They will first find a way to do X cheaper, and that can be innovation or producing elsewhere.
I write about the subtleties in a section on regulation in the appendix:
“Many countries use regulation to set environmental standards (e.g. for cars) or ban certain technologies completely (e.g. coal power).
Take non-electric car bans: France, the UK,[242] and even China and India[243] have all announced plans to ban sales of non-electric cars by 2040. More than ten countries have targets for electric vehicles in place.[244],[245]. Unfortunately, these initiatives are often not technology-neutral and exclude synthetic fuels, hydro-fuels, and biofuels, which can decarbonize transport. However, there are also legitimate arguments against technology-neutral policies.[246] For instance, they might incentivize only slightly greener technology that is more cost-effective in the short term (think: biofuels), but lock out emerging energy technologies that would be better in the long term (think: electric cars). Frontloading technology-specific policies may actually be more optimal.[247]
The benefits of regulation and setting emission standards can diffuse throughout the world. Due to pressure from advanced importing economies that have adopted stringent emission standards, emerging economies have more rapidly adopted these standards.[248] And this is not only so that they meet the requirements for export, as evidenced by the fact that some countries, such as China, now have emission standards even though local car manufacturers cannot compete in international markets.[249] Rather, emerging economies have adopted these emission standards because the technology is now cheap enough that, in the case of China, for instance, adoption makes sense to reduce heavy air pollution.[250] Thus, environmental regulation can be a successful strategy for international technology transfer, and more ambitious future non-electric car bans should be implemented. Moreover, many countries already have generous tax breaks for electric vehicles,[251] which could be expanded in tandem with bans.
It makes sense to regulate emissions standards for cars, for which the demand is probably relatively inelastic. To an extent, this might also be the case for residential electricity usage, which, unlike industrial electricity usage, does not suffer from carbon leakage. The global passenger car fleet causes around 9% of total global energy-related emissions;[252] innovating to make electric cars cheaper might therefore be a great global public good.
Another way for governments to stimulate clean energy innovation through regulation is banning certain technologies. Consider bans on coal power. More than 20 states have joined “Powering Past Coal Alliance”[253] to phase out coal power and signed a moratorium on any new traditional coal power stations without operational carbon capture and storage (incidentally, the International Energy Agency estimates that carbon capture and storage has been dramatically underinvested in, receiving only $1.2 billion in investment in 2016 (total low-carbon energy investments amounted to $850 billion). Admittedly, the signatories did not use much coal power in the first place.
Finally, the EU’s “Biofuel FlightPath Initiative” aims to replace 4% of current EU jet fuel consumption with biojet fuel derived from renewable sources by 2020.[254] Aviation causes about 5% (2%–14%, 90% likelihood range) of climate change.[255]
Regulations such as these bans are theoretically equivalent to a punitive carbon tax and might have positive spillovers for the world, yet they have drawbacks similar to the carbon pricing described above (e.g. carbon leakage). In contrast to outright bans, future expected regulation and phase-ins have the benefit of guarding against abruptly high switching costs. Commitments to ban environmentally harmful technology in the future might be politically easier to push for than regulating the present and might seem like quick policy wins. But the effectiveness of future regulation is traded off with how credible commitments are against industry pressure on policy-makers when the time comes around to actually phase out environmentally harmful technology.
Finally, in theory, elegant carbon pricing based on estimated externalities (here the social cost of carbon) is more welfare maximizing than crude bans or arbitrary environmental standard setting.”
If regulators don’t think about the unintended consequences, then yes, I agree we risk unintended consequences. But surely the solution is to do regulation well?
With proper consultation with industry, regulation could induce innovation as Khorton suggested. With proper thought, it could set the right incentives and not encourage outcomes that are only marginally help. Indeed part of the point of lobbying should be to help governments see where they might go wrong and help them to get it right.
Re your comment:
“However, the basic economic fact remains that if you have two countries, one with regulation, one with less tight regulation, then, all else being equal, there is the potential for carbon leakage and that’s why many people worry about economic competitiveness. ”
A large company cannot move to a different jurisdiction at the drop of a hat. If the regulation is done well, with proper consultation, firms would rather work towards a regulation with a proper lead time than move countries.
I’m very much pro regulation and we rank it very highly in my comparison of climate policies :)
>> If regulators don’t think about the unintended consequences, then yes, I agree we risk unintended consequences. But surely the solution is to do regulation well?
