Because fossil fuels remain cheap, such innovation efforts must be led by the public sector. Indeed, virtually every existing low carbon technology was developed by the public sector, not the private sector. As the cases of France and Sweden show, governments must not only push innovation through research, development, demonstration and deployment (RDD&D); they must also pull new energy technologies into the market through their role as large, early-adopting purchasing customers. Indeed, the role of governments — especially the U.S. Department of Defense — as a customer for emerging technologies has been a key catalyst — arguably the key catalyst — for technological innovation across most of the important areas of new technology since World War II, from aircraft and jet engines to telecommunication systems and information technologies. The key lessons here overall are that very large investments in energy technology innovation will be necessary, and that such investments can lead to benefits coincident with the primary goal of decarbonization — most importantly, economic growth from the creation of new, highly competitive and innovative industries.
B. How to Pay
Recent accumulating experience suggests that it hasn't proved possible to create carbon pricing regimes that are simultaneously efficient in reducing demand or in stimulating innovation and that are accepted or even well tolerated by democratic electorates.
Our strategy is more modest and specific. We propose that nations fund innovation aimed at direct decarbonization through a very modest hypothecated (dedicated) carbon tax. Such a tax has the useful political and economic advantages of avoiding negative growth effects. We are aware that as a general rule politicians and Ministries of Finance hate the principle of hypothecation, because it ties their hands. We see that as one of the virtues of hypothecation, because it removes the issue from the political arena, and by doing so, may help to restore public trust at a time when the stock of politicians is not high in many of the democracies. And hypothecation is not hypothetical. In the February 2010 Union Budget, the Indian Minister of Finance, Pranab Mukherjee, established a National Clean Energy Fund to support RDD&D and to be funded by a tax of Rupees.50/ton on both domestic and imported coal.
The proposed (initially modest) hypothecated tax would not be designed to change consumer behaviour; it would be used to conceive, develop and demonstrate and even purchase low-carbon or carbon-free technologies. It would provide a dependable and secure means of financing RDD&D essential to decarbonisation.
Arrangements will be needed to manage the tax revenue and direct investment. There are innovative models to be studied. It may well be that national politics require independent national approaches Consistent with our perspective throughout, it may also be that the competitive nature of having different national approaches will yield the most rapid progress. But there are other models worth exploring, especially those that build on multilateral and public-private partnerships. Examples include the Global Fund to Fight AIDS, Malaria and TB, which has managed high-risk R&D in a way that allows progressive focus on successful approaches while discontinuing failure, and the Consultative Group on International Agricultural Research, the set of then-innovative regional research centres that provided the scientific and technological foundations of the Green Revolution.
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