Price is not enough

Putting a price on carbon through the tax system is difficult, controversial and will only get us so far. A cap on greenhouse gas emissions is also needed, says Jonathan Lash

Clean technology investment is booming. The trend continued in 2007, as $2.2 billion in venture capital was aimed at the clean technologies efforts of 202 companies – an increase of 47% over 2006. It will continue in 2008 – despite the recession – because the world needs it.

Indeed, venture capital is the tip of the iceberg. Big industrial companies are investing in the innovations that they believe tomorrow’s markets will be buying. GE alone is likely to spend more than $1.5 billion on clean technology research in 2008, more than the federal government.

Richard Branson recently announced he will fly a 747 on biofuels in 2008, and General Motors made a splash at the Detroit Auto Show announcing a partnership with Coskata, a second-generation ethanol producer that claims big cost and carbon dioxide (CO₂) emissions reductions from its production process.

And the technology pipeline is full, despite the absence of a carbon price in the US or Asia. Investors are convinced that a price on carbon is simply a matter of time, and the evidence is that they are right.

Twenty-one US states, representing more than half the US economy, are moving to cap CO₂ emissions, regardless of activity – or the lack of it – at the federal level.Twenty-seven companies with a market capitalisation of more than $2 trillion have joined with six environmental groups under the auspices of the US Climate Action Partnership to call on Congress to enact mandatory, economy-wide legislation to cap US emissions and achieve 60–80% reductions by 2050. Probably not this year, but certainly soon, Congress will act.

As the political currents flow more strongly toward action on climate, there have been increasing calls from economists and some investors for Congress to consider a carbon tax. Such a solution is simple, elegant, and predictable, its advocates say. But I believe that there are compelling arguments against a global warming policy based on a carbon tax alone, and those arguments have a great deal to do with the pace of technology implementation.

"The key problem is that price alone is not enough to push new technologies into the economy as fast as makes economic and environmental sense"

Put aside for a moment the political problems with converting an environmental problem into a tax increase, and the risk of setting a carbon price and leaving emissions reductions uncertain when our future depends on getting the level of reductions right. The key problem is that price alone is not enough to push new technologies into the economy as fast as makes economic and environmental sense.

Much of the economy responds only slowly to price signals because of a lack of information, a lack of capacity, institutional barriers and conflicting priorities. A McKinsey Global Institute study released last year found the equivalent of 1.3 gigatons per year of CO₂ emissions reductions available in the US economy at negative cost. Chemicals giant DuPont has reduced emissions by more than 70%, claiming savings of $2 billion. California uses about half as much electricity per dollar of output as the rest of the US because of state policies and regulations put in place a few decades ago to drive cost-effective energy efficiency measures.

Each of those stories reflects a price signal that wasn’t, or in the case of the McKinsey study, isn’t, sufficient. The reality is that not many executives get to be chief executives by saving money on the energy bill.

We need to start technology change today by telling investors and businesses how much carbon we’re going to get out of the economy in the next 10, 20, 30 or 40 years. Since we don’t know how much the new technologies will cost, we can’t know how to get the price right, but we can get the road map right.

A greenhouse gas cap-and-trade system, combined with a set of complementary measures, will be the only way to move new technology fast enough while guaranteeing the necessary emission reductions.

The FutureGen consortium has announced plans to build the first demonstration carbon capture and sequestration (CCS) plant in the US at Mattoon, Illinois. In a few years, we need to have four or five CCS demonstrations under way to have any hope of learning what it takes to make CCS work, and how much it will cost to use it on a large scale. Price alone won’t get that done for decades. The risk is too big. We need public-private partnerships to get big technologies on line soon.

The legislation that Congress will pass is likely to be based on a cap-and-trade system supplemented by specific technology incentives. I think that is encouraging news for today’s clean-tech investors.

Jonathan Lash is president of the World Resources Institute, a Washington, DC-based environmental think-tank. E-mail: jlash@wri.org