>>With proper consultation with industry, regulation could induce innovation as Khorton suggested. With proper thought, it could set the right incentives and not encourage outcomes that are only marginally help. Indeed part of the point of lobbying should be to help governments see where they might go wrong and help them to get it right.
Yes, absolutely, this is an excellent point. However, I feel sometimes governments do not do regulation very well. Regulation is sometimes not set into in the future (and then sometimes when the time comes around there is industry push-back and the regulation is diluted), phasing in regulation to minimize switching costs is not done, making regulation ‘revenue neutral’ by reducing other non-Pigovian taxes does not often happen, making regulation technology neutral (see comment above).
>>A large company cannot move to a different jurisdiction at the drop of a hat. If the regulation is done well, with proper consultation, firms would rather work towards a regulation with a proper lead time than move countries.
Yes, you’re absolutely right—companies can’t move very easily and this point is frequently overstated. However, supply chains often can sometimes be switched more effortlessly and carbon leakage has been demonstrated empirically (I cite some studies on this). More crucially though, if you look at the carbon intensity of different economies:
you see that advanced economies have already moved energy intensive industries abroad. Thus, regulation in our advanced economies will not create the right incentives that are optimal from a global perspective.
Your point about advanced economies having already moved energy intensive industries abroad was really interesting. I hadn’t thought about that. I wonder whether regulation that covers imports in advanced economies could be way to tackle that?
Carbon tariffs (or border carbon adjustments) might prevent some, but not all,[156] carbon leakage and reduce emissions. But they are quite difficult to calculate (calculating the carbon intensity of every imported good) and might lower trade flows and welfare, especially in emerging economies.[157]
Generally, I thought there was surprisingly little research on carbon tariffs, even though, as your intuition shows, they should go hand in hand with carbon taxes.
Crucially, even if we were to have perfect carbon taxes and tariffs, UK emissions only make up 3% and shrinking of the global total.
I’m confused. If Government says, “You must do X” and X is currently very expensive, then companies will absolutely find innovative ways to do X.
They will first find a way to do X cheaper, and that can be innovation or producing elsewhere.
I write about the subtleties in a section on regulation in the appendix:
“Many countries use regulation to set environmental standards (e.g. for cars) or ban certain technologies completely (e.g. coal power).
Take non-electric car bans: France, the UK,[242] and even China and India[243] have all announced plans to ban sales of non-electric cars by 2040. More than ten countries have targets for electric vehicles in place.[244],[245]. Unfortunately, these initiatives are often not technology-neutral and exclude synthetic fuels, hydro-fuels, and biofuels, which can decarbonize transport. However, there are also legitimate arguments against technology-neutral policies.[246] For instance, they might incentivize only slightly greener technology that is more cost-effective in the short term (think: biofuels), but lock out emerging energy technologies that would be better in the long term (think: electric cars). Frontloading technology-specific policies may actually be more optimal.[247]
The benefits of regulation and setting emission standards can diffuse throughout the world. Due to pressure from advanced importing economies that have adopted stringent emission standards, emerging economies have more rapidly adopted these standards.[248] And this is not only so that they meet the requirements for export, as evidenced by the fact that some countries, such as China, now have emission standards even though local car manufacturers cannot compete in international markets.[249] Rather, emerging economies have adopted these emission standards because the technology is now cheap enough that, in the case of China, for instance, adoption makes sense to reduce heavy air pollution.[250] Thus, environmental regulation can be a successful strategy for international technology transfer, and more ambitious future non-electric car bans should be implemented. Moreover, many countries already have generous tax breaks for electric vehicles,[251] which could be expanded in tandem with bans.
It makes sense to regulate emissions standards for cars, for which the demand is probably relatively inelastic. To an extent, this might also be the case for residential electricity usage, which, unlike industrial electricity usage, does not suffer from carbon leakage. The global passenger car fleet causes around 9% of total global energy-related emissions;[252] innovating to make electric cars cheaper might therefore be a great global public good.
