Anthony Patt and Johan Lilliestam of ETH Zurich make the case against carbon taxes. Climate policy is most effective when it helps people use alternative energy sources, rather than when it makes fossil energy more expensive. Fostering an energy system free of fossil fuels requires financial, infrastructure, and institutional support for specific technologies. That requires a different and much braver approach.
Reducing or eliminating carbon taxes goes against the conventional wisdom. So in an exclusive interview, Energy Post asked Anthony Patt to answer some questions too, which you will find at the end of the article.
Twenty years ago, scientists agreed on the need to reduce CO2 emissions from the energy sector. Today, there is agreement on the need to eliminate CO2 emissions entirely. Carbon taxes were the policy instrument developed to achieve the first objective effectively and efficiently. However, they are of relatively little use for achieving the second.1
At first glance, carbon taxes are both simple and morally appealing. They force people to pay for the social cost of their pollution, and induce them to consume less fossil energy, helping the climate. Research shows, however, that carbon taxes do little to stimulate investment in alternative sources of energy.2 Higher gasoline taxes cause people to drive a little less, but not to switch to an electric car powered by sunshine.
That’s a problem when the target is to eliminate emissions, not merely reduce them. In every area of life – driving, heating, dressing, eating – we need to either stop consuming entirely, or consume only things produced with and making use of non-fossil energy. Reducing energy demand is neither necessary nor sufficient to eliminate emissions3. What is both necessary and sufficient is a switch to 100% renewable energy, and there is enough wind and sunshine for this to work.
Targeted R&D + financial incentives + legal limits + infrastructure + regulations = success
What happens when people make the jump from an old technology to a new one? Social science research has identified a sequence of four processes:
- First, there is the process of inventing new technologies. Government R&D support is crucial.
- Second, new technologies need to become affordable. This doesn’t happen in the laboratory, but through commercialisation. Public policies that create demand in protected market niches for new technologies, at a time when they are still far too expensive for mass uptake, are often critical. Feed-in tariffs and technology quotas are successful examples.
- Third, once they are economically competitive, new technologies need to move from niche to mainstream. Here too, government policies often play a critical role. A century ago, cars began to displace horses only when governments began to build the right kinds of roads, with appropriate traffic laws. Similarly, smart phones required a new set of regulations and standards, and entirely new networks to take off.
- Fourth, when the new technology offers better service than the old, at an attractive cost, that technology will become the norm. But in some cases governments may need to mandate the use of the new technology, or prohibit the use of the old. Building standards going into effect next year for the EU will require all new houses to consume almost no energy for heating and to supply the little heat they may need from renewables.
Taxes focus on the spending habits. We need to focus on the technology transition
Carbon taxes don’t fit this framework. Arguably they can help in the second stage, where cost barriers do play a role. But even here, for several reasons, direct support mechanisms have proven far more effective at stimulating investment in the new technologies.4 Governments can more easily adjust the level of direct support in response to changes in technology costs, typically by decreasing the level of support as the new technology becomes cheaper. Carbon taxes, however, are most effective when investors expect them to remain stable or rise over time, which means that any point in time they are either too low to be effective, or too high to be efficient.
“To push solar power or electric cars, we need neither carbon taxes nor new subsidies, but rather new regulatory frameworks and infrastructure networks.” – Anthony Patt
Venture capital flows react to policies, not carbon taxes
Research studies have looked, for example, at how Cleantech venture capital flows respond to a number of different policy instruments. What they have found is that such flows increase in response to greater confidence that the given technological ecosystem (e.g. PV, EVs) will grow. That confidence appears to rise the fastest when the government enacts policies that create a protected market niche for the technology, so that at least for the coming 5 – 10 years it looks very likely that growth will occur.
The more the policy instruments are specific with respect to the technology they are supporting, the greater the niche appears to be protected. A feed-in tariff is highly specific: if it supports growth in rooftop (i.e. crystalline silicone) PV, then there will be growth in rooftop PV, period. A renewable energy quota system is less specific: it allows the market to decide between competing renewable technologies. That leaves a risk that, for example, thin film PV, or wind, will outcompete rooftop PV in the future. So this creates less confidence.
A carbon price leaves the greatest amount of risk: maybe it will induce growth in PV, or maybe in wind, or maybe technologies for energy efficiency. It creates the least confidence. The point is, the more flexibility the policy instrument gives the market, the less well it protects specific technologies, and the greater are the perceived risks associated with any given technology. To get the kinds of innovation that you need at this particular stage in the technology diffusion process, you actually need less flexibility.
Carbon taxes raise money from the wrong people, and are vulnerable to politics
Carbon taxes’ main value may be as a tool to raise revenue for other support instruments. But they are a political choice, and they do disproportionally burden the rural and less wealthy segments of society.5 The climate doesn’t care how governments choose to raise revenue, but as the recent protests in France demonstrate, people do.
