The Latest Nobel Winner Thinks ‘Creative Destruction’ Can Stop Climate Change

Philippe Aghion — one of three Nobel laureates in economics announced Monday — is a theorist of innovation. Specifically, his work concerns “creative destruction,” the process by which technological innovation spreads throughout the economy as new businesses replace old ones, sparking economic growth.

If that reminds you of the energy transition, i.e. the process by which cleaner fuels and new, more efficient ways of generating energy replace fossil fuel combustion, well, you’re not alone.

“I think innovation is the best hope for climate change,” Aghion said in a 2023 interview with VoxTalks Economics. “Of course, we need to innovate in our day to day behavior, but we’ll fight climate change because we will find new sources of energy that are cleaner than coal or gas, and because we will also find ways to produce with energy-saving devices.”

Along with Brown University economist Peter Howitt, Aghion developed mathematical models to describe how creative destruction works, building on foundational work by the Austrian economist Joseph Schumpeter. Along the way, Aghion also worked with 2024 Nobel laureate Daron Acemoglu, who won his prize for describing the institutions that best foster economic growth.

Aghion and Acemoglu have tangled with fellow laureate William Nordhaus, whose models of how the harms of climate change slow down economic growth practically invented the field of climate economics. In Nordhaus’ framing, climate change is the ultimate externality — that is, an economic factor not reflected in the market. The most efficient way to solve climate change, then, is to price in the externality by putting a tax on carbon emissions. Once the price of highly emitting goods reflects the true cost of producing them, the market will naturally favor lower-emitting goods.

Aghion instead sees carbon prices as another way to spur climate-friendly innovation throughout the economy.

In a 2014 paper written with Cameron Hepburn, Alexander Teytelboym, and Dimitri Zenghelis, Aghion argued that “product and process innovation” will ultimately drive decarbonization. Previous approaches to climate economics, Aghion wrote, use inadequate models for the effects of innovation, and so “significantly bias the assessment of the cost of future low-carbon technologies” to be higher than they are in reality.

To be clear, Aghion isn’t against a carbon tax. “A carbon tax or carbon price is a tool to redirect natural charge but it’s not the only tool,” Aghion said during the 2023 interview. “You need other tools, as well,” including “subsidies to green innovation, and more generally green industrial policy.” The point is less to discourage emitters and more to encourage the producers of non-emitting technologies.

Aghion argues that climate policy needs to hit hard and hit quickly, precisely to induce the kind of competitive innovation that he thinks drives economic growth. “If you wait longer, firms will be even better at dirty technologies, and it will take longer before their skills on clean technologies catch up with their skills on dirty technologies, and so you need to act promptly,” he said in 2023.

In a 2012 paper on the auto industry written with Antoine Dechezleprêtre, David Hemous Ralf Martin, and John Van Reenen, Aghion tracks patents in the auto industry and finds that “higher fuel prices induce firms to redirect technical change towards clean innovation and away from dirty innovation.”

He also finds that the nature of the firms matters. Companies that have a background in green technology innovate more in green technology, while companies that specialize in carbon-emitting or “dirty” technologies are more likely to find better ways to emit carbon. You’d expect Porsche or Ferrari to come up with a better internal combustion engine than Tesla, for instance, but for Tesla to invest more in pushing the capabilities of electric drivetrains.

Tesla is in many ways the ideal example of this kind of policy mix working. The company has benefited both from federal and state taxes on gasoline (as well as California’s unique emissions rules), which suppress demand for fossil fuels, and from subsidies and other financial support, which helped it reach economies of scale and performance parity with internal combustion vehicles more quickly.

While theoretically every auto company had the same incentives in both California and the nation as a whole to develop electric vehicles, Tesla made up the bulk of the entire market for years as it never had to split its focus between a legacy internal combustion business and a battery electric business.

Aghion’s work supports this kind of “belt-and-suspenders” approach to climate policy, where fossil fuel emissions are made more expensive and subsidies are provided to advance green innovation.

This may sound pretty familiar. While America’s signature climate law, the Inflation Reduction Act, eschewed carbon taxes in favor of incentives and subsidies, the overall policy mix pursued by the Biden administration — including a fee on methane emissions, regulations on tailpipe and power plant emissions, and increased fuel economy standards — approximated this mix.

Aghion clearly recognized the IRA as a real life version of his ideas. When asked in 2023 about the kind of industrial policy he envisioned, he said, “The Americans are doing it now with the IRA.”

This kind of policy mix wasn’t just optimal policy economically, but also necessary politically.

Pointing to France’s experience with fuel taxes, which led to country-wide protests beginning in 2018, he cautioned that if policy makes dirty fuels more expensive without making clean technology technology cheaper, “then people riot.”

Of course, the IRA and other U.S. climate policies have not been as politically durable as their supporters hoped for. This is despite the fact that, alongside trying to boost green businesses, recent attempts at industrial policy explicitly tried to support “dirty” business, as well, whether by subsidizing older auto companies’ investments in electric vehicles or by supporting carbon capture and hydrogen investments by big oil companies.

But the power of dirty business remained immense — and opposed to climate policy.

The oil and gas industry were some of the biggest supporters of President Trump’s reelection campaign. Since he took office, one of their own — former fracking executive Chris Wright — has overseen the dismantling of much of the Energy Department’s investments in clean energy.

The basic calculus of Aghion’s approach may very well persist as rich countries struggle with growth and the harms attributed to climate change continue to add up.

“I think now we made progress on the idea that innovation is a big part of the solution and … that carbon price is not enough,” he said. “You need smart industrial policy aimed at green innovation. That’s the idea.”