Report: High carbon prices have little effect on the pace of technological change

Yoana Cholteeva 18 January 2021 (Last Updated January 18th, 2021 16:38)

A new study by the German Institute for Advanced Sustainability Studies (IASS) in Potsdam has shown that carbon pricing has been less effective in driving technological change than previously anticipated, despite many governments relying on it to encourage climate change action.

Report: High carbon prices have little effect on the pace of technological change
According to the study, bringing about the necessary transformation will require sector-specific promotion of climate-friendly technologies. Source: Gerd Altmann from Pixabay

The IASS research, ‘The effect of carbon pricing on technological change for full energy decarbonisation: A review of empirical ex‐post evidence’, has focused on the effects of carbon pricing systems in the EU, New Zealand, the Canadian province of British Columbia, and the Nordic countries.

The data has shown that while the introduction of carbon pricing systems has led to emission reductions in some countries, they have not significantly stimulated technological change.

According to the study, bringing about the necessary transformation will require sector-specific promotion of climate-friendly technologies, such as changes in electricity market design, efficient charging network for electric vehicles, and significant investments.

IASS lead author of the report Johan Lilliestam says: “The significant reductions in emissions that we are seeing are being driven not by urgently needed investment in zero-carbon technologies but by operational shifts towards less carbon-intensive applications.

“But the effect of switching from gasoline to diesel or from coal to gas-fired power generation is practically irrelevant when it comes to achieving climate neutrality. Achieving net-zero emissions will require more sweeping, systemic changes.”

Higher carbon prices fail to boost investment in zero emission technologies

The study has also identified that overallocation of emission certificates, leading to low carbon prices, is a key factor in the failure of carbon pricing to drive change. For instance, in the Nordic countries, where carbon prices are relatively high, carbon pricing schemes have had little noticeable effect on the pace of technological change.

The research suggests that instead of carbon pricing itself, it is other policy measures such as programmes to promote renewable energy generation, that have driven energy transition in the region.

These targeted measures have offered investors stronger incentives than the carbon pricing systems introduced at the same time. The growth of renewables triggered by these measures has also resulted in notable reductions in wind and solar power costs.

In addition, fluctuations in the price of fossil fuels often exceed the cost of carbon surcharges and such fluctuations, for example in petrol price, undermine the steering effects of carbon pricing schemes.

Despite this discouraging track record, the authors of the report identify two benefits of high carbon pricing: “On the one hand, carbon pricing can be used to generate revenue for urgently needed support measures and public investment.

“On the other hand, in certain sectors, such as coal-fired power generation, it could be used to diminish the competitive advantage of carbon intensive technologies as emerging technologies reach market maturity,” Lilliestam says.

The report suggests that while carbon pricing is not suitable as a central policy solution, it could contribute to efforts to achieve the Paris Agreement climate goals as a part of a broad package of measures.