Last week MIT’s Global Institute released a paper showing that a modest carbon tax would be beneficial to the economy because it could help avoid cuts to the federal budget, which the Congressional Budget Office has warned will send the U.S. economy across a “fiscal cliff” toward negative GDP growth. Importantly, the research found that the economy would do better with a carbon tax than with existing taxes. While I think the political possibility of a tax on carbon is essentially zero, the paper did trigger myself and others to re-examine the need for a sustainable source of government funding for cleantech R&D.
In response to the paper’s release, Brookings Senior Fellow Mark Muro tweeted “Why does no one insist some revenue go to tech investment?” Muro is getting at the heart of what I believe is needed to spur forth a new energy economy. It’s long been known that fossil fuels receive six times the subsidies that renewable energy receives, and the question has always been what is the most efficient and feasible way to correct that imbalance.
In places like Germany and Italy, and to an extent the U.S., one solution has been to subsidize the market with programs like the Production Tax Credit and the Treasury Departments section 1603 cash grants program for renewable energy projects. Both programs are either gone or fighting for dear life, and while they may have increased the amount of renewable energy on the grid, they haven’t made renewable energy technologies more competitive on their own merits.
I think for places like Germany where there is broad cultural support for clean energy, where nuclear power is being phased out, and where a family of four spends 157 Euros a year subsidizing renewable energy, it’s perfectly reasonable to continue to hold the torch of higher energy prices in exchange for cleaner energy. Some analysts in the U.S. have even argued that the obsession with “grid parity” is damaging the efforts of the solar industry and setting it up for failure. But that willingness to pay more to go green won’t fly in the U.S. long term and more importantly, it won’t work in India and China.
So how do we support the renewable energy industry in a way that gives it the best chance of becoming cost competitive with fossil fuels? Forward looking countries like India have actually begun the process by taxing enacting very small taxes on coal and using the proceeds for a renewable energy fund. There are two things I like about a tax and fund program.
First, it starts to correct the artificially low fossil fuel prices that have resulted from 60 years of fossil fuel subsidies. It also should imply that the true cost of coal or natural gas or oil isn’t just what we pay for it on the spot market but the downstream costs to the environment, which are hard to see right now but which insurance companies are starting to consider. Humans are poor at considering consequences that don’t yet exist, even if we’re starting to build risk models for climate change to help judge the probability of warming within a given time frame.
Second, the money would need to go toward a major effort at tech investment and cleantech research. The only way renewable energy will prevail is if the cost of renewable energy continues to trend downward, and if the incredibly difficult biology, physics and chemistry problems, that next generation biofuels, batteries and solar panels are trying to crack, have long term funding. More importantly, that funding must help these companies cross the “valley of death” in which meaningful IP never reaches the market because the capital scaling costs are too high for investors.
No doubt we’ll need new financing in the private market, which we’re seeing in areas as diverse as solar backed securities and private equity. But a tax on carbon itself that was redistributed into a Manhattan Project like focus on renewable energy research and development would pave the way for cost competitive renewable solutions.