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February 20, 2018

To: Governments looking to scrap prices on greenhouse gas emissions

Re: Clean Technology Investment Begins with a Price on Greenhouse Gas Emissions

From: David Popp

Date: February 20, 2018

Governments across Canada are making support for low-greenhouse gas energy technology a top priority. Canada is among the group of 23 nations participating in Mission Innovation: a commitment to double investments in clean energy innovation within five years.  The federal and many provincial governments have committed billions of dollars in new clean energy spending.

While these efforts are laudable, the most important policy support for clean energy technology is a price on emissions. Saskatchewan’s recently released climate change strategy emphasizes its technology fund, but makes no attempt to properly price the harmful emissions from fossil fuels. There is also a debate raging in Ontario of whether to scrap the existing cap-an-trade program.  Technology support without a carbon price is mostly hot air.

Both carbon taxes and cap-and-trade markets put a price on the harmful emissions from burning fossil fuels. Putting a price on carbon is important because demand drives innovation. Entrepreneurs want to develop products for growing markets.  Higher prices create demand for green energy technologies throughout the economy.

In contrast, deploying technology subsidies without a price on carbon is just half the battle. As long as energy prices do not reflect the true costs of fossil fuels, consumers will prefer them to higher priced clean alternatives. Numerous studies of energy and climate policy show that carbon prices do more to promote the use of clean energy than do energy R&D subsidies alone.

Fostering innovation is just one advantage of pricing carbon.  A carbon price offers firms flexibility. It rewards innovative firms that discover better ways to reduce pollution. Emissions fall, as firms with better technologies chose to reduce pollution rather than pay the price.

A carbon price also raises revenues that can benefit the economy elsewhere.  British Columbia provides an example.  There, the government used revenues from the province’s carbon tax to help taxpayers. It reduced low-income tax brackets and offered tax credits to low-income households. By taxing harmful emissions, a carbon tax allows governments to reduce the tax burden on beneficial labor and investment.

Even with a price on carbon, governments can still play a role in clean energy innovation.  But that role should be to work with the private sector as we move to a cleaner economy.   Governments should focus targeted research support on emerging technologies not yet cost-competitive.  Small, early stage grants to young companies overcome difficulties raising capital, helping smaller firms move new ideas from the laboratory to commercial markets.  

Such support not only furthers a culture of innovation, it can even reap dividends for the public sector.  For example, the U.S. Department of Energy was criticized for its support of the failed Solyndra project.  However, the loan guarantee program that supported Solyndra made money.  Interest payments from successful projects outweighed losses from failed projects such as Solyndra.

This is just one sector.  It’s time to move from a sector-by-sector regulatory approach to supporting innovation throughout the clean energy economy.  A carbon price is the most effective way to create the demand for a cleaner, more efficient energy economy.


David Popp is Professor of Public Administration and International Affairs at the Maxwell School of Syracuse University and author of the C.D. Howe Institute paper A Blueprint for Going Green: The Best Policy Mix for Promoting Low-Emissions Technology.”