12 July 2010

The Emerging Climate Technology Consensus

[NOTE: The Q&A below is cross-posted from The Breakthrough Blog and is by Ted Nordhaus and Michael Shellenberger, of The Breakthrough Institute, where I am a Senior Fellow, and proudly so - RP.]

The Emerging Climate Technology Consensus
by Ted Nordhaus and Michael Shellenberger

The twenty-year effort to create a single global pollution framework to reduce carbon emissions is in a state of collapse. Europe's Emissions Trading Scheme (ETS) has not reduced emissions and is quickly fading as the central effort to decarbonize European economies. The UN process is becoming a forum for nations to compare and coordinate national policies and measures, not create or enforce a binding global treaty. And it is now clear that, if energy legislation passes the U.S. Senate, it will not create an economy-wide cap-and-trade system, nor will it increase the deployment of clean energy.

Meanwhile, a new climate policy consensus is emerging, one which prioritizes direct investment in technology innovation. This consensus begins with the recognition that the root cause of the failure of the pollution paradigm was the technology and price gap between fossil fuels and their alternatives. No nation -- not even the wealthiest in Europe -- is willing to price carbon enough to cover the difference. Until the technology gap is closed, little will be done to accelerate the transition to a low-carbon economy.

Think tanks on the left, center, and right -- from Brookings to Third Way to the American Enterprise Institute (AEI) to the Information Technology and Innovation Foundation (ITIF) to the Breakthrough Institute -- have put out a growing number of policy proposals and analyses reinforcing the need for direct investments to overcome the technology gap and make low-carbon power (renewables and nuclear, alike) much cheaper. In Britain, this technology-centered approach to climate has been championed by leading thinkers from Oxford's Steve Rayner, LSE's Gwyn Prins, East Anglia's Mike Hulme, (independently and in the recent Hartwell Paper, which we co-authored), as well as by think tanks such as the Institute for Public Policy Research (IPPR) on the left and Policy Exchange on the right. And recently, Bill Gates and executives from Xerox, General Electric, and other high-tech firms have begun to publicly and privately lobby President Obama and Congress for a tripling or more of U.S. energy R&D funding.

Even so, many continue to misunderstand the reasons for a technology-centered climate policy framework, and how it would work. Some, such as New York Times columnist Thomas Friedman, continue to imagine that carbon pricing will result in radical technological innovation, badly garbling the history of the digital revolution, which depended on direct government investment in things like R&D and military procurement -- not an analogue tax, or a cap on typewriters.

Others, led by America's leading environmental groups, staffed by pollution regulation attorneys experienced in dealing with technologically simpler problems like the ozone hole and acid rain, claim such an approach lacks the certainty of prominent cap and trade proposals which, ironically, would allow emissions to rise at business-as-usual rates as long as offsets are purchased. And a mix of environmentalists and libertarians, typified by Alex Evans of the UK Global Dashboard on the left and Robert Michaels of the Master Resource blog on the right, imagine this technology framework to be simply more subsidies for existing clean energy technologies. In fact, the goal of a climate energy technology framework must be to make clean energy cheaper in unsubsidized terms -- a radically different strategy than today's energy-subsidy or carbon-pricing frameworks.

Over the past three years we have written long and short articles laying out our views on these questions in Foreign Policy, the Harvard Law and Policy Review, the Democracy Journal, The New Republic, Slate, the American Prospect, and in a series of white papers on our web site. Others have made excellent contributions to creating the framework, and we would point to reports and analyses by Brookings, Third Way, ITIF, and IPPR.

Recognizing that this is a lot of material, and that some important new questions are being raised about a technology-centered program to reduce emissions, we offer here a set of questions -- including, we hope, hard ones -- about our proposal. We do so in the spirit of mutual understanding so that we can achieve genuine disagreement and agreement where it exists. Comments, criticisms, and further questions are welcome.

Why propose a new climate policy framework when we are starting to make progress with the Kyoto process of national emissions reductions targets and timetables?

Simply put, because we are not making progress. Promises to reduce emissions are not the same as actually reducing emissions. Buying carbon offsets, most of which do not represent real reductions in emissions, simply avoids the hard work of technological innovation and transformation.

Two decades of commitments, legally binding and otherwise, from nations around the world have had no discernable impact upon the trajectory of emissions or the pace of innovation. Among nations that ratified the Kyoto Protocol and made binding commitments to reduce emissions, there has been little evidence that such commitments have impacted national emissions levels. Emissions have gone up in some nations and down in others, but in almost every case, those trends have been predominately, if not wholly, driven by factors that have been almost entirely exogenous to the Kyoto commitments that those nations made.

But haven't emissions gone down in Europe?

There is little evidence that either the EU's Kyoto commitments or policies put in place to comply with those commitments, have had any impact upon emissions. Virtually all of the emissions reductions touted by EU leaders are the result of having negotiated emissions targets based upon a 1990 benchmark. As a result of the collapse of Eastern bloc economies in the early 1990's, virtually all of the EU's new members are substantially below their Kyoto emissions targets (including those of reunified Germany).

For different reasons, UK emissions declined substantially in the early 1990's, before Kyoto was negotiated but after the 1990 emissions baseline that became the basis for the Accord. Excepting Britain and Germany, the remaining western European members of the EU saw their emissions rise 12 percent between 1990 and 2005. In the years since, EU emissions have risen and fallen with the region's economic fortunes, recording precipitous declines since the onset of the financial crisis in 2008. But those trends are consistent with similar declines in the United States and other developed economies that have not implemented (supposedly binding) caps. (See: "Scrap Kyoto")

But without legally binding emissions caps, how can we be certain that we will achieve the reductions in emissions that climate scientists say we must achieve to stabilize the climate?

