Carbon Pricing and Deep Decarbonization: When Theory is Not Supported by Empirical Evidence.

To reach the temperature goals of the Paris Agreement, the world needs to achieve net-zero greenhouse gas (GHG) emissions around mid-century. In the energy sector, where mitigation options are plentiful, the Paris Agreement implies a need for complete decarbonisation (IPCC, 2018). This practically bans the use of fossil fuels and calls for an entirely new energy system. Carbon pricing, materialised as carbon taxes or emissions trading schemes (ETS), is widely seen as the main policy instrument needed to solve the climate problem and achieve the goal of the Paris agreement (High-Level Commission on Carbon Prices, 2017 ). In some cases, scientists propose that a carbon price is the only policy intervention needed for climate protection and that further policy instruments would reduce the cost-efficiency and/or the effectiveness of climate policy (Nordhaus 2015, Edenhofer et al. 2019). However, we know relatively little about the actual effects of of carbon pricing schemes on the decarbonization of the energy system, and especially how they affect innovation and diffusion of zero-carbon technologies. In particular, it is not clear whether the theoretically assumed dynamic cost-effectiveness of carbon pricing is supported by empirical evidence. Here, we investigate this question. Carbon pricing can affect different processes and play out over different timescales. It can have short-term effects, originating in operational changes in existing assets, such as a switch within a power plant fleet from coal towards gas power. Carbon pricing can also have longer-term effects, both by triggering investments in new low- (e.g. new gas power) or zero-carbon assets (e.g. new wind farms) or by inducing innovation in new low- or zero-carbon technologies or practices (e.g. private R&D in enhanced solar energy production). The importance of the three effects for reaching the 2 degrees target differs. Short-term emission reductions are beneficial especially because they increase the time available for creating the new energy system, by delaying the point at which the available carbon budget is consumed, but are not a necessary condition for complete decarbonisation. The last two factors are both necessary and sufficient conditions for full decarbonisation: if the aim is not only to reduce emissions but to eventually completely eliminate them, innovation and substantial investments to build the new, fully carbon-neutral energy system are necessary. In this paper, we perform a meta-analysis of peer-reviewed ex-post evaluations of the effect of carbon pricing schemes on short-term operational shifts, investment in new assets, and innovation. We show that the empirical evidence for the effectiveness of carbon pricing is very thin: reductions originating in short-term operational shifts are documented (e.g. in the UK and Germany, triggered by the EU-ETS), but the scientific empirical literature finds very small, or no, effects of carbon pricing schemes on zero-carbon investment and innovation.