The effect of carbon pricing on technological change for full energy decarbonization: A review of empirical ex-post evidence

In order to achieve the temperature goals of the Paris Agreement, the world must reach net-zero carbon emissions around mid-century, which calls for an entirely new energy system. Carbon pricing, in the shape of taxes or emissions trading schemes, is often seen as the main, or only, necessary climate policy instrument, based on theoretical expectations that this would promote innovation and diffusion of the new technologies necessary for full decarbonization. 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. This article is categorized under: Climate Economics > Economics of Mitigation

Automated summary

Empirical analyses of existing high-price carbon pricing schemes in the European Union, New Zealand, British Columbia, and the Nordic countries show short-term operational effects but no significant impact on technological change or zero-carbon investment. The theoretical argument for the effectiveness of carbon pricing in stimulating innovation and zero-carbon investment remains unsupported by empirical evidence.