Transcript Document

Technology’s the answer!
(but what was the question?)
Analytic and Transatlantic divisions in responding to
climate change
Presentation to HGDC seminar, 19 November 2003
Michael Grubb
Associated Director of Policy, the Carbon Trust
Visiting Professor, Climate Change and Energy Policy, Imperial College London
Senior Research Associate, Department of Applied Economics, Cambridge
Overview
 The basic issue of technology-push vs demand-pull: examples and significance
 Economic theory and technology innovation
– The different conceptions – evidence, strengths and
weaknesses
– Integrated perspectives
– Practical problems arising from incomplete theories of
innovation
– Some implications for UK strategy
– Technology perspectives and Kyoto strategies
 Some additional observations on energy policy and
technology
 Conclusions
The basic issue
 Technology is the answer!
– All studies agree that low carbon technology is central to
addressing long-term climate change
– Technologies adequate to stabilise the atmosphere are not
yet commercially available
 But what was the question?
– Is this a question of R&D investment by governments to
develop the technologies that can solve the problem
(‘technology push’ / exogenous technical change)?
– Or a question of market incentives to promote private
sector investment in emerging technologies and learningby-doing (‘demand pull’ / induced technical change)
35000
7500
30000
6500
5500
25000
4500
20000
3500
15000
2500
10000
1500
5000
500
0
Source: Morthurst, Riso national laboratory
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
-500
MW per year
MW cumulative
Global Development of Wind Power capacity
Cumulative
Annual
Cost trends in wind energy, historic
and projections compared to
conventional power production
12
Inland site
10
Coastal site
c€/kWh
8
6
Gasfired power plants
Denmark Norway
4
2
0
1985 1987 1990 1993 1996 1999 2001
Source: Morthurst, Riso national laboratory
Time
Induced technical change can revolutionalise
the long term view…
results of IIASA studies with induced innovation



Uncertainty in key inputs
very wide range of energy technologies and resources
learning-by-doing
learning spillover effects in technology clusters

