David Leonhardt has a very interesting column, here is one excerpt:
…history shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced.
“We didn’t tax typewriters to get the computer. We didn’t tax telegraphs to get telephones,” says Michael Shellenberger, president of the Breakthrough Institute in Oakland, Calif., which is a sponsor of the proposal with A.E.I. and Brookings. “When you look at the history of technological innovation, you find that state investment is everywhere.”
Here's the good news, sort of: we often hear, especially from left of center economists, that ideas are a public good which require subsidy, especially at the level of pure science. This argument has a strong pedigree, most of all from Kenneth Arrow. In that framework, if the relevant idea is a public good, a higher price of fossil fuels may not encourage its creation very much. If oil and coal are more expensive, it's still not worth it for a single firm or institution to produce this public good. If you think that technologically, we are fairly far from solving the problem (my view), you will be less crushed by the absence of a price incentive for something which is a public good anyway.
If you think we are fairly close to solving the technological problem — maybe souped up wind, nuclear, and hybrids can do it — then you should be quite disappointed by our inability to raise the price of fossil fuels. The switch to the already-available technologies is at least partially a private good and a higher price for fossil fuels would help a lot.
There is a kind of "utility diversification" at work here. If you are happy on "technological closeness," you are very unhappy on "policy implementation." If you are unhappy on technological closeness, you are less unhappy about failures at the policy level.
I believe we are far at the technological level because of institutional constraints. Wind and nuclear, whatever you think of them, run into fierce local opposition and they are not allowed to reach their potential. It seems we're only going to adopt a solution which is quite easy and cheap in any case, and doesn't crash into NIMBY; maybe that's a much-improved form of solar. And with that constraint in place, our inability to raise the price of fossil fuels may matter less than is sometimes suggested. Maybe only really cheap solutions will be adopted in any case and the rate of their discovery may depend more on research subsidies than on prices at the user level.
In the meantime, it still makes sense to clean up dirty coal, limit cow farts by taxing meat, and spread better indoor heating and cooking technologies in the poorer countries.
Addendum: Here is more from Leonhardt.