The effect of carbon pricing on technological change for full energy decarbonization: A review of empirical ex‐post evidence

Johan Lilliestam,Germán Bersalli,Anthony Patt

doi:10.1002/wcc.681

Abstract

AbstractIn order to achieve the temperature goals of the Paris Agreement, the world must reach net‐zero carbon emissions around mid‐century, which calls for an entirely new energy system. Carbon pricing, in the shape of taxes or emissions trading schemes, is often seen as the main, or only, necessary climate policy instrument, based on theoretical expectations that this would promote innovation and diffusion of the new technologies necessary for full decarbonization. Here, we review the empirical knowledge available in academic ex‐post analyses of the effectiveness of existing, comparatively high‐price carbon pricing schemes in the European Union, New Zealand, British Columbia, and the Nordic countries. Some articles find short‐term operational effects, especially fuel switching in existing assets, but no article finds mentionable effects on technological change. Critically, all articles examining the effects on zero‐carbon investment found that existing carbon pricing scheme have had no effect at all. We conclude that the effectiveness of carbon pricing in stimulating innovation and zero‐carbon investment remains a theoretical argument. So far, there is no empirical evidence of its effectiveness in promoting the technological change necessary for full decarbonization.This article is categorized under: Climate Economics > Economics of Mitigation

Highlights

Carbon pricing, either in the shape of a cap-and-trade emissions trading system (ETS) or a carbon tax, is widely seen as the main policy instrument needed to solve the climate problem and achieve the goal of the Paris Agreement of keeping the global temperature increase below 2C (Bureau, Henriet, & Schubert, 2019; Edenhofer, Flachsland, Kalkuhl, Knopf, & Pahle, 2019; Löschel, 2019; Stiglitz et al, 2017)
We describe the main findings, including the key explanations for each finding of the 19 investigated articles for carbon pricing schemes in the emission trading schemes of the European Union (EU ETS, Section 4.1) and New Zealand (NZ ETS, Section 4.2), and of the carbon taxes in the Nordic countries (Section 4.3) and British Columbia (Canada; Section 4.4)
We have showed that there is no empirical evidence that carbon pricing triggers technological change, in terms of either increased innovation or zero-carbon investment, it has had operational, short-term effects from fuel shifts and behavioral change

Summary

Introduction

Either in the shape of a cap-and-trade emissions trading system (ETS) or a carbon tax, is widely seen as the main policy instrument needed to solve the climate problem and achieve the goal of the Paris Agreement of keeping the global temperature increase below 2C (Bureau, Henriet, & Schubert, 2019; Edenhofer, Flachsland, Kalkuhl, Knopf, & Pahle, 2019; Löschel, 2019; Stiglitz et al, 2017). Some scientists suggest that a carbon price is the only policy intervention needed for climate protection (Blum et al, 2019), and that further climate or technology policy instruments would reduce the cost-efficiency and/or the effectiveness of climate policy We discuss how the effects of carbon pricing schemes can be evaluated, including different evaluation perspectives, and the underlying theoretical reasons for our choice of evaluation framework (Section 2.2). There are, numerous sources of market failure, leading to suboptimal outcomes One of these is an environmental externality: when a traded good causes environmental damage that is not included in the price. An early recognition was that in these cases, putting a price on pollution, such as on carbon emissions, effectively corrects the market failure (Pigou, 1920). The “internalization” of externalities through “Pigouvian taxes” ensure that the cost of damage is factored into the decisions of firms and individuals and that an efficient level of pollution is reached

Results

Discussion

Conclusion