12%
Source:
Gritzevski &
Nakicenovic, in
Energy Policy,
1999
11%
10%
Near-optimal set of 53
technology dynamics
Relative Frequency
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
5
10
15
20
Ranges, GtC
25
30
.. And fundamentally affect international strategy
… Induced technology & policy spillovers determine long-run
Carbon Emissions (MTCpa)
effect of Kyoto-style agreement
First
Commitment Period
14,000
12,000
10,000
8,000
Developing
Country
Emissions
6,000
4,000
2,000
Industrialised Country
Emissions (Kyoto -1% pa)
Source: Grubb, Hope and Fouquet, in Climatic Change, 2003
Zero
Spillover
Scenario
Intermediate
Spillover
Scenario
Maximum
Spillover
Scenario
Overall, different conceptions of technical change
can radically affect the policy conclusions
Issue
Technology-push:
Market pull:
Govt R&D-led technical change
Demand-led technical change
Implications for long-run
economics of large-scale
problems (eg. climate change)
Atmospheric stabilisation likely to
be very costly unless big R&D
breakthroughs
Atmospheric stabilisation may be
quite cheap as incremental
innovations accumulate
Policy instruments and cost
distribution
Efficient instrument is government
R&D, complemented if necessary
by ‘externality price’ (eg.
Pigouvian tax) phased in.
Efficient response may involve wide
mix of instruments targeted to
reoriented industrial R&D and spur
market-based innovation in relevant
sectors. Potentially with diverse
marginal costs
Timing implications
Defer abatement to await
technology cost reductions
Accelerate abatement to induce
technology cost reductions
Carbon cost profile over time
Carbon cost starts small and rises
slowly till meetings technology
(Hotelling principle)
Big investment in early decades, cost
declines as learning-by-doing
accumulates
‘First mover’ economics of
emissions control
Costs with little benefits
Up-front investment with potentially
large benefits
Nature of international spillover
/ leakage effects arising from
emission constraints in leading
countries
Spillovers generally negative
(positive leakage) due to
economic substitution effects in
non-participants
Positive spillovers may dominate
(leakage negative over time) due to
international diffusion of cleaner
technologies
Source: Grubb, Koehler and Anderson, in Ann.Rev.Energy, 2002
Economic theory and environmental
innovation policies
Technology-R&D push
– the track record is not encouraging..
 The theoretical basis
– Classic R&D market failures
– The impact of liberalisation
 Some classic energy examples:
– Nuclear fission
– Coal-based synthetic fuels
– Nuclear fusion
 Basic problems of:
– ‘picking winners’
– Cooperation vs competition
– Policy displacement
 Theoretical paradox of the ‘classical’ view
– the giant leap
– the ‘valley of death’
Demand-led induced technical change
– if only markets were so perfect ..
 Some classic energy examples:
– North sea oil
– CCGTs
– Wind energy …?
 Basic problems of:
– Classic R&D failures
– Policy stability for environmental innovation
– The real world is ‘second best’
 Theoretical paradox of the ‘classical’ demand-led view
– the need for perfect R&D markets
– The need for long term certainty
– The need for perfect communication between government,
research, and industry
Integrated perspectives: technologies have to
traverse a long, expensive and risky chain of
innovation to get from idea to market
Government
Policy Interventions
Market Pull
Research
Basic
R&D
Applied
R&D
Demonstration
Market
Commercial
accumul
-isation
ation
Diffusion
Product/ Technology Push
Investments
Business and finance community
Source: Foxon (2003) adapted by the author
Consumers
There are extensive barriers to investment that
differ along the innovation chain
Basic
R&D
Applied
R&D
Demonstration
Market
Commerc
accumula
ialisation
tion
Social
n
Political
Technical
Economic
High
Medium
Low
Diffusion
Market theory is blind to the innovation process
– innovation assumed to emerge out of R&D and
market pull, with government no-go zone in between
Government
Univ
funding
Cofunding,
tax breaks
Policy Interventions
C,C,C
Carbon trading
/ taxation
Market Pull
Research
Basic
R&D
Applied
R&D
Demonstration
Market
Commercial
accumul
-isation
ation
Diffusion
Product/Tech Push
Investments
Business and finance community
C,C,C: Contentious, constrained, confused …
Consumers
Consequently we lack integration across the
innovation chain
 New entrants (technology and corporate)
– require €/$ billions, and years, of development
– Compete against established incumbants and rules
– Rely upon regulation to embody external costs of
incumbants
 political signals of future regulation are not ‘bankable’
– (‘White paper reactions’)
 fierce market competition and regulatory change in
electricity has left:
– Financial community extremely risk averse
– companies without financial resources for longer term
investment
– (‘CMI reactions’)
Some elements of integrated strategies application for the UK
A range of policy measures are needed to help
technologies traverse the innovation chain
Appropriate economic support for specific technologies
will vary as costs decline
Technology
specific
support
14
Electricity Price (p/kWh)
12
10
Offshore
Wave
RD&D Grants
Energy
Crops
8
6
4
Capital Grants/ Loans
Offshore
Wind
ROC (Buyout)
Onshore
Wind
CCL Exemption
2
Wholesale Price
0
1995
2000
2005
2010
2015
2020
2025
Note: ROC excludes recycling; Capital grant based on maximum of 40% of typical capital costs
Source: PIU Working Papers (OXERA II Base case cost decline)
General
support
Support needs to target advantaged technology
groups and build upon comparative advantages
- whilst market used to identify winning solutions
 High Domestic
Resource
Technology
Groups
Funding Prioritisation
Co-operate
Internationally
Invest
Aggressively
Watching brief
Build
Options
 High Materiality
 Early mover advantage
 Value added potential
UK comparative
advantage
Estimated impact
Assessment Criteria
Carbon Trust: Low Carbon Technology Assessment
seeks to classify main technologies on these bases
Estimated impact on
carbon emissions
High
Monitor
Focus
Limited
Consider
•
•
•
•
•
•
•
•
•
•
Buildings (Controls)
Waste to energy
Nuclear fission
Ultra-high efficiency CCGT
Smart metering
Wind
Fuel Cells (Transport, Baseload power
Biomass for Transport
Industry (Alternative Equipment)
CO2 sequestration
• Intermediate energy vectors
• HVDC Transmission
• High Efficiency Automotive
Power Systems
• Nuclear fusion
• Cleaner coal combustion
• Solar thermal electric
• Low head hydro
• Tidal (Lagoons, Barrages)
• Geothermal
Low
Low
• Buildings (Fabric, Ventilation, Cooling,
Integrated Design)
• Industry (Combustion technologies, Materials,
Process control, Process intensification,
Separation technologies);
• Hydrogen (Infrastructure, Production,
Storage and Distribution);
• Fuel cells (Domestic CHP, Industrial
and Commercial)
• CHP (Domestic micro, Advanced macro)
• Biomass for local heat generation
• Solar Photovoltaics
• Solar water heating collectors
• Photoconversion
• Wave (Offshore, Near shore devices and
shoreline)
• Biomass for local electricity generation
• Tidal stream
• Coal-bed methane
• Electricity storage technologies
• Buildings (Lighting, Existing building fabric,
Existing building services)
• Industry (Waste heat recovery).
Materiality of potential Carbon
Trust investments
High
Some implications for Kyoto
implementation and strategy
Kyoto commitments and trading potential
- a low or zero price will not aid technology development!
Gap between present (yr 2000) emissions and Kyoto target,
400
and managed forest allowances (MtC/yr)
US
19.3%
300
Reductions required
200
Reductions
required
100
(MtC)
EU
6.4%
Japan
8.5%
Canada
23.5% Australia
15.4%
OOECD
12.7%
0
-100
EU-A
-46.4%
OEIT
-78.9%
-200
Increases allowed
-300
Ukraine
-83.6%
Russia
-43.6%
Analogies with the oil markets?
The oil market:

