A Carbon Tax Remains the Best Incentive For a Low-Carbon Planet

A Carbon Tax Remains the Best Incentive For a Low-Carbon Planet
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A clean-energy startup called Heliogen announced last month that it had managed to use artificial intelligence and a large field of mirrors in the desert to reflect and focus enough sunlight to exceed 1,000 degrees Celsius. Achieving such a high heat intensity is significant, the company says, because extreme temperatures are necessary to produce steel, concrete, and glass, as well as various other industrial processes.

All of these happen to be extremely carbon-intensive products — the production of cement alone creates 7 percent of all greenhouse gases. If solar energy could be integrated into these production processes it has the potential to significantly reduce greenhouse gases.

Heliogen has received significant backing from Bill Gates, who has been a fervent advocate for the federal government to spend more money to identify and subsidize promising emerging technologies related to low-carbon energy. The tentative success of Gates’s investment in Heliogen suggests to some that it might be time for the government to follow his lead. People working to reduce carbon emissions find themselves frustrated with the limited array of instruments currently available and would like the government to place more bets on promising emerging technologies in an attempt to find more ways to mitigate climate change.

However, this strategy presupposes that a government agency is capable of identifying such technologies as efficiently as — or more efficiently than — the market. This is simply not the case, and it is not certain that even Bill Gates can do so either. Until the government gains a level of prescience well above its current abilities, selected bets on technology will likely fail to speed efforts in this regard.

The government already provides substantial targeted funding. In fact, U.S. taxpayers spent about $15 billion in subsidies and tax incentives for low-carbon technologies in 2019.

In the last decade, Congress has enacted a variety of tax breaks and other incentives intended to reduce climate change, including subsidies dedicated to the development of certain technologies--most notably wind and solar.

For example, homeowners receive a 30 percent tax credit for the cost of installing solar panels. The tax code also provides a $7,500 credit for most people who buy an electric-powered automobile and credits for certain energy-efficient home investments. And engineering companies that design a new or remodeled building that significantly improves energy efficiency are eligible for a tax deduction.

What’s more, various states provide green energy subsidies as well. For instance, the state of New York recently spent hundreds of millions of dollars to construct a factory for SolarCity to build solar panels near Buffalo, and the nearly-bankrupt Illinois will spend an estimated $2.35 billion in the next decade to keep its nuclear power plants open for the next decade.

In short, our government is allocating resources to incentivize the production of low-carbon energy, but in a haphazard process that can be maddeningly ineffective.

The last decade has seen a flurry of technological innovations that could pave the way to an economy that produces much less carbon than today. The increased efficiency of solar and wind energy has made those two energy sources almost competitive with fossil fuels, and steady improvements in battery storage hold hope that one day soon the intermittency of those sources will no longer present a constraint. And the success of Tesla and other electric car companies may pose an existential threat to cars that run on gasoline in the near future.

But it would take a crystal ball to forecast how the energy market will shake out in the next ten years, and individuals and firms will collectively make billions of dollars of investment decisions based on their prognostications. If history is any guide, much of this money will likely go to technologies that end up not succeeding — an unfortunate but necessary part of the process to ensure that some capital does go into what turn out to be the most promising avenues for success.

The federal government should — and does — finance basic scientific research that helps advance the development of low-carbon energy alternatives, but it should not engage in targeted efforts to foster the commercial development of specific technologies.

A more promising strategy — and one that does not require any long-term public-sector investment foresight — would be for the government to create incentives for individuals and businesses to invest in potential carbon-reducing technologies across the board. The simplest way to do this is with a carbon tax.

A broad-based carbon tax would naturally steer investors to companies like Heliogen hoping to improve or discover some sort of technology that helps to reduce carbon emissions. It would not guarantee the company’s ultimate success, but it would provide a greater potential payoff should it succeed, which will in turn help it to attract more capital, thereby boosting its odds of success.

While Mao never followed his maxim “Let a thousand flowers bloom” when it comes to economic policy, it nevertheless remains a sensible approach for achieving continued improvements in technologies that reduce carbon emissions.

Ike Brannon is a senior fellow at the Jack Kemp Foundation.

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