The Creative Destruction Of Climate Change Economics

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Climate economics until recently mostly treated global warming as a challenge of distributing scarce resources (e.g., the right to pollute), not of creating new ones (e.g., cheap zero carbon energy sources). Climate models treated technological innovation as a given, not as a dependent variable.

That’s starting to change. Over the last few years, economists have modeled ways to accelerate the innovation of zero carbon power sources. The boldest of these entries to date comes from one of the discipline’s rising stars, MIT’s Daron Acemoglu, along with Philippe Aghion, Leonardo Bursztyn and David Hemous, in a paper published last February in American Economic Review. The paper argues that conventional climate models have overstated the importance of carbon pricing and understated the importance of public investment to encourage technological innovation.

The Economist’s Ryan Avent praised the paper, noting, “economics is clearly moving beyond the carbon-tax-alone position on climate change, which is a good thing.” In fact, Acemoglu and his colleagues went further than Avent suggested. “Optimal policy,” they found, “relies less on a carbon tax, and even more so on a direct encouragement of clean energy technologies.”

This technological turn within the economics profession comes at a time of three big events in the energy sector.

More than thirty years of government funding for unconventional gas research, demonstration, and tax credits have contributed to a glut of cheap natural gas, making everything from solar to wind to nuclear uncompetitive, at least in the near-term

The tripling of public and private sector investment in clean tech over the last five years has resulted in the price of solar panels declining by 75 percent and wind turbines by 25 percent

Carbon pricing, which many analysts and policy makers believed would be the central mechanism through which nations reduced emissions, has had no measurable impact.

All of this has sent those who believe carbon pricing should be the highest climate policy priority scrambling.

But US emissions are today declining not because of cap and trade — it died in the Senate two years ago — but because we are awash in natural gas. And we are awash in gas neither because of caps nor taxes nor regs but because of a government technology push started by Presidents Ford and Carter.

Out of real-world evidence, Wagner falls back on economic theory. “[C]arbon is a pollutant; we need make polluters pay… Price goes up, demand goes down. Economists typically call it the ‘law of demand’–one of the very few laws we’ve got.”

But no exceptions to the law of demand are required to acknowledge that it is the pace and scale of innovation, not the efficient allocation of existing emissions mitigation options, which will most determine the overall cost of mitigating and adapting to climate change.

When economics 101 was created in the 18th Century, there were one billion humans on the planet, mostly living on farms, using animals, wood, and dung for energy — about 20 exajoules of it a year. Today, there are seven billion humans, mostly living in cities using electricity and liquid fuels, consuming 430 exajoules of energy annually.

Over the next century, global energy demand will double, and perhaps triple. But even were energy consumption to stay flat, significantly reducing emissions from today’s levels will require the creation of disruptive new technologies. It’s a task for which a doctrine focused on the efficient allocation of scarce resources could hardly be more ill-suited.

(This was excerpted from The BreakThrough Institute, where it first appeared)