International traded price far greater than marginal cost

Major ‘swing’ suppliers have big influence but not monopoly power

Price instability has forced restructuring of markets and relationships

International collaboration to maintain oil price at ‘reasonable’ levels

Strong government-industry interrelationships
Kyoto CP1 carbon market could have all these features
(Russia as the Saudi Arabia; EITs as the OPEC; DCs as non-OPEC)
But important differences:

Constructed commodity, depends upon institutional credibility
(compliance, etc)

Heirarchy of ‘environmental and political legitimacy’

Sequentially negotiated allocations

CP1 massive supply-demand imbalance created by US pullout
Implications for the Kyoto mechanisms
- projects
Heirarchy of value led by project mechanisms:
– CDM, small projects
• renewable energy may be highest value
• Potential for early start (Delhi, COP8)
– Other CDM
– JI – ‘track two’ dependent upon Supervisory Cttee
– JI – mainstream, forward trading contingent on meeting
eligibility, probably looser project governance

Removal Units (Annex I sink projects): variable domestic
price, low international price

Total volume from international project credits limited
Implications for the Kyoto mechanisms
– emissions trading
Heirarchy within AAU trading:

‘Greened’ trading: revenues linked to environmental
reinvestment (Russian Green Investment Scheme)

OECD countries that exceed their targets due to domestic action
(eg. UK?)

EIT exports governed through non-GIS-type routes (eg. through
domestic trading with ‘acceptable’ allocation).

wholesale transfers of AAUs without any linkages or constraints
(will this happen at all?)
Some broad conclusions on innovation
 ‘Supply push’ vs ‘demand pull’ conceptions lead to radically
different perceptions and policy prescriptions
 An important obstacle to effective policies is inadequate
economic combined theories of industrial innovation (and
especially environmental innovation):
– ‘standard’ theories yield policies that are limited in their
feasibility, effectiveness and dynamic efficiency
– We have no goods tools to design the most dynamically efficient
mix of policies
– But it is clear that effective policies are impeded by ‘one size fits
all’ application of core policies, such as:
• New Electricity Trading Arrangements (NETA)
• European State Aids
 Coherent policies need to work across the innovation chain and be
clear about strategic priorities and comparative advantages
 Kyoto commitments and Kyoto-style structure is a foundational
element to give incentives and develop global markets
Supplementary thoughts:
On UK energy prospects and energy
diversity
UK electricity mix – under ‘business as
usual’ gas dominates
UK supply – “reference” scenario
Electricity Supply - MtOe
Imports
80
70
60
Renewables
Nuclear
50
40
Oil
Gas
30
20
10
0
1995
Coal
2000
2005
2010
2015
2020
2025
Year
Note: Assumes no new nuclear build
Sources: DTI - IAG, DUKES, EP68
2030
2035
2040
2045
2050
Greater effort on variety of renewables would
lead to a more diverse set of energy sources
UK supply – “Renewable Energy” scenario
Electricity Supply - MtOe
Imports
80
70
60
Nuclear
Renewables
50
40
30
20
10
0
1995
Oil
Coal
2000
Gas
2005
2010
2015
2020
2025
Year
Source: CT Strategic framework analysis
2030
2035
2040
2045
2050
Diversity can be quantified and is enhanced
under an increased renewables scenario
UK electricity supply mix scenarios
Diversity index
2
Renewables
Scenario
1.6
1.2
0.8
Business as
Usual scenario
0.4
0
1990
2000
2010
2020
Year
Source: CT Strategic framework analysis
2030
2040
2050
Diversity – index and concentration charge
Diversity index for portfolio of I options = -ipi . ln[pi]
where
pi = the proportional reliance on the ith technology / fuel source
To encourage diversity, could levy a concentration charge, eg.
(exp[pi] – 1)
cents /kWh
Would
• increase marginal cost of given source as it starts to dominate
• give modest boost for new entrants
UK at present relatively diverse –politically palatable starting point!
Conclusions 1:
Implications of technology innovation analysis
 Modern understanding of the economics of industrial
innovation (and especially environmental innovation) need to
be codified and applied to inform policy:
– A mix of policies is required for different stages of the innovation
chain through from research to market
– Core established policies need to be adapted to avoid being
impediments
 International economic studies need to incorporate technology
(and political) spillovers as well as economic substitution
effects
 The debate on ‘targets’ vs ‘technology’ is false:
– Technology policies without targets (cap & trade) are ineffective
– Targets without technology policies are inefficient
 Kyoto provides a bedrock of credibility and carbon markets –
but much more needs to be done on technology to enable
deeper and wider cuts in subsequent negotiating rounds
Conclusions 2: supplementary
observations on climate-technology policy
 The challenge is not adding abatement costs to ‘do
nothing’ future, but is to reorient €/$ trillions of
investment over coming decades
– IEA World Investment Outlook
 This will not happen without active intervention
domestically and internationally
– Innovation is too risky, the ‘bankable’ signals of political
declarations and agreements are too weak, and the
obstacles to new entrants are too big
 Low carbon sources can generally support security
objectives, but need appropriate tools to support new
entrants rather than protect high carbon existing
options
– A ‘concentration charge’ to foster system diversity could
be considered