June 17, 2019

One (and Only One) Cheer for the Republican “Innovation” Answer to Climate Change

With climate change and its associated extreme weather events becoming increasingly undeniable, a growing number of Republican officeholders are entertaining ideas about how to respond. Skeptics of climate action are none too happy about this, but these restless Republicans are (rightly) uncomfortable about allowing the planet to burn while their party doggedly maintains that nothing is happening. Alas, they’re also uncomfortable about imposing discernible economic costs on anyone, so technological “innovation” via subsidies for favored low-carbon industries and increases in federal energy R&D has thus far been their policy response of choice.

Give these would-be Republican rebels some credit for braving criticism from the party’s activist base, who for years have been warned that concern about global warming will lead to an embrace of global socialism. But the Republican innovation agenda alone is not, in and of itself, a serious policy proposal. It is, perhaps, the prelude to a serious policy proposal.

While it’s unclear what a Republican energy innovation bill might look like (thus far, they’ve been vague and noncommittal about the details), let’s assume a scenario in which the Republican rebels went all-in with an ambitious, government-driven energy innovation project. That might entail something akin to the “Mission Innovation” program that was launched at the COP 21 conference in Paris in 2015 (the same conference that produced the infamous “Paris Agreement” that Republicans are fond of slagging). “Mission Innovation” would have nations double their public low-carbon energy research budgets as well as their expenditures on technology development & demonstration projects over the next five years (a policy referred to as “RDD&D”).  

A recent modeling exercise by the U.S. Department of Energy concluded that a doubling of RDD&D might reduce U.S. greenhouse gas emissions from about 10 percent below 2005 levels in 2040 (what DOE expects to happen with no additional policy changes) to almost 40 percent below 2005 levels by 2040. That’s pretty good, but it’s well short of the 63 percent emission reduction we’d have to see over that period to keep us on track to hold warming to no more than 2 degrees Celsius.

And that’s the first problem — we don’t have the luxury of time. If Republican rebels are prepared to accept the consensus within the climate science community, they need to be prepared to act even more aggressively than is suggested by “Mission Innovation.” We need to deploy zero-carbon energy technology right now, and can’t wait for better options to come out of federal national laboratories a decade or more hence.

The second problem is that Republicans are assuming the proverbial can opener — that government money for technologies x, y, and z will produce technological breakthroughs for x, y, and z. It would be nice if the world worked that way, but the tens of billions of RDD&D dollars already thrown into nuclear fusion, synthetic fossil fuels, “clean” coal, hydrogen-powered fuel cells, and a host of other things should remind us that government RDD&D cannot reliably produce economic magic. Sometimes it does (as it did with solar energy and hydraulic fracturing), and sometimes it doesn’t.   

If the government-driven innovation agenda of the Republican rebels falls short of the mark, the government-free innovation agenda of the climate skeptics is even less impressive. By the skeptics’ telling, climate doomsaying is unwarranted because, if there’s really a problem, ingenious market actors in search of profit will solve it without any need of governmental direction. Fears about resource depletion (whether we’re talking about commodities or the global atmosphere), they believe, are a Malthusian delusion in a free market economy (an argument given full book-length treatment here), and those fears have been proven in error time and time again.

The skeptics’ case for endogenous market innovation is anchored in the lessons supposedly taught by the late Julian Simon, a former colleague of mine at the Cato Institute. Simon is widely lionized on the right as the great slayer of environmental doomsaying, the man who wagered and won a famous bet with biologist Paul Ehrlich regarding whether five metals (chromium, copper, nickel, tin, and tungsten) would become more expensive (Ehrlich’s position) or less costly (Simon’s position) 10 years hence. To the right, Simon proved once and for all that, if we give space to human ingenuity in free market economy, capitalism will conquer all problems.

It’s worth spending some time pondering Simon’s argument, because it does in fact offer valuable insights about how to best promote innovation. The lessons are not, however, what the skeptics think they are. What Simon in fact argues is that 1) innovation does not fall from the skies — it depends on price signals and has to be incentivized; and 2) panic about the costs associated with climate action — and the technologies we might have to rely on in the course of decarbonization — is misplaced.

First, let’s dispense with the lazy morality play often told of the Simon-Ehrlich bet. Just because one scientist in the past was wrong about something does not mean that all scientific claims in other, unrelated fields have automatically been rendered suspect. Paul Ehrlich’s thoughts about mineral scarcity (or, for that matter, Thomas Malthus’ about population) have absolutely nothing to do with the credibility of paleoclimate records, atmospheric physics, or the global climate system, and climate scientists have no reason whatsoever to answer for them.

