Prices versus policy: Which path to clean technology?

The conventional economic perspective on long run resource limitations is that short run scarcity will lead to price increases, which will induce innovation, which will in turn, overcome scarcity. In the global warming case, if we are convinced that cost-effective low carbon technologies will in fact emerge as carbon prices rise, why wait? Given that the investment dollars will be spent regardless, would it not be more efficient to invest in the new technologies today? In that way, we might avoid several decades of carbon emissions and consequent environmental damage. Moreover, such an approach is attractive for its likely impacts on both the size and composition of national R&D spending, as well as for its insurance function. On the other hand, informational constraints may argue against a technology policy strategy. This chapter explores these issues. In an application to the wind industry, I conclude that if wind power continues down its experience curve at its historical pace, early investment in wind would be socially efficient.