

How the times have changed. In a piece posted last weekend, Tyler Cowen, a prolific blogger and card- carrying economist at George Mason University, writes that there are a number of reasons--10, in fact--why the case for a carbon tax is not as airtight as its advocates claim:

1. Other countries won't follow suit and then we are doing something with almost zero effectiveness.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse.

3. There is Jim Manzi's point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers. Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they've done no better than stop the growth of carbon emissions; see Robert Bryce's Power Hungry, which is in any case a useful contrarian book for considering this topic.

4. Especially for large segments of the transportation sector, there simply aren't plausible substitutes for carbon on the horizon.

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy -- making stuff -- and it will shift more talent into finance and other less productive sectors.

6. Oil in particular will become so expensive in any case that a politically plausible tax won't add much value (careful readers will note that this argument is in tension with some of those listed above).

7. A carbon tax won't work its magic until significant parts of the energy and alternative energy sector are deregulated. No more NIMBY! But in the meantime perhaps we can't proceed with the tax and expect to get anywhere. Had we had today's level of regulation and litigation from the get-go, we never could have built today's energy infrastructure, which I find a deeply troubling point.

8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.

9. Jim Hamilton's work suggests that oil price shocks have nastier economic consequences than many people realize.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax. Maybe we won't adopt green energy until it's really quite cheap, in which case let's just focus on the subsidies.

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage.

Economists like to say that a carbon tax would "maximize economic efficiency," but this is only true if we could somehow institute a harmonized global carbon price. Such an outcome was always a fantasy but is especially so today given the cantankerous state of international climate negotiations.

As readers of this blog know, the Breakthrough Institute has long argued that there are political limits to raising the price of carbon, especially in the developing world. Yet in order to have any significant effect on demand for low carbon energy technologies, the price of carbon would need to be higher than any political economy has been willing to bear. Moreover, a strictly price-based comparison between clean and dirty energy ignores many of the other non-market barriers that must be solved for clean energy to adopted on a meaningful scale, such as regulatory and infrastructure hurdles, issues with intermittency, technology risk, and other barriers. A carbon price may encourage a switch to already available mature technologies, but it won't do much to encourage the development of new innovations that will be necessary to displace fossil fuels.

What's the alternative? As Cowen notes, "maybe we won't adopt a green energy until it's really quite cheap." For the last seven years, the Breakthrough Institute has articulated, and continues to enhance, a strategy that is focused explicitly on making clean energy cheap by driving radical innovation in clean energy technologies. And that innovation, as history shows us, is catalyzed first and foremost by epic public investments.


Fortunately, energy innovation has moved into the mainstream. Even John Doerr, the carbon price devotee, has become a proselyte to the energy innovation agenda, and as part of the American Energy Innovation Council (AEIC) has called for a tripling of federal investment in energy innovation to $16 billion per year.

To be sure, the old guard will continue to clamor on about the immutable centrality of a carbon tax. Witness New York Times Columnist Tom Friedman's incoherent broadside against federal investment in clean energy in favor of carbon price fetishism.

Yet with leading economists and business leaders openly discussing the inadequacy of carbon pricing and the need for major investments in clean energy R&D, demonstration, and deployment, it's clear that while carbon pricing will undoubtedly be revived in the future, the energy innovation agenda is here to stay. After years of failed efforts with regulation-centered energy policy, many more groups are shifting their intellectual capital toward the difficult work of structuring energy innovation policies to catalyze a clean energy revolution. And that's something that any serious climate advocate should support.