Another way for governments to stimulate clean energy innovation through regulation is banning certain technologies. Consider bans on coal power. More than 20 states have joined “Powering Past Coal Alliance”[253] to phase out coal power and signed a moratorium on any new traditional coal power stations without operational carbon capture and storage (incidentally, the International Energy Agency estimates that carbon capture and storage has been dramatically underinvested in, receiving only $1.2 billion in investment in 2016 (total low-carbon energy investments amounted to $850 billion). Admittedly, the signatories did not use much coal power in the first place.
Finally, the EU’s “Biofuel FlightPath Initiative” aims to replace 4% of current EU jet fuel consumption with biojet fuel derived from renewable sources by 2020.[254] Aviation causes about 5% (2%–14%, 90% likelihood range) of climate change.[255]
Regulations such as these bans are theoretically equivalent to a punitive carbon tax and might have positive spillovers for the world, yet they have drawbacks similar to the carbon pricing described above (e.g. carbon leakage). In contrast to outright bans, future expected regulation and phase-ins have the benefit of guarding against abruptly high switching costs. Commitments to ban environmentally harmful technology in the future might be politically easier to push for than regulating the present and might seem like quick policy wins. But the effectiveness of future regulation is traded off with how credible commitments are against industry pressure on policy-makers when the time comes around to actually phase out environmentally harmful technology.
Finally, in theory, elegant carbon pricing based on estimated externalities (here the social cost of carbon) is more welfare maximizing than crude bans or arbitrary environmental standard setting.”
all citations at: Lets-Fund.org/Clean-Energy
If regulators don’t think about the unintended consequences, then yes, I agree we risk unintended consequences. But surely the solution is to do regulation well?
With proper consultation with industry, regulation could induce innovation as Khorton suggested. With proper thought, it could set the right incentives and not encourage outcomes that are only marginally help. Indeed part of the point of lobbying should be to help governments see where they might go wrong and help them to get it right.
Re your comment:
“However, the basic economic fact remains that if you have two countries, one with regulation, one with less tight regulation, then, all else being equal, there is the potential for carbon leakage and that’s why many people worry about economic competitiveness. ”
A large company cannot move to a different jurisdiction at the drop of a hat. If the regulation is done well, with proper consultation, firms would rather work towards a regulation with a proper lead time than move countries.
I’m very much pro regulation and we rank it very highly in my comparison of climate policies :)
>> If regulators don’t think about the unintended consequences, then yes, I agree we risk unintended consequences. But surely the solution is to do regulation well?
>>With proper consultation with industry, regulation could induce innovation as Khorton suggested. With proper thought, it could set the right incentives and not encourage outcomes that are only marginally help. Indeed part of the point of lobbying should be to help governments see where they might go wrong and help them to get it right.
Yes, absolutely, this is an excellent point. However, I feel sometimes governments do not do regulation very well. Regulation is sometimes not set into in the future (and then sometimes when the time comes around there is industry push-back and the regulation is diluted), phasing in regulation to minimize switching costs is not done, making regulation ‘revenue neutral’ by reducing other non-Pigovian taxes does not often happen, making regulation technology neutral (see comment above).
>>A large company cannot move to a different jurisdiction at the drop of a hat. If the regulation is done well, with proper consultation, firms would rather work towards a regulation with a proper lead time than move countries.
Yes, you’re absolutely right—companies can’t move very easily and this point is frequently overstated. However, supply chains often can sometimes be switched more effortlessly and carbon leakage has been demonstrated empirically (I cite some studies on this). More crucially though, if you look at the carbon intensity of different economies:
https://en.wikipedia.org/wiki/List_of_countries_by_carbon_intensity
you see that advanced economies have already moved energy intensive industries abroad. Thus, regulation in our advanced economies will not create the right incentives that are optimal from a global perspective.
Your point about advanced economies having already moved energy intensive industries abroad was really interesting. I hadn’t thought about that. I wonder whether regulation that covers imports in advanced economies could be way to tackle that?
Yes, this is an intuition I had as well.
Carbon tariffs (or border carbon adjustments) might prevent some, but not all,[156] carbon leakage and reduce emissions. But they are quite difficult to calculate (calculating the carbon intensity of every imported good) and might lower trade flows and welfare, especially in emerging economies.[157]
Generally, I thought there was surprisingly little research on carbon tariffs, even though, as your intuition shows, they should go hand in hand with carbon taxes.
Crucially, even if we were to have perfect carbon taxes and tariffs, UK emissions only make up 3% and shrinking of the global total.