Impact of Carbon Pricing on new green technologies

Environmental Economics


Technological breakthroughs in the past had benefited society as whole many benefits. For example, the technological development has solved many problems of hunger, disease and certain types of pollution in the past. The same breakthroughs are necessary as it will be a major reason in resolving the current global warming international environmental problem.

Economic rational of carbon pricing and the evidence of breakthrough technology in practice

In the current energy and climate debate many advocates argue putting a price on carbon emissions through a carbon tax or a cap-and trade system will send proper market signals to entrepreneurs so that they motivate them to develop breakthrough green technologies as alternatives. However, there is no evidence that carbon pricing has produced a surge of new green technologies as alternatives to current form of energy production or consumption in the world. In the past, major breakthroughs in innovative technologies had come from the support of public for early-stage development and markets, and not price signals.  As I argue, there is no reason to believe that the carbon pricing alone will produce new innovative green technologies.

Oversimplified understanding the drivers of breakthrough technologies

Green technological innovation is needed for several reasons.  To avoid the worst impact of climate change, global emissions should be at least halved by 2050. In addition, the global population


to grow by 46 percent by that year. As well, the per-capita income will increase by 129 percent in that year. This means, that global economic activity must become 84 percent less polluting to halve emissions. That is, the current energy technology has to be transformed into clean energy technology to produce at least fifteen terawatts of energy by mid-century. This is a massive figure, that is equal to the existing global energy system. In the same time, the international Energy Agency has said that an oil production peak has been likely been reached and the oil production from fossil fuels is likely to plateau for the next few decades. Due to this reason alone it is vital to develop green innovative breakthrough technologies at a massive scale to combat increasing fossil fuel prices and uncertainty in the future.


On cost competitive basis, the current clean energy technologies cannot compete with coal powered energy production. That is the  carbon pricing  must be at least 100 or more in the future to become cost competitive with coal powered energy sources. This is not politically possible. Their fore, new green innovative technologies has to be developed and not switching to existing clean energy technology to meet the future energy demand at affordable prices.

According to the Economist Jeffery Sachs,  " Even with a cut back in wasteful energy spending, our current technologies cannot support both a decline in carbondioxide and expanding global economy. If we try to restrain emissions without fundamentally new set of technologies, we will end up stifling economic growth, including development prospects for billions of people". That is, without spuriing and developing new green technologies it is not possible to restrain carbon emissions as well enable economic growth and meet energy demand in the future at affordable prices.

Many in the academic, environmental and business communities believe that carbon pricing will act as a  catalyst to spur new innovative green technologies. In essence the argument for carbon pricing to induce new green technologies are very simplified. The argument for the carbon pricing is based on the incentive it provides by market pricing signals to firms to use cost-effective technologies or to innovate new technologies as higher prices for carbon will make firms to invest in alternative new green technologies due to the pricing signals in the energy market. In this world view, technological innovations will be spontaneous irrespective of industrial sector and technological innovative dynamics. The carbon pricing is based on neoclassical Economics, which insists on markets, prices and capital accumulation as an aggregate production irrespective of differences in kinds of technology and research. Lack of microeconomic detail this approach makes difficult to make policy recommendations or institutional framework and policy.

As well the Neoclassical economics the firms are seen as rational optimizes with adequate information, to calculate risk, choose the ideal research and development path and allocate resources such as capital and labor in response to price signals and come into equilibrium spontaneously. In essence the neoclassical economics fail to capture the real world evolutionary innovation process and the complex and messy technological development and innovative dynamics. As well they also underestimate collaborative between public and private institutions in the national innovation infrastructure.

Many studies also has demonstrated that incremental technological change can happen by price signals but radical innovative technolical change is not possible. That is carbon pricing can assist firms to use existing green technologies but do not induce firms in all sectors to radically develop new green technology due to the complex and risky nature of such activities as well as information issues and complex evolutionary process of radical new technology innovation.


As discussed above Carbon pricing or cap-and trade system may assist firms in the adoption of existing green technologies. However, there is no evidence to suggest carbon-pricing in it own self will induce firms to invest in radical technology in all sectors of the energy industry. Put it simply the carbon pricing will not adequately address the technological breakthroughs necessary to reduce carbon emissions and in the same time meet increased future demand for energy as well not disrupt world economic growth. It is important if new green technology innovation to happen government must be also involved and fiscal and other measures are necessary with pricing signals and collaborative processes are necessary and institutional framework also must be considered.