Why Taxing Carbon May Not Make the World More Green?

EEEIG ResearchExpert Blog

The above is a thought-provoking perspective (see here) and research on carbon pricing and renewables, developed by two Wharton professors – Sergei Nettessine and Sam Aflaki.

Sergei’s and Sam’s counterintuitive conclusion is that carbon pricing may shift energy investments away from clean energy technologies.

The arguments underlying the conclusion rests on two major pillars in our view – 1) renewable sources are intermittent, hence for every green electron, you need a dirty electron as a backup, which is expensive and 2) as we move towards liberalized electricity markets, there is greater electricity price volatility that don’t benefit renewables, i.e., prices are low when green electron production is highest.

Storage is an answer, but probably we are not at the industrial scale to produce cost effective battery storage, a natural consequence of barriers due to materials and chemistry. Encouraging technology and other interventions that reduce intermittency is clearly one solution (7X24 electricity auctions as in some markets). Long term price signals that reduce price volatility (like FIT regimes and PPAs) is another, Therefore carbon pricing needs to complement other interventions, and if acting alone, it may not work.