Innovation Is The Only Answer, But There's No Reason To Wait

The climate debate is kind of funny. Leave aside the denialists; I’m talking about the debate between people who think global warming is real and potentially quite serious, but who disagree about what (if anything) we should do about it.

The funny thing is that the debate tends to start with solutions (Kyoto, cap-and-trade, Copenhagen) and proceed to debate whether to vote up or down on same, rather than starting with problems and debating the best way to get to a solution.

The non-denialist conservative critics of the mainstream proposals to tackle climate change don’t spend most of their energy debunking the potential dangers of global warming. Jim Manzi, for example, has taken to task folks on the other side for the discount factor they use, for the time-frame used, for the precise probabilities imputed to various scenarios – but this isn’t the core of his argument, and he never denies that extremely bad downside scenarios are very possible.

Rather, the case against these proposals is anchored in three arguments: that American action will be swamped by larger global forces (the industrial rise of China and India being the biggest); that politics will so thoroughly corrupt the process of trying to properly price carbon (and evaluate carbon offsets) that much of the value of American action will itself be dissipated; and that the economic costs of these actions will be so large as to vastly exceed the expected costs of climate change.

The proposed alternative is to encourage innovation to eventually make the fossil fuel economy obsolete. Jim Manzi specifically thinks the government should be spending a few billion dollars a year on such efforts – a drop in the bucket relative to the costs of climate change legislation.

But sensible advocates for climate change legislation don’t deny the necessity of innovation. Indeed, it’s central to their case that the projected economic costs of the legislation are wildly overstated, as were the projected costs of the Clean Air Act. If a cap-and-trade scheme actually leads to the rapid development of a larger and cleaner electricity-generation capacity, and also to the development of cheaper, longer-lasting batteries suitable for transportation, then you’ve got the basis for replacing carbon in just about everything but jet fuel. And at that point the economic drag of cap-and-trade falls away as well.

So I would argue that there are two key points of agreement between the opposing camps. First, that climate change is a real and potentially very serious threat. Second, that significant technological innovation is an absolutely necessary component to addressing that threat.

Which leaves as the proper question to debate: what is the most effective way to get that innovation, “effective” being defined as some function combining “shortest time” and “lowest economic cost” (the precise function being left open as a side debate).

My impression is that government grants are not generally considered the best means for driving incremental innovation. Where they’ve been much more effective is in driving very expensive basic research.

To make our energy, industrial and transportation sectors less carbon-dependent, we mostly need incremental innovation. If we’re looking for the cheapest marginal ways to reduce carbon consumption, whether by reducing energy consumption or by substitution of other energy sources, the right mechanism is the market, and the right way to drive the market to look for those marginal savings is to tax the thing you want to discourage. Similarly, if you’re trying to increase returns to an incremental innovation that would help achieve these goals, the right way to do it is with a tax.

What would be the consequences of implementing a tax on carbon only in the United States, without coordinated global action? You’d see some carbon-intensive activities move offshore to lower-carbon-cost regimes; this would probably increase the global carbon load. You’d see some reduction in carbon-intensive activities; this should reduce the global carbon load, but some proportion of this reduction would be due to a simple drop in consumption and hence lower economic growth. And you’d see some increased private investment in making existing activities less carbon intensive, and in providing non-carbon energy sources to substitute; this should also reduce the global carbon load, and any associated economic cost should be temporary. It’s difficult to predict what the net effect on carbon emissions would be in the short term – but it doesn’t really matter, because the goal isn’t to directly reduce emissions but to encourage that investment in incremental innovation.

Of course, the tax on carbon will itself have a negative economic effect. But this could be offset by reducing other taxes, the payroll tax and the corporate income tax being two obvious targets.

If one were to try to evaluate such an approach versus the Jim Manzi approach of spending money on government research, there would really be two questions to ask: first, what’s the net economic drag (if any) associated with shifting the tax burden from one set of taxes to a carbon tax versus the net economic drag (if any) associated with increased government spending on whatever research he favors; second, which approach is more likely to yield substantial dividends in terms of incremental innovation more quickly?

This is not by any means my field of expertise, but I would think that a carbon tax, offset with appropriate other tax cuts, should have a fairly limited economic drag, and should be considered much more likely to lead to successful innovations than direct government spending, simply because the innovations we’re looking for (marginally cheaper nuclear and wind and solar power, marginally more efficient grids, marginally cheaper and more powerful batteries) are incremental. And, as a side benefit, you’ll be creating incentives to do simple things that actually improve economic performance while also achieving an environmental benefit (e.g., retiring dirty coal-fired plants).

Where I think direct government investment in “breakthrough” research is more important is on the other side of the carbon ledger. A great deal of energy in cap-and-trade has to go into calculating the value of carbon offsets. But this is the least-accurately measurable part of the carbon cycle, and the most obvious area for political corruption. It’s the part of cap-and-trade that most clearly smacks of the desire for a “total” solution to the problem, which usually results in no solution at all.

But technologies to capture or remove carbon from the atmosphere are going to be an essential part of the any effort to stop global warming. No matter what the United States does – no matter what the entire developed world does – the amount of carbon dioxide in the atmosphere is going to go up for the next few decades. In fact, no matter what China and India do, it’s going to go up, because the laudable efforts they are going to make to improve the energy efficiency of their economies are going to be swamped by the rate of increase of energy use. (If China and India get 2% more energy efficient every year but their economies also grow by 8% per year, then their energy usage will still grow by a bit less than 6% per year. Which is a lot. And, in fact, energy use is going to grow much faster than that because individual consumption is going to skyrocket even if industrial uses get more efficient.) This trend could reverse itself quickly if non-carbon energy sources come on line that are cheaper than fossil fuels, which is the whole point of trying to encourage the development of these sectors through a carbon tax. But that’s not going to happen overnight.

So we should indeed be looking for effective mechanisms for removing carbon from the atmosphere. That’s going to require breakthrough research, and is an ideal area for government investment because incremental progress will have no economic value to an investor.

That’s my suggestion in a nutshell. Drop the idea of trying to capture every aspect of the carbon cycle via cap-and-trade. Instead, just tax carbon, offset that new tax with appropriate other tax cuts, and spend a bunch of money on breakthrough research aimed at developing technologies to remove carbon from the atmosphere.

Is it a total solution to the problem of global warming? Of course not – but there are no total solutions to complex policy problems, and aiming at them is sometimes a great way not to get any loaf at all. Is it politically feasible? Well – compared to what? Cap-and-trade just died. Could you get Republican votes for a carbon tax offset with other tax cuts? I don’t know – if the GOP playbook after November remains “say no to everything” then, by definition, no, you can’t. But the political calculations for GOP Senators change after November – they won’t be able to count on having the wind at their backs to the same degree two years later. And the political calculations for the GOP in the House change if they take the majority.

I’d be interested to see whether after November the Obama Administration actually tries to put feelers out to see whether there’s something genuinely bi-partisan to be done. And I’d be interested to see whether, after November, center-right opinion makers like David Brooks and Ross Douthat and Reihan Salam, who all believe that global warming is real and serious, start arguing that Republicans should be leading on this issue, simply because it’s a real issue and real parties lead on real issues, and, if so, what they should argue for.

I should think that setting the boundaries as no net tax increase, minimize the degree of political intrusion into the economy, and try to get the most bang for the buck in terms of incentives to innovate, there should be lots of room for real proposals from the GOP side of the aisle. If they are interested in leading.