At the beginning of last year’s COP in Paris, political leaders from twenty countries came together to announce Mission Innovation, a commitment to double publicly funded Research & Development (R&D) into low-carbon energy alternatives over the course of the next five years. Together with its private sector counterpart, the Breakthrough Energy Coalition, this effort gives an unprecedented role to energy innovation policy, particularly noteworthy in the context of international climate policy, which has traditionally focused on emission targets and carbon pricing. This post will argue that Mission Innovation provides an essential addition to the climate and energy policy mix that should receive far more attention in the future.
With much of the climate debate focusing on carbon pricing or subsidies for renewable deployment (such as feed-in-tariffs in Germany driving the Energiewende or the Renewable Energy Production Tax Credit (PTC) in the US), one might wonder why the strengthening of a third element – energy innovation policy – should be crucial in tackling the climate challenge (see Figure 1 visualising the triangle of instruments).
After all, if the only market failure leading to climate change was that the negative effects of carbon emissions are not considered in economic decisions, then putting a price on carbon – through emission trading systems (ETS) or carbon taxes – should be sufficient to solve the climate crisis. This view, once held by Thomas Friedman, is still influential as carbon pricing arguably dominates the international climate policy debate. Similarly, proponents of low-carbon technologies such as renewables or nuclear often argue that all necessary technologies already exist and it is simply a matter of the political and economic will to deploy them. In both of these views, Mission Innovation, an increase in public R&D for the development of new technologies, is a side-show or even unnecessary. To make the case that this is a dangerous misperception, section II will argue that the underlying assumptions of these views are likely false, whereas section III will provide the positive case for a much stronger role for energy innovation policy.
There is a massive need for additional technological innovation
When considering projected energy demand, most energy scenarios compatible with the 2°C target assume historically unprecedented rates of renewable energy expansion and/or a significant share or even expansion of nuclear power, the latter – for better or worse – seen as undesirable by many environmentalists.
While sometimes argued for by advocates, it is a fairly questionable and highly risky assumption that all technologies for global decarbonisation are already available and that they will take the form of present-day renewable technology (even leaving aside the many technological hurdles to be solved relating to intermittency, storage and non-electric forms of energy). Indeed, as argued for in detail by the authors of a recent review of global decarbonisation scenarios, it is likely that “deep energy system decarbonization [will] require an ambitious, focused agenda of rapid innovation and improvement in every critical technology area, even those commercially available today.” Given that the deployment of low-carbon technologies is still marginal compared to the required scale for decarbonisation, it also makes sense to judge current policies – be them deployment, carbon pricing or explicit RD&D – by their ability to facilitate future deployment by reducing cost and increasing efficiency and reliability.
Carbon pricing alone does not induce sufficient innovation
Carbon pricing, either through emission trading or carbon taxes, has been the prime focus of international climate policy and it plays a central role in shifting to a low-carbon energy transition. However, pricing carbon alone and leaving innovation to the market is unlikely to induce sufficient innovation. There are at least two reasons for this – one political-economic and the other related to the economics of innovation.
First, it is very unlikely that a carbon price that fully reflects the negative effect of carbon emissions is ever reached on a global scale. While the estimates for the social cost of carbon vary widely and by orders of magnitude (for example, the US Environmental Protection Agency considers values between USD 11 and 105 per metric tonne of CO2 for 2015 in 2007 USD), even the lower bound of these values is higher than the carbon price in the EU ETS in 2015, a polity far more concerned with climate change than the global average. Higher estimates of the social cost of carbon (e.g. USD 105), associated with the more catastrophic climate change scenarios we should be most worried about, seem politically infeasible to ever be reflected by carbon pricing instruments.
Second, even if there was a carbon price high enough to fully internalise the negative externalities of carbon emissions, innovation suffers from the additional market failure that the gains from technological innovation are, to a large degree, public goods – accruing to entire sectors and the world economy and thus being under-provided by profit-maximising firms as well as national governments. From this analysis, which is broadly shared among economists, follows not only a mandate for national governments to step in to facilitate innovation nationally, but also a clear rationale to jointly commit internationally to overcome the under-provision that would likely follow from national interest calculations alone.
Apart from this consensus on the importance of basic research government R&D, there is also a somewhat narrower but still solid consensus among innovation scholars that governments have played a very active role in most fundamental technological breakthroughs – such as nuclear energy, microchips, hydraulic fracturing and the internet – and that there are good reasons for government involvement far beyond basic R&D (for example, see these detailed case studies and analysis on the American case here; and here for an excellent discussion of the development of the energy innovation consensus).
