Last week I discussed the basic arithmetic associated with population and economic growth, which will make it impossible to dramatically reduce greenhouse-gas emissions without major improvements in technology. (Some commenters protested, saying that current technology is sufficient, but they are mistaking the ability to reduce emissions based on current levels of income and population and what emissions will be as countries grow and economies expand.)

Now I would like to turn to a short discussion of some of the policies that can help to promote technological innovation.

Getting the prices right

The fact that there is no price paid for emitting greenhouse gases acts as a passive subsidy for all carbon-based fuels (and other activities as well). A carbon tax and a cap-and-trade system are two different ways of attributing a price to carbon, although the carbon tax is the most direct. Economic logic dictates that if users of carbon-based fuels had to pay for the carbon pollution they would use less of it, especially relative to fuels without such emissions. As the demand for the former decreases, the demand for the latter will increase — i.e., less oil, coal, and gas, and more solar, wind, and hydro. In a cap-and-trade scheme total carbon emissions are capped, but total emissions in the economy may still exceed this cap if the penalties are low relative to the benefits of burning additional carbon.

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The key to maximizing the development of alternatives to carbon-based fuels, from a policy standpoint, is to steadily phase in these increasing costs of carbon and maintain political credibility. A tax that rises each year or a cap that decreases each year allows for a smoother transition, and less economic disruption, than raising the price of carbon all at once. In addition, economic actors must believe that the policy is going to last for the long term; if political winds can easily shift, there will be much less incentive to switch to alternatives.

Government sponsored R&D

There are many economists who believe that “getting the prices right” is sufficient to move us towards a low-carbon economy. They may be right. If the price is high enough and our politics stable, businesses and entrepreneurs will have plenty of incentive (because of the money to make) to help us switch away from carbon-based fuels. But there is no reason not to employ other methods in tandem in order to try to accelerate technological innovation toward cleaner energy and greater efficiency.

The first method is the least sexy and most long-term: increasing investment in basic science and R&D in energy technology. Government grants help advance science and technology in virtually all fields, and there is every reason to increase grants in the realm of energy.

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In addition, major government-sponsored prizes for technological breakthroughs in energy demand serious consideration. Unlike the X Prize and other similar prizes, the government should think big and offer a sizable reward for something such as a commercially viable 200 mpg car or viable carbon sequestration technology. Even at a price tag of a few billion dollars or more, this would be a great investment (to put things in perspective, it’s what we are spending in Iraq every week; Congress is set to send a new spending bill to the president with $60 billion in pork projects).

Technological dissemination and adoption

Any discussion of technological innovation is incomplete without a discussion of dissemination, especially from richer countries to poorer countries. And such a discussion revolves in large part around patents. Patents can help to encourage technological innovation because they grant medium-term monopoly rights and thereby reward R&D, but they can also stifle innovation by decreasing competition. They also lead to much higher prices for consumers, which decreases adoption.

Some of this can be avoided if governments sponsor research and retain the patents, which can then be made part of the public domain. Another option is for governments to negotiate the purchase of patents for privately-funded R&D if the technology has wide social benefits, thereby creating an incentive to make it cheaply available quickly. This is especially true in the developing world where, despite rising incomes, it will be difficult for consumers to switch to new low-carbon technologies if they are expensive. A combination of shorter-term patents, public domain R&D, and international aid may be required to help widely disseminate new energy technologies in the poorer regions.

While I do not share David’s optimistic forecast that combating global warming will be a net positive for the economy, I am extremely confident that we are capable of making the necessary changes in our society while maintaining an extremely high standard of living. The key is not economic know-how or faith in the brilliance of our inventors, but political will, and here I am not so optimistic. While Robert Samuelson likes to unfairly chide environmentalists, his cynicism regarding environmental politics is not unwarranted. Anyone who thinks otherwise need only look at the current state of the 2007 Farm Bill. If ever there was a set of ridiculous programs that calls for bipartisan reform it is this. Instead, the bill being considered right now is so bad that the Bush administration is threatening a veto!

Virtually everything else on the climate change front — from ethanol subsidies, to “clean coal,” to nuclear power — demonstrates that changing the political dynamics in this country is the most important thing we can do for the environment. The necessary policies aren’t that complicated, but taking on the special interests and the general level of ignorance exhibited by our politicians is.