Now, let’s consider the core of Simon’s argument, which boils down to “necessity is the mother of invention.” As resources become scarce, Simon maintains, people will anticipate future scarcities, prices will be bid up, incentives will be created for developing new technologies and substitutes, and the resource base will be renewed. And just as important, Simon contends that society is almost always better off with these new technologies and resource substitutes than it was before the resource scarcity hit in the first place. In short, scarcity crises are birthing exercises that produce a better world.

If we think of the atmosphere as the increasingly scarce resource at issue (in the sense that its ability to absorb greenhouse gases without dangerously warming the planet is rapidly disappearing), we run into a problem. The atmosphere is not a private good traded in markets, but a public good outside the market that is owned by everyone and no one. Consequently, there is no clear price signal to suggest that the carrying capacity of the atmosphere is disappearing. Without adequate price signals to incentivize ingenious market actors, there will be suboptimal production of new technology and resources in response to the threat.

The upshot is that Simon’s narrative about resource renewal only plays out when we’re dealing with tradable commodities in a free market economy where price signals are accurate and can do their job. And we don’t have those conditions when it comes to the atmosphere.

But if the federal government puts an accurate price on the cost of using our depleting atmospheric resource (by taxing, for instance, the emission of greenhouse gases), then price signals arise and the Simon narrative can come into play. A scarcity-induced price increase driven by market forces is functionally no different from a scarcity-induced price increase driven by public policy. Price signals will act in the same manner and deliver the same information in either case. The same profit opportunities will subsequently exist for more efficient resource use and for resource substitution. And the same human ingenuity will be incentivized by the market to solve the problem.

There is a tremendous amount of academic evidence that “pulling” innovation via price signals is far more effective than “pushing” it via government subsidy. And that stands to reason. Rather than having government make all the decisions (through a political lens) about what to subsidize, how much to subsidize it, and when to shift investment strategy, price signals “crowdsource” these matters to tens of millions of private market actors disciplined by profit and loss.

In sum, if Julian Simon is right, conservatives should calm down. If we act aggressively to decarbonize the economy and fossil fuel prices go up, smart and creative minds will find other energy resources to cost-effectively replace them. And we’ll subsequently be better off than we were before the fossil fuel price increases happened.The (relatively anemic) price signals that have followed from low-carbon energy subsidies, renewable energy production orders, and regulatory controls of greenhouse gas emissions (which serve as a rather invisible carbon tax) have already had a large impact. Over the course of 2009–2018, the unsubsidized cost of wind energy in the United States has declined from $135 per megawatt hour in 2009 to $42 per megawatt hour; the unsubsidized cost of solar photovoltaic energy has declined from $359 per megawatt hour to $43 per megawatt hour; and the unsubsidized cost of utility-scale battery storage has likewise fallen from $1,000 per megawatt hour in 2010 to $187 per megawatt hour in 2018. According to Deloitte, the total cost to consumers of owning and operating an all-electric vehicle will equal that of a conventional internal combustion engine by 2022. As the latest analysis from Lazard (one of the industry’s most respected consulting firms) suggests, we’re already at the point where renewable energy is nearly cost-competitive with fossil fuel energy.

Accordingly, the global economy is decarbonizing, but not fast enough. Today’s economic models say that U.S. decarbonization will likely proceed at 0.4 percent per year over the course of the coming decade, well short of what is needed if we’re to do our part to hold global warming to no more than 2 degrees Celsius. A modest carbon tax of $14 per ton would — according to a recent study by Columbia University — increase our expected rate of decarbonization by a factor of three. A more ambitious $50 carbon tax would increase our expected rate of decarbonization by a factor of eight. Even those reductions are smaller than we might like, given the accumulating nature of climate risk.

In sum, we need to turbocharge the engines of human ingenuity with powerful incentives to accelerate this trend. If Simon is right and past is prologue, using price signals to drive innovation is the best way forward, and the economy will be better off with a clean energy transition than it was before the climate problem came upon our radar screen. That’s particularly the case given that the human health impacts from fossil fuel consumption (primarily associated with air pollution) prematurely kill 194,000 Americans every year.

None of this is to say that increasing federal RDD&D is a bad idea. In fact, most economists support it on market failure grounds alone, and recent academic work from Mariana Mazzucato, Dani Rodrik, Fred Block, and others suggests that government-driven innovation is more important than economic scholars have previously appreciated. Accordingly, even if we were to adopt ambitious carbon pricing, something like “Mission Innovation” would be a worthwhile complementary policy. There is even an argument that government subsidies for low-carbon technology will help us move toward carbon pricing by reducing the costs of decarbonization.

With carbon pricing off the table in this Congress (as it will be in the next two Congresses if Donald Trump remains in the White House after 2020), an ambitious federal RDD&D effort is probably the most we can hope for now. While it’s unclear whether Republican rebels will have the stomach even for that, it has to be the first step for climate policy, not the last.

Photo credit: YouTube screenshot.