By Richard Lipsey

Humans are inventive creatures. Throughout history, whenever we’re presented with a challenge, we’ve invented our way around it.

Carbon pricing is the perfect example of a business challenge. When we put a tax on fossil fuels or create a cap-and-trade system for carbon emissions, it increases the cost of doing business. And that encourages companies to find ways to cut their fuel use and reduce their emissions.

Essentially, a carbon tax or a cap-and-trade system gives people an incentive to innovate. And innovation is the route to rising living standards.

Pricing carbon — and pricing it high enough to create real economic incentive — will spur people to improve current processes so they use less fossil fuel. It will also spur people to find alternative forms of energy that produce no carbon emissions at all. It is already doing so in Europe, where carbon emissions have been priced for almost a decade. All this creates employment and contributes to growth. At the same time, of course, it’s going to reduce the greenhouse gas emissions that are driving climate change.

But to reap all the benefits, we need to act now

The sooner we start pricing carbon, the sooner the resulting innovation will benefit our own economy and the more opportunity we’ll have to export that innovation to other countries.

The first people who develop a new technology have a big advantage. Take the example of the Chinese. In 2005, China set a target of supplying 15 per cent of their electricity from renewable sources by 2010. Now they’re a major exporter of solar panels.

In contrast, if you wait until you’re the last person in line, you’ve got to buy that technology from somebody else. Other countries have started pricing carbon, and even some of the states in the U.S. are moving in that direction. California, for instance, implemented a cap-and-trade system in 2012.

By now Canada is too late to capture that first-mover advantage. However we can still seize economic opportunities by jumping in before more states follow California’s lead.

The bottom line on carbon pricing and innovation

Yes, a carbon tax or cap-and-trade system may create a small competitive disadvantage for companies that have to compete against businesses in jurisdictions that don’t price carbon. However, it’s a small, short-term disadvantage that will soon be overcome by the advantages of the technologies and processes that companies develop in response.

It’s a pattern that economists see again and again. When we present businesses with this carbon-pricing challenge, lo and behold, they will do what they’ve always done: find a way of innovating around the challenge.