How Much Will a Carbon Tax Spur Innovation?

I meant to blog last week about the long dispute between Jim Manzi and Ryan Avent over what sort of innovation you get out of a carbon tax.  Digging into my massive RSS queue, I see that Matt Zeitlin blogged what I take to be a fair summation of the carbon-tax-as-innovation-stimulus side--a side to which I have, myself, occasionally subscribed.

Ryan Avent speaks for everyone who has been to Europe -- or has familiarity with their carbon usage and transportation policy -- and points out that Europe's transportation sector is hugely different from ours:

Clearly that's not the case. In general, Europeans do drive different automobiles, which tend to be smaller and more efficient. Some of these have been innovative enough in their design to generate raised eyebrows from American tourists (see: the Smart car). In Europe, the scooter is far more popular and differentiated (the scooter with roof is a common sight). Bicycles are also more common and differentiated, and the institutional supports for cyclists are more highly developed (cycle superhighways are old news in Europe).

And then there's public transport. From buses to trams to trains to high-speed rail, Europe is well ahead of America. When American transit systems go shopping for vehicles, they generally look to European manufacturers. When the District sought a technology that would allow the city to run streetcars without using overhead wires, it looked to France's Alstom and Canada's Bombardier (Canadian gas tax rates are considerably higher than those in America). And transit innovation goes beyond vehicle technologies. It includes fare-gathering methods, scheduling, system design and maintenance, and so on.

And this isn't just a qualitative difference. Not only is it vastly easier to get around using public transportation in Amsterdam than it is in downtown Los Angeles or Houston, but Europeans simply use much less carbon in their transportation sector than we do. And here's a nice handy chart, using data from the International Energy Agency. This is the per capita carbon emissions in the transportation sector in 2007 of the U.S. and an assortment of wealthy European countries.

Obviously, there's a huge difference: the U.S.'s per capita transportation emissions are roughly three times greater than the OECD-Europe average. And it's a disparity that can be greatly explained by the array of policies and the infrastructure that Avent describes. More generally, I think Manzi's focus on "innovation" -- some totally new or vastly more efficient method of energy production -- is misplaced. Although it would hardly solve our climate change problems, if we could get the emissions in the transportation sector down to European levels, that would be a huge improvement. More generally, according to McKinsey, there are huge potential gains in energy efficiency that would surely be more easily realized if the cost of energy, and especially carbon, were higher.

As I say, I support a carbon tax (which should be taken as shorthand for support of a well-designed cap-and-trade regime, or a source fuels tax, or other variations which basically do the same thing).  But I think that Manzi's criticism is well aimed, for a number of reasons.

First, it's just not true, or even partially true, that the only thing standing between us and European levels of efficiency is our danged cheap gas.  In many places, the US transportation sector is extremely efficient--we use rail much more heavily for goods movement than Europe does, for example.

I am not going to extensively rehash the ways in which the US is simply different from Europe:  the number of children and the length of time they have to spend in car seats that cannot be crammed three-to-a-bench-seat; the geographic dispersal; the extremes of weather which make air conditioning and heating necessary for much of the country.  I will note that though our population is majority urbanized, large swathes of it are living like my grandmother, in a place where the nearest "big city" is almost an hour away and has 150,000 in it, something that I don't think is physically possible to achieve in most of Western Europe. 

I will also note that it doesn't do much good to say that we shouldn't have sponsored so much auto-heavy development, because the fact is that we did, and these things seem to be path dependent.  The only city in which a majority of the population find it convenient to move about entirely car-free is New York.  No city that I am aware of has managed to replicate auto-free development in an auto-abundant atmosphere no matter what tax incentives were applied.  DC is the best we've managed to do so far, and according to wikipedia, a whopping 32% commute by any form of public transit; almost half drive.  That's of the people who work in the district.  Obviously, the numbers outside will be lower still.  That's after decades of relatively heavy investment in the metro, and one of the worst traffic congestion problems in the country.  I am very skeptical that changing our living modes will get us from here to there.

But more importantly, the major reason to support a carbon tax is not, per se, to reduce our emissions.  Carbon fuels are fungible, as the Arabs discovered when they attempted the oil boycott; if you don't sell it one place, the oil simply gets sold somewhere else, maybe at a lower price.  If you take seriously--as I do--the possibility that we may simply not be able to ramp oil production up much higher, then mostly what you do by making the American transportation sector more efficient is subsidize use by China and India.

The strongest argument in favor of a carbon tax, from my perspective, is that it should encourage innovation in more fuel-efficient ways to use our limited supplies of oil and natural gas, as well as hopefully in ways to better produce energy entirely without the use of fossil fuels.  If those technologies become cheap and widespread enough, China and the rest of the developing world will pick them up, actually decreasing demand for carbon-intensive fossil fuels.

If Jim Manzi is right about the limited innovative effects of a carbon tax, then moving our houses around, slapping in some light rail, and maybe making the houses a little smaller, will be rearranging those deck chairs on our proverbial environmental titanic. 

Now, I hope that Manzi is not right.  I can think of some reasons he might not be:

  • The US is the world's largest single market for energy-intensive goods
  • Incremental investment is always good
  • We have those geographic and cultural limitations which might push us into radical innovation rather than smaller cars
  • Innovation always builds on what came before, so that even if a carbon tax in Europe didn't get us to an alternative-energy system before, we might now be ready for a breakthrough if we get the right push

Nonetheless, I think that Manzi's argument is a serious challenge to those of us who are in favor of a carbon tax.  It's not enough to say that it will change our marginal propensity to live in high rise apartments.  The Chinese are already living in high-rise apartments, and they're going to rapidly outstrip us in greenhouse emissions if something isn't done.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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