DeLong Smackdown Watch: Size of the Stimulus Edition
links for 2010-08-01

Incentives and the Environment: Ryan Avent Critiques Jim Manzi:


The Bellows » Innovation, and the Gas Tax: I’m not sure why anyone would argue that the imposition of a carbon price, even a relatively modest one, wouldn’t spur innovation. Price increases — the market’s signal for scarcity — lead to a range of human responses, among the most important of which is invention. The opinion that a price increase will likely lead to innovation is little more than a ratification of the idea that markets generally work. But Jim Manzi seems skeptical of this connection. And he cites variations in the gas tax rate as evidence:

Consider as an important example that most major Western European countries have had very high gas taxes – typically several dollars per gallon – for decades. But despite the efforts of lots of very smart engineers, the automobile has been a pretty stable technology for these same decades. Raising the price of gas does reduce consumption, and will of course induce some incremental innovation. But Western Europe seems to me to a big enough market so that if a low-carbon technology could be developed globally that was competitive with internal combustion in the face of a ~$5 per gallon gas tax, we already have a big enough end-use market to induce it. Why would increasing prices in America work when it hasn’t for Europe? There might be some carbon price that would radically accelerate innovation across the array of uses of fossil fuels (the limit case is simply outlawing coal and petroleum), but it has never, to my knowledge, been imposed anywhere at scale, presumably because it would impoverish any country that tried.

If you look closely, you’ll find that Manzi has gone and made the case for a carbon price in as compelling a fashion as you’re likely to find. Manzi thinks about automobiles and gas taxes and pictures a certain kind of innovation — new cars with new engines that don’t run on gas. And when he looks at Europe he doesn’t see it. But does that mean that there has been no innovation in response to the higher gas tax rates? Clearly that’s not the case. In general, Europeans do drive different automobiles, which tend to be smaller and more efficient. Some of these have been innovative enough in their design to generate raised eyebrows from American tourists (see: the Smart car). In Europe, the scooter is far more popular and differentiated (the scooter with roof is a common sight). Bicycles are also more common and differentiated, and the institutional supports for cyclists are more highly developed (cycle superhighways are old news in Europe).

And then there’s public transport....

And then, of course, there are innovations in the physical structure of the landscape....

And so on. The end result is that Europeans use a lot less gas, as Manzi acknowledges. But they don’t just reduce their consumption, as he intimates. They don’t lead lives exactly like ours, only they opt to sit at home while Americans go for Sunday drives. They have adapted and innovated their way around higher gas prices.

And the great breadth and variety of responses to higher rates is important to note. A country that sets its mind to innovating will approach problems with certain preconceived notions. They’ll say, “Well, we need to innovate our way around gasoline, so let’s see what new fuel we can find to replace it. Ethanol? Hydrogen? Electricity? We’re bound to hit on the right solution eventually.” But if you allow prices to do some of the work, you get many different solutions to the problem, many of which are far cheaper and more effective than the pre-conceived idea you had in mind. You get folks coming up with bike-sharing programs, car-sharing programs, and so on. You get effective innovation, which is exactly what we want. Manzi looks for the innovation he thinks he should see, and in the process he misses all the innovations that are actually there. And that’s precisely why the carbon price signal is so crucial.