Many of the new energy technologies that we need have already gone through the process of commercialisation and become economically competitive, thanks to support policies that have run their course. The key to a fully renewable energy system is to improve the power grids, adapt the market rules to the needs of renewables, and develop and deploy supporting technologies, like batteries. To push technologies like solar power or electric cars, we need neither carbon taxes nor new subsidies, but rather new and updated regulatory frameworks and infrastructure networks.
Energy Post asks: One of the fastest ways to cut emissions is to tax carbon use. We don’t have the luxury of time, so it has to be done, even at the expense of the two things you highlight: 1] fair “progressive” taxation and 2] when you make people spend less on energy, it makes it harder for renewables providers to grow.
Anthony Patt: Actually carbon taxes have proven not particularly effective at cutting emissions. There have been very few empirical studies on this, but the best I know conducted a cross-comparison of European countries with different carbon tax levels, as well as difference in other policy instruments. In only one country (Finland) did the carbon taxes show up as having a significant effect, and even there it was small: about a 1% decline in emissions due to the taxes. The fact is, energy consumption is what economists call “inelastic,” which means that it is hard for consumers to adjust their behaviour very much in response to a change in price. Moreover, the kind of changes that we do see in response to carbon taxes — primarily improvements in energy efficiency, and in some cases a switch from coal to natural gas — are not the kinds of changes we need to see in order to get to a system 100% free of fossil fuels. So even if carbon taxes were to lead to short-term reductions in emissions, it would be a bit of technological dead end. The evidence suggests that it is other instruments that first lay the groundwork, and second best promote, the kinds of shifts in capital investment and consumption that avoid the dead end, and actually get us a system with no emissions at all.
Energy Post: You say carbon taxes make people drive less. The danger is, once they get used to taking the bus and train, they may never buy an EV. That makes it harder for EV producers to sell their cars in the future. And in general, once they reduce their consumption and therefore spending on energy, they may never increase it again once the renewables take over, making it harder for renewables providers to grow. Do you have any proof of this? Maybe they will buy that EV once the EV car costs come down. Maybe they will consume more energy, once it is fossil-free.
Anthony Patt: I am not sure I understand the concern. There would be lots of reasons to celebrate people driving less, and using less energy. What is more important, however, is that whatever driving they do, they do with a car that doesn’t burn fossil fuels, which probably means an EV, and whatever energy they use comes from non-fossil sources. Carbon taxes do promote, to a very small extent, reductions in driving and energy use in general, but they do not promote the switch to EVs and to renewable energy. A number of policies have proven to be effective in these areas. A set of policies in Norway, for example, have led EVs to capture 50% of the new car market. The policies haven’t included a tax on fuel, and hence carbon, but rather initially took the form of a large tax rebate for the car itself, which was very visible at the time of purchase. Perhaps more importantly, Norway invested heavily in charging infrastructure, and gave electric car owners a number of highly visible benefits, such as being able to park for free in the cities, drive in the bus lanes, and drive on the highways without paying tolls.
Energy Post: Can you name any countries that are following your recommendations: low or no carbon taxes, more direct incentives, regulations and infrastructure to promote renewables?
Anthony Patt: Yes, there is a list of jurisdictions. California, Germany, UK, China, Morocco, Massachusetts, and many more. The acute reader will of course respond: but the emissions in these places are not falling, or not falling fast enough, so how can you say their policies are working? Our core argument is that to see whether an energy transition is underway, emissions reductions, at least at first, are the wrong indicator of progress. Rather, you need to look at the sustained growth rates for renewables, and the investments into infrastructure that will enable that growth rate to be maintained into the future. All of these countries and states have sustained exponential growth in renewable energy, but that growth started from a very small base, and so is only now starting to become large enough to displace any noticeable amount of fossil energy.
1. Patt, A. & Lilliestam, J. The case against carbon prices. Joule (2018).
2. Eskeland, G., Criqui, P., Jochem, E. & Neufeldt, H. Transforming the European energy system. in Making climate change work for us: European perspectives on adaptation and mitigation strategies (eds. Hulme, M. & Neufeldt, H.) 165 – 199 (Cambridge University Press, 2010).
3. IPCC. Special Report on Renewable Energy. (Cambridge University Press, 2011).
4. Held, A., Ragwitz, M. & Haas, R. On the success of policy strategies for the promotion of electricity from renewable energy sources in the Eu. Energy & Environment 17, 849–868 (2006).
5. Wier, M., Birr-Pedersen, K., Jacobsen, H. K. & Klok, J. Are CO2 taxes regressive? Evidence from the Danish experience. Ecological Economics 52, 239–251 (2005).
Anthony Patt is Professor of climate policy at ETH Zurich
Johan Lilliestam is Professor of renewable energy policy at ETH Zurich
The original article was published on the ETH Zurich Zukunftsblog. The interview is exclusive to Energy Post.