Finance & Development, December 2009, Volume 46, Number 4

In December’s Viewpoint, Bjørn Lomborg argues that investment in research and development (R&D) of low-carbon energy technologies and “geo-engineering” schemes is a sufficient response to the risks posed by human-induced climate change. Policies aimed directly at reducing emissions, he claims, are not needed. Unfortunately, Mr. Lomborg has crucially misinterpreted the work of economists his own center has commissioned and published (see for example Yohe et al, 2009 and Bosetti, 2009). R&D is undoubtedly a necessary component of climate policy, but it is by no means sufficient. Most analysts agree that it is neither economically nor politically feasible to deeply cut greenhouse gas emissions with currently available technologies, making new technology development a top priority. Still, successful R&D only puts new technologies on the shelf. A price on carbon (whether explicitly via a tax or implicitly via a permit system) is needed to create incentives for getting technologies off the shelf and deployed in the marketplace, and to stimulate private sector innovation. Moreover, a price on carbon is justified by the simple fact that emissions impose external costs, uncertain in magnitude but almost certainly positive, leading to excessive societal demand for fossil fuels. Similarly, R&D provides external benefits, leading to a social under-supply and motivating public investment. These results are consistent with the last half-century’s research on environmental and welfare economics.

Some of Mr. Lomborg’s observations are in line with the literature. It is true that rapid emissions reductions in the near term could be very costly, particularly to the extent that they force early retirement of long-lived capital stock. It is also true that the aspirational goal of limiting temperature increase to 2°C will likely prove so costly as to be excessively stringent from a benefit-cost perspective, not to mention essentially impossible to meet (even with major advances in technology). However, one cannot conclude from these findings, as Mr. Lomborg does, that a zero price on carbon emissions today is the best public policy. Despite the uncertainty, and despite the urgent need for technology development, immediate emissions mitigation is warranted by our current understanding of potential damages. A price on carbon, with clear signals about its future trajectory, is particularly important to guide near-term investments so as to avoid further lock-in of carbon intensive capital. A portfolio approach that combines R&D, efficient and flexible emissions mitigation, and investment in our capacity to adapt to inevitable future change is the smartest alternative for climate policy today.

Geoffrey J. Blanford, Ph.D.
Program Manager for Global Climate Change Policy Costs and Benefits
Electric Power Research Institute (EPRI), Palo Alto, CA