Deployment support, such as feed-in-tariffs, is unlikely to induce sufficient innovation
If we know that innovation will not be incentivised sufficiently/optimally by a carbon price alone, the question arises what the right role of innovation policy should be vis-à-vis the other major class of policy instruments – deployment subsidies, such as feed-in-tariffs, for low-carbon technologies. Unlike carbon pricing that is politically difficult, support for renewables has until now been much more politically feasible, with subsidies corresponding to a carbon price of EUR 174 per ton of CO2 in Germany in 2012 (compared to an EU-ETS carbon price in the range of EUR 3-5 during that time). Apart from spurring an unprecedented rise in the installation of renewable capacity, the recent surge in policy support for renewable deployment has also contributed to radical cost declines of solar and wind through learning-by-doing and economies of scale. There is thus reason for optimism that the increased deployment, cost reductions, and incremental innovation are inciting an accelerated adoption of renewables that goes far beyond most expectations. However, there are two caveats:
First, existing policies for renewables support are usually not rewarding innovation but deployment of existing technologies and, given the increasing political and economic clout of existing renewable industries, this is unlikely to improve.
Second, and relatedly, policies explicitly focused on supporting innovation have – at their current level of application – consistently been found to be much more cost-effective in inducing innovation than the innovation created as a by-product of increasing deployment (peer-reviewed articles, here, here and here). This does not mean that deployment subsidies such as the German feed-in-tariff do not induce innovation and cost reductions at all (arguably they do, as demonstrated by the rapid decline of costs for solar). Rather it means that the current balance between deployment and innovation subsidies is extremely tilted towards deployment and that this is extremely inefficient. A strong example for this comes from estimates of innovation effects from additional effort on deployment or RD&D policies in Germany between 2002 and 2009. In these estimates, visualised in Figure 2, a one standard deviation increase in RD&D would have increased patents (a proxy for innovation) by over 120%, whereas a one-standard deviation increase in deployment support would only have led to around 20% of additional patenting.
In a world of limited funds for climate mitigation and a rapidly decreasing carbon budget consistent with the 2°C goal, choosing the most effective mix of policy instruments matters a great deal, not only for cost efficiency but also for successful mitigation being feasible at all.
Thus far, the argument has focused on the necessity for increased attention to energy innovation policy. But, just like decarbonisation would have many benefits even if climate change was a hoax, increased energy innovation policy has many benefits even if the above arguments failed to convince.
The main reason for this is that energy innovation policy has been neglected in the energy policy mix despite its fundamental importance to providing cheap, clean and affordable energy. Whether compared to innovation activity in other sectors of the economy, to resources allocated to deployment support (lesser by two orders of magnitude) or to expected returns, energy innovation has been woefully neglected.
This makes it likely that there are substantial gains to be realised from increased spending from innovation as visualised in Figure 3.
Estimates for the optimal ratio of RD&D to deployment subsidies for wind/other renewables and solar suggest that at least one third of spending should be devoted to explicit RD&D in order to optimally induce innovation. In comparison, actual RD&D spending in the six largest European economies in 2010 in comparison to the total of RD&D and deployment subsidies was close to only 0.01%.
As a recent report from the Grantham Institute at the LSE citing these numbers in the analysis of policy choices put it, the “marginal euro [...] spent on low-carbon technologies should go to R&D [e.g. innovation policy such as Mission Innovation] rather than deployment [such as feed-in-tariffs].”
In other words, since innovation has been so neglected compared to deployment and explicit R&D support is much more effective inducing innovation than deployment, an increase in funding for innovation policy will have a much higher impact than increased subsidies for low-carbon deployment (estimates vary across analyses and stages of technological maturity, but the effect can be huge, as illustrated by Figure 2 showing estimates for the case of wind).
As innovation policy is likely to be neglected by both fossil fuel industry interests as well as the interests of existing renewable technologies, and many of its likely beneficiaries (companies and entrepreneurs profiting from innovation support) are diffuse and in the future, it is of utmost importance that those concerned with climate change and clean energy for non-economic reasons aggressively push for the realisation of Mission Innovation to achieve the decarbonisation objectives so important to us.
Data sources of graphics
Fischer, Carolyn, Richard G. Newell, and Louis Preonas. (2013) "Environmental and technology policy options in the electricity sector: Interactions and outcomes." RFF DP 13-20. http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-13-20.pdf
Zachmann, Georg, Amma Serwaah-Panin, and Michele Peruzzi. "When and How to Support Renewables?—Letting the Data Speak." Green Energy and Efficiency. Springer International Publishing, 2015. 291-332. http://link.springer.com/chapter/10.1007/978-3-319-03632-8_12
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