A post dated 2017 by Skillings on the website of E3G, a think tank focusing on the political economy of climate change, refers (in the 5th paragraph) to:

"recent emerging consensus that, whilst carbon prices are great at optimising existing operations, they are poor at driving investment and efficiency and next-to useless when it comes to supporting innovation."

No supporting evidence or reference is given.

The claim about investment seems counter-intuitive. Suppose that there are favourable circumstances including:

  • A carbon price is in place and expected to remain in place for many years ahead.
  • An industry has available a choice of high-carbon and low-carbon production technologies.
  • The high-carbon technology has the lower cost per unit in the absence of the carbon price, but the low-carbon technology has the lower cost when the carbon price is taken into account.

Given such circumstances it seems reasonable to expect that the carbon price would provide a strong incentive for investment to switch to the low-carbon technology.

Is there indeed a consensus as stated in the quotation (and if so references would be appreciated)? Is the point perhaps that the combination of circumstances outlined above rarely exists in practice?

  • $\begingroup$ I think the claim being made is about carbon pricing improving things already being done, but failing to encourage new products and other innovations: such novelties typically do not have a competing technology for a price comparison. $\endgroup$
    – Henry
    Feb 20, 2022 at 22:02

1 Answer 1


There is indeed an evidence that carbon taxes are not as efficient at driving innovation as one would though. However, stating they are next to useless is exaggeration.

For example, Lilliestam et al 2021:

Here, we review the empirical knowledge available in academic ex-post analyses of the effectiveness of existing, comparatively high-price carbon pricing schemes in the European Union, New Zealand, British Columbia, and the Nordic countries. Some articles find short-term operational effects, especially fuel switching in existing assets, but no article finds mentionable effects on technological change. Critically, all articles examining the effects on zero-carbon investment found that existing carbon pricing scheme have had no effect at all. We conclude that the effectiveness of carbon pricing in stimulating innovation and zero-carbon investment remains a theoretical argument. So far, there is no empirical evidence of its effectiveness in promoting the technological change necessary for full decarbonization.

However, note most studies of carbon taxes come from EU. EU is on technological frontier and R&D is funded here much less by private sector (compared to let’s say USA) since in EU government is heavily involved in R&D. For USA, numerical models predict higher effects (Brown et al 2019).

Also there are potential non-linear effects that complicate things. For example, Cheng et al 2021 find that in Sweden the tax had effects on innovation but only up to a point.

So it’s fair to say that there isn’t strong evidence supporting idea that these taxes provide strong incentive for innovation (meaning R&D there is a lot of evidence for switching to more sustainable existing technologies). However, there still is evidence for some effects. Rather it would be more fair to say that the effects are smaller than expected not non-existent.

  • $\begingroup$ Thank you - it's especially helpful that the Lilliestam et al paper is a meta-study drawing on a large number of empirical studies. $\endgroup$ Feb 19, 2022 at 18:45
  • $\begingroup$ "there is a lot of evidence for switching to more sustainable existing technologies" - That's quite an important statement within the brackets of your last paragraph, and seems to imply that carbon prices are not poor at driving investment, even if they are fairly poor at driving innovation. $\endgroup$ Feb 19, 2022 at 18:49
  • $\begingroup$ @AdamBailey yea although it’s fair to say they are poor at driving R&D investment $\endgroup$
    – 1muflon1
    Feb 19, 2022 at 18:54

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