Economics

Cap and Innovate?

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Science  14 Dec 2012:
Vol. 338, Issue 6113, pp. 1398
DOI: 10.1126/science.338.6113.1398-b

Climate policies, such as emissions caps or carbon taxes, aim in part to induce technological change: Make emissions more expensive and market incentives will drive companies to develop technologies that emit fewer, or no, greenhouse gases. Such innovations, it has been argued, will drive down the costs of the policies. Gans suggests that prior research in this area gives an incomplete and sometimes misleading picture. His economic model explores three types of technological innovations: fossil fuel efficiency (e.g., improved automobile efficiency), alternative energy (e.g., wind power), and carbon offset (e.g., carbon sequestration). As emissions caps drive down emissions-intensive behaviors, they make fossil fuel efficiency innovations less valuable, limiting incentives to improve technology. Alternative energy innovations may also suffer, as profit incentives would depend on the overall size of the economy, which could contract under emissions caps. A higher carbon price could, however, spur innovation in carbon offset technologies, suggesting that carbon offset credits should be widely integrated into emissions trading schemes. Gans concludes that the market alone, driven by climate policies, will not be enough. Innovation policies must be pursued as well, including public investments in fossil fuel efficiency and alternative energy.

CREDIT: ISTOCKPHOTO

Am. Econ. J. Econ. Policy 4, 1 (2012).

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