In the early 1990s, Yale economist William Nordhaus made us an offer we shouldn’t have refused. His work showed we had an opportunity to curb carbon dioxide emissions, and thereby avert the worst of global climate change, if we simply taxed the emissions, starting at a rate of just $5 per ton. That would have provided our market-driven society an incentive to seek less carbon-intensive ways of operating.
Of course, we lacked the political will to accept the offer, so emissions continued unabated. As a result, our cumulative emissions problem has now worsened considerably, which has driven up the price we will have to pay to bring it under control.
The consequences of our refusal to take the deal Nordhaus offered were on full display recently as he collected a Nobel prize for modeling the link between climate and the global economy. Indeed, in the weeks leading up to the award, the White House released a report stating matter-of-factly that the Earth’s temperature could rise as much as 4 degrees Celsius in the next century, while an international panel warned that an increase of just 1.5 degrees could be too much. Against that backdrop, the economic models now suggest that the highest carbon tax society can afford to pay would be about $40 per ton — and it wouldn’t be enough to reduce emissions to levels we need to stabilize the atmosphere.
So, where does this leave us? The answer is we need to accelerate significantly the pace of innovation in clean-energy technologies. And as it happens, Nordhaus shared this year’s Nobel prize with another economist, Paul Romer, whose work shows how to make that happen.
Romer made his name by incorporating technology into models of economic growth. Raise the profitability of new technology and companies produce more of it. One example of this is the so-called “induced innovation” that a carbon tax would create. Raising the cost of carbon emissions causes companies to emit less. But it would also cause them to invest more in finding better technologies to reduce emissions. One study estimates that this could reduce the total cost of achieving a given emissions level by 30 percent.
The impact would be even greater if we used carbon tax revenues to underwrite even more research and innovation. Policies such as research subsidies or an expansion of the research and development tax credit would generate even faster technological change, further lowering the cost of reducing emissions. Because research produces huge social benefits, public support makes sense. Broad subsidies would speed the advancement of clean technologies. It would also increase economic growth, making it easier to absorb the costs of whatever warming does occur.
America is at a tipping point as far as public support is concerned. The Obama administration negotiated an international agreement to reduce emissions. But even if every country met its commitments, we would still surpass the 1.5-degree target. The Trump administration has announced its intention to withdraw from the treaty, and in the same recent report that stated temperatures might increase as much as 4 degrees Celsius if nothing is done, it proposed doing nothing.
But others are beginning to act. A few prominent Republicans, including Trent Lott and James Baker, have come out in support of a carbon tax that rebates the revenues to Americans. Unfortunately, using the revenues this way would be less effective in boosting innovation and holding down the economic costs.
The dilemma only worsens as time goes on. To escape the worst effects of climate change, we need to take sensible actions now. We should enact a carbon tax that escalates steadily over the next few decades to signal that it will be profitable to develop clean technologies and expedient to adopt them, and we should plow the tax revenues back into research and innovation, including clean-energy breakthroughs, so the cycle of innovation begins to snowball.
The correct policy could produce a win-win-win: lower emissions, better technology and faster growth.