By. Devon Swezey

This article was published with permission from The Breakthrough Institute

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  • Anonymous on September 26 2011 said:
    Even given the very lucid and rational arguments presented above by Devon Swezey, there are still some measures I will continue to advocate. First, we should not subsidize energy usage by using the taxpayer's money to provide security for oil tankers in regions such as the Strait of Hormuz. If the oil industry needs protection, let the oil and tanker shipping companies pay for it. Those who use the most fuel should pay the most for said protection. Second, we should let fossil fuels be expensive. In other words, no government assistance or tax breaks for the "dril baby drill" school of thought. And NO relaxation of regulations aimed at preventing future offshore oil well disasters.Carbon taxes may seem regressive, but we need to incentivize people to purchase cars like the Honda Fit, Toyota Prius, Chevrolet Cruze, etc. and then, not use their superior fuel economy as a means to live further from their jobs.
  • Anonymous on September 26 2011 said:
    There are legitimate points made by Mr. Cowen, but they are all refutable. In order:(1) Under GATT, we can impose tariffs on imported goods from countries that don't impose a similar tax as we do domestically. This certainly applies to imported oil, but most would argue also to imported goods that use fossil fuels in their manufacture (at the very least, this would be part of a post-Kyoto accord, that countries putting a price on carbon could collect tariffs on goods from countries that don't). I believe other countries would want to collect the tax on their goods themselves rather than letting us collect it. while gathering the tariffs themselves may be attractive to some in and of itself, the greater benefit is that it allows the U.S. to change behavior by using its leverage as the world's biggest consumer.
  • Anonymous on September 26 2011 said:
    2. See #1. That problem already exists with environmental regs generally, and you can't push fossil fuel extraction to countries that don't have them as natural resources. You'd have to be more specific before that "reason" makes sense in the real world.3. I disagree that there's been no major innovation out of Europe. Germany, Denmark and Spain are all major players on the global renewables market; Germany will be getting 35% of its energy from renewables by 2020; France is the leading country on nuclear development. So I just disagree.4. True. Efficiencies are where the transportation market would combat increased gasoline (or natural gas) prices.
  • Anonymous on September 26 2011 said:
    5. First of all, it would be tax on carbon, not on energy. and the alternative energy market is every bit as "productive" (in the sense of high paying and innovative) as fossil fuels. Second, your point that we won't be off carbon for the foreseeable future undermines your suggestion that we'd be transferring talent out of that industry just by putting a price on carbon.6. I'm not sure what to make of this comment. The tax would either encourage efficiencies and innovation (in which case it "adds value") or it would not be high enough to cause any real economic pain.7. A carbon tax would be in lieu of, not in addition to, EPA regulations of GHGs. I would also couple it with a phase-out of the production and investment tax credit for renewables.
  • Anonymous on September 26 2011 said:
    8. If the tax were truly revenue-neutral, that is every penny collected is returned to the American public in equal shares, then I don't think it would be regressive. Wealthier individuals who lead more fossil fuel intensive lives would pay more in increased costs than they would receive in rebates. Whereas energy efficient folks would receive more in rebates than they pay.9. Could be. That's a legitimate argument, and really counsels against a high initial price. I would set it really low at the start, to cushion the shock. while a low level may not immediately change behavior, I think it's more important to gt the mechanisms and logistics in place to impose a more significant price in the future, as the pendulum of climate change pulic opinion swings back and folks get used to getting their rebate checks.
  • Anonymous on September 26 2011 said:
    9b. From a climate change perspective (which is how I come at this), incentivizing alternatives has the same leveling effect as disincentivizing fossil fuels with a carbon tax. So I'm neutral on that. However, I do believe that the political prominence of the national debt make the tax more attractive than more incentives.10. If you're talking the massive Waxman-Markey cap-and-trade system, then this last point makes sense. But a relatively simple revenue-neutral carbon tax would not create the morass you fear. This is especially true if it is imposed in lieu of EPA GHG regs, and is coupled with a phase-out both of oil and gas subsideies and alternative energy tax credits.See http://www2.timesdispatch.com/news/oped/2011/sep/26/tdopin02-belleville-reinvigorating-a-revenue-neutr-ar-1336262/andhttp://www.roanoke.com/editorials/commentary/wb/298749
  • Anonymous on September 27 2011 said:
    Protecting tankers and things. I worked for the US Navy for a year, and the only thing I remember that might apply to this this riddle is that protecting tankers and things must be easier than washing your hands after using the toilet. Have you ever heard of radar? Have you ever heard of helicopters? Have you ever heard of adding two plus two and getting four?General James Gavin of the 82nd Airborne Division once said that when it came to supplying ground troops with the weapons they needed, there was a shortage of imagination and probably intelligence. The only better weapon that the US Army needed at that time was a better main battle tank, and developing that was child's play, engineering wise. Do you get my point.
  • Anonymous on September 27 2011 said:
    "First, we should not subsidize energy usage by using the taxpayer's money to provide security for oil tankers in regions such as the Strait of Hormuz."Tell me what part of Western or even world culture does not use petroleum products everyday in everything? Not just fuel (how do we get produce to supermarkets?) but plastics (name me anything of mundane everyday use that does not have a plastic component in it). Without petroleum we would be back in the 19-early 20th C. Except that our population is too big to exist in a world without cheap petroleum products. The petroleum companies merely produce what we demand in almost geometrically increasing quantities. However instead of wasting money on stupid wars in places where we cannot win, we should spend that money on providing adequate naval protection for tankers (radar, helicopters...) carrying cargo that we cannot do without. As a matter of necessity not choice.
  • Anonymous on September 27 2011 said:
    There is an alternative to tankers...If some bright spark ever considered building pipelines from the Gulf states across the desert to somewhere like Haifa or Latakia, to avoid pirates. But then the risk would be from land based terrorists. So you have a choice of paying for either naval or military protection. No guarantee eiuther way that oil transportation would be safe. Anyhow, with tankers, anyone on the Hormuz islands or the Horn of Africa/Djibouti with an anti-ship missile could close down the shipping lanes very easily. Somethreats you can't defend against...

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