Can a well implemented carbon pricing be an ally to our economies?

A new WCP study by University College of London seeks to provide the answer.

As the use of fossil fuels becomes more and more constrained within a low carbon economy, it is fundamental to ensure the availability of technologies delivering sustainable energy in the long run, and to encourage their uptake. Price incentives are an important tool in the ongoing debate between demand-pull and technology-push options in environmental and energy innovation policy.

Despite some existing empirical investigation, no thorough evaluation of the impact of price signals has been implemented for economies as whole, taking into account the long delays and uncertainty intrinsic to the innovation process, and the role of expectations about long-term energy strategy. As most evidence is based on short-term micro-econometric approaches, our understanding of the national impact of price incentives in stimulating technological innovation in the energy field remains unclear.

Assessing the full benefits from energy efficient and low carbon technological change is paramount to ensure effective policy-making, bearing in mind implications for economic competiveness, exposure to exogenous shocks and ability to deliver wealth in a growing industrial sector. The question is, can Carbon Pricing instruments drive low carbon and energy efficient technological change?

To answer such question, Worldwide Carbon Price will fund a new study to be performed by the University College of London team led by Mariana Mazzucato, Professor in the Economics of Innovation and Public Value, UCL Institute for Innovation & Public Purpose, and Paul Ekins, Professor of Resources and Environment Policy, UCL Institute for Sustainable Resources.

The aim of the research is to assess the way in which energy and carbon prices have driven historical energy efficient and low carbon technological change and the extent to which national economies have benefited from it and may stand to benefit in the future.

Prof. Paul Ekins, member of the WCP Scientific Committee, commented: “a rare point of agreement among economists is that a strong price signal for decarbonisation, with a conviction among businesses that the signal will become stronger in future, is an essential, if not sufficient, condition for the levels of emission reduction required to meet the targets in the Paris Climate Agreement. So far, in most of the world, this signal is either absent, or made negative because of fossil fuel subsidies. There is little theoretical reason why carbon pricing, if well implemented, should have a negative influence on the economy, and a real possibility that it will actually help countries to build competitive advantage in the industries of the future. This project should provide some welcome new evidence on this score.”

Prof. Paolo Agnolucci, Senior Lecturer in the Bartlett School Environment, Energy & Resources at University College London and member of the research team explained: “the project will assess the impact of price signals on new knowledge and ultimately gains in energy efficiency or low carbon energy use through the analysis of the causal relationship between energy saving, low carbon technological change and their drivers. The project is also devoted to assess benefits from energy efficient and low carbon technological change, such as ability to export, resilience to external shocks and the wide notion of competiveness.”

WCP Scientific Committee Coordinator, Michele Governatori, remarked: “when I read about manufacturing industry leaders calling for reduced decarbonization commitments, I tend to worry. The later we internalize the cost of climate change, the worse might be the mid-term impact on the companies themselves. Can we expect that a serious predictable carbon price strengthens our industry? This is what we are investigating through the study by UCL”.

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