Path dependence, innovation and the economics of climate change

Headline issue

Innovation is required to transform our fossil-fuelled economy into a clean, low-carbon economy. But economic models of climate change have overlooked the role of innovation. By taking innovation fully into account, a whole new set of policy conclusions are drawn. This report finds that the longer governments wait to promote clean energy innovation, the greater the eventual cost to the environment and the economy. Increased public support for clean innovation should therefore be a priority. Government policies to promote low-carbon innovation may only need to be in place for a limited time because, once a low-carbon pathway has been kick-started, the economy will become ‘locked-in’ to that low-carbon pathway with no further intervention needed.

Key points

  • Governments should introduce a carbon tax (or cap-and-trade scheme) and directly support the research, deployment and adoption of low-carbon technologies.
  • Governments need to redirect private market forces towards cleaner energy sources. Government intervention should be credible, transparent and non-discriminatory.
  • Governments must act now. Even for very high discount rates, delaying clean energy innovation policies will result in much higher costs in the future.
  • Developed countries should act as technological leaders in implementing environmental policies. They should subsidise access to new clean technologies for less developed countries.
  • Intermediate energy sources, such as shale gas, may warrant support, but only if this support is temporary and research in clean technologies is strongly stepped up over the intervening period.
  • Investment in coal should not be encouraged and should be redirected towards clean energy sectors.