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How Induced Innovation Lowers the Cost of a Carbon Tax

Many nations have pledged to reduce their emissions of carbon dioxide (CO2) over the next several decades in an attempt to keep global temperatures from rising more than 2 degrees Celsius above pre-industrial levels. One policy tool that is likely to be increasingly embraced is raising the price of carbon emissions by taxing them, an effect of which would be to induce needed innovation in less carbon-intensive technology. Research shows that such innovation helps reduce the cost of lowering emissions—and potentially eliminates the costs altogether if the carbon tax revenues are used to provide tax incentives for innovation and investment (e.g., a more generous research and development tax credit).

This report from the Information Technology & Innovation Foundation (ITIF) examines the potential impact a revenue-neutral carbon tax would have on technological development and suggests policies to maximize that impact while minimizing the economic cost.

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