Adam Jaffe is the Dean of Arts and Sciences and Fred C. Hecht professor in Economics at Brandeis University.
At the same time he is a research associate at the National Bureau of Economic Research.
He holds a PhD degree
in economics from Harvard University
and he specializes in industrial organization, environmental economics, technological change and innovation.
Climate change is one of the largest policy challenges of the 21st century. Like most economists, I believe that the primary policy response to this challenge must be to raise the price perceived by private agents to be associated with the emission of so-called greenhouse gases (“GHG”) through taxation or regulation, in order to create the appropriate economic incentives for such agents to align all of their economic activities—production, consumption, and investment of all kinds—with the social objective. In this article, I argue that such “carbon-price policies” should be complemented by “technology policy,” i.e. policies designed to foster the creation, improvement and diffusion of new low-GHG technologies by pathways other than the incentives created by a higher price on GHG emissions.
The problem is big. There is considerable disagreement about how large a reduction in world emissions is needed to avoid catastrophic climate impacts. Resolution of this debate is not necessary in order to conclude that the challenge is enormous, and unlikely to be met solely by making carbon emissions more expensive. Suppose we wished only to stabilize—not reduce—world emissions by 2050, while still allowing world GDP to grow at a modest 2.5% per year in the interim. Simple arithmetic tells you that this would require about a 60% reduction in the ratio of world emissions to world GDP over about forty years. How big is this? Since the “oil crisis” of the early 1970s, the ratio of world oil consumption to world GDP has been reduced by about 40%, as the price of oil has increased by more than a factor of six. Now, “petroleum” is a subset of “fossil fuels,” so economic theory tells us that the price elasticity of demand for petroleum has to be larger than the price elasticity of demand for fossil fuels. This suggests strongly that it would require an enormous increase in the effective price of fossil fuels—something like a ten-fold increase—to stabilize or potentially reduce carbon emissions. Even assuming the current policy impasses over climate change are eased, effective price increases of this magnitude seem very unlikely. Theory says two market failures require two policy instruments. At a conceptual level, the justification for carbon policy is that there is a negative externality associated with GHG emissions; imposition of a carbon tax or permit system internalizes this externality. But there are wholly distinct positive externalities associated with technological innovation and diffusion. Carbon policy cannot internalize these, leaving a separate policy gap to be addressed.
These externalities flow generally from the fact that knowledge is a public good. The two characteristics of a public good are that it is non- rival in consumption, and that it is difficult to exclude people from benefitting from the good if anyone uses it. Knowledge clearly has the first property, and has the second property to varying degrees depending on the situation, leading economists to talk about the problem of “imperfect appropriability” of the returns to new technology. This appropriability problem is inherent both in research and development, and in the diffusion of new products, because the production and use of new products itself generates knowledge about the production process and the best product designs. This means that in the absence of policy intervention both the research process and the diffusion of new technologies will be undersupplied by the market.
It’s not clear what the needed transformation will look like, but history suggests that it won’t happen without government support. Given the magnitude of reduction in GHG intensity that is needed, we need to think about a profound transformation in the social-economic- technological system by which we heat and cool, move around and produce things. It is not clear that there is a historical analogy for change of this magnitude, but I submit that digital computation and communication have been improved over the last four decades in a way that is qualitatively comparable to the change we need in our carbon system. And I think the analogy is instructive. We do not calculate or communicate today with improved versions of the instruments that were available for these purposes in 1970. We use a system whose backbone infrastructure and individual components did not exist, and in important aspects were not imagined, in 1970. If we are going to meet the climate challenge, we are going to have to effectuate a comparably broad and deep reconstruction of our energy and industrial systems. The information technology and digital communications transformation was fostered in significant ways by public policy around the world. Particularly in the U.S., the government invested in both research and in acquisition of early-stage technology projects related to defense, space, and communications that accelerated technology development significantly. Other, less extensive technological transformations such as nuclear power, commercial aviation and health care have analogous histories of government research and technology purchase in support of technological development. Current efforts do not match the importance of the problem. Current public spending on energy research, development and demonstration is about $15 worldwide. This is less than the U.S. alone spends on health sciences research. Policies such as tax credits for electric cars, special tariffs for electricity from renewable sources, and “portfolio” standards that require electricity generators to derive minimum fractions of their power from non- carbon sources have had some impact in expanding the markets for hybrid cars, windmills and solar power. But these policies are largely uncoordinated, and their future is uncertain as fiscal austerity becomes more and more acute.
Evaluation is essential. It would be nice if economists nd other experts could advice policy makers on which of the various mechanisms that have been used to foster technology development are the most effective. Unfortunately, careful evaluation of such programs— which requires attention to the incremental impact of the policy over what would have occurred in the absence of the policy—is rare. This is an area in which economic research could have a beneficial impact.
Conclusion. The current divisive debates about climate policy, and the general focus on fiscal austerity around the world make near-term policy innovation in this area unlikely. But climate change is a long-term problem. Academic scholars should analyze it from a long-term perspective, developing the methods and data that will facilitate better policy over the long term.
(This article is a condensed version of an article “Technology Policy and Climate Change” that is forthcoming in the journal Climate Change Economics.)
Selected Further Reading:
Griliches, Zvi, 1992. “The search for R&D spillovers,” The Scandinavian Journal of Economics
Henderson, Rebecca and Richard
Newell, eds., 2011. “Accelerating Energy Innovation: Insights from Multiple Sectors,“ University of Chicago Press
Jaffe, Adam B., 1998. “The Importance of ‘Spillovers’ in the Policy Mission of the Advanced Technology Program,” Journal of Technology Transfer, Summer
Jaffe, Adam B., 2002. “Building Programme Evaluation into the Design of Public Research-Support Programmes,” Oxford Review of Economic Policy
Popp, David, Richard Newell and Adam Jaffe, 2010. “Energy, the environment, and technological change,” in Hall and Rosenberg, op cit