In fact, supposed emissions caps offer no such certainty. Every nation that has enacted carbon caps has also enacted a variety of mechanisms, overt and covert, to control the costs of complying with emissions reduction mandates. These have included over-allocating emissions allowances, "borrowing" allowances from future compliance periods, exempting critical industries from emissions reduction requirements, allowing for the purchase of "hot air" from former Eastern bloc nations whose emissions declined sharply after the collapse of the former Soviet Union, and the purchase of carbon offsets from developing economies in lieu of actual emissions reductions.

Given this reality, cost containment measures such as those in wide use throughout Europe and proposed in current U.S. climate legislation functionally abrogate carbon caps. To date, carbon caps have had little impact on emissions because no nation that has implemented them has been willing to allow compliance costs to rise to levels that might compel the achievement of the reductions mandated by the caps.

Doesn't this just mean that we need to push harder for stricter caps and work to close loopholes in the future?

The loopholes and cost-containment mechanisms that have rendered carbon caps ineffective are not accidental nor are they the result of poor policy design. They reflect the underlying dynamics of every political economy in the world. Governments introduce loopholes to their carbon regulatory policies to keep the cost of compliance low. Most policymakers around the world are happy to promote carbon caps and climate policy so long as the costs are minimal or delayed to someone else's watch. But the unwillingness of policymakers to impose real costs in the present is reason to be skeptical that the present loopholes that have rendered carbon caps completely ineffectual are likely to be closed anytime soon nor that long term emissions reduction targets or commitments offered by policymakers today are likely to be meaningfully binding upon future policymakers. Until clean energy becomes much cheaper, such commitments will continue to be pyrrhic.

Why is it so expensive to transition to clean energy if we have, as Al Gore and many others have said, all the technology we need to reduce our emissions?

The issue is not so much that we don't have low carbon technologies that could replace fossil fuels, it is that we don't have low carbon technologies that can do so cost effectively. Solar panels still suffer from low conversions of sunlight to electricity and high installation costs. Wind and solar thermal require enormous amounts of land to generate large amounts of electricity, often require transmission across vast distances, and require additional storage costs if they are to reliably provide power for more than a few hours a day. Next generation biofuels, still in the demonstration phase, are roughly twice as expensive as gasoline. Nuclear power is energy dense and dispatchable all day-long, but remains unpopular and very capital intensive, making the cost of new plant construction high.

The result is that low carbon energy, when all is said and done, costs two to five times more than coal, the dominant source of power generation in the global economy. While mature low carbon energy technologies such as wind and nuclear can be cost competitive in certain very limited contexts, where fossil fuels are scarce and expensive and conditions are optimal for the alternative, such circumstances represent the exception, not the rule. They cannot be applied broadly to the global climate challenge.

Isn't there vast potential to reduce emissions cheaply through energy efficiency?

The emissions reduction potential of energy efficiency programs has been vastly overhyped. Emissions reduction scenarios that rely heavily upon low cost efficiency improvements to accomplish substantial emissions reductions in the next several decades, including those of the IPCC and IEA, double-count reductions resulting from improved energy efficiency, assuming robust rates of energy intensity declines in baseline emissions scenarios and then further assuming deep reductions from a wide range of energy efficiency measures in policy scenarios without specifying what specific measures are responsible for the assumed energy intensity declines in the baseline scenarios. As such, much, if not all energy intensity decline resulting from energy efficiency measures in the policy scenarios are almost certainly already assumed in the baseline scenarios upon which the policy scenarios are built. The result is that such estimates significantly understate the scale of the emissions reduction challenge and overstate the potential of energy efficiency measures to meet it. (See Pielke, et al., "Dangerous Assumptions")

But didn't programs like the CFC phase out and the sulphur dioxide cap result in companies finding a range of ways to cheaply comply with those mandates?

On the contrary, it was the availability of low-cost alternatives that made those policies successful. Efforts to negotiate a global agreement to phase out CFC's failed repeatedly until DuPont developed a low cost chemical substitute that did not deplete the ozone. Agreement on a global accord was quickly concluded once a cheap, widely available alternative became available. Similarly, the completion of rail lines that could transport large quantities of low sulfur coal from the western United States to coal plants in the East paved the way for the acid rain amendments to the Clean Air Act in 1990. Low sulfur coal, along with cheap scrubbing technologies developed in the 1970's and 80's, not the federal emissions trading program as is commonly claimed, are what allowed American firms to cost-effectively comply with the SO2 restrictions imposed in 1990.

The lessons from these experiences are not that regulatory measures will not ultimately be necessary to deal with climate change. It is rather that the success of such measures depends upon the availability of cheap and widely available technologies to either mitigate emissions associated with carbon based fuels or replace those energy sources entirely. Efforts to establish regulatory policies as the first, primary, and central step in the effort to address global warming put the pollution regulatory "cart" before the energy technology "horse." The result has been serial political and policy failure for 20 years.

Once we set a price for carbon, won't private firms have an incentive to invest in technology innovation to make clean energy technologies cheap?

There is little evidence that pricing carbon will drive the kind of energy technology revolution that will be necessary to achieve substantial reductions of global carbon emissions. Carbon pricing proponents often note that economies, such as Denmark and Japan, that have high energy prices and high gas or carbon taxes have lower carbon intensity than the United States. But those economies, in virtually every case, had lower carbon intensity prior to the imposition of high carbon and gas taxes. There is no evidence that the imposition of carbon taxes or gas taxes resulted in substantial shifts in economic behavior or technology innovation.

But hasn't Europe's carbon price had an impact?

Carbon prices in the European Union have at times reached as high as $40/ton but have had little discernible impact upon both the trajectory of European emissions and the dispatch of capital for new energy technologies. Indeed, at the same time that European carbon prices were soaring towards $40/ton, European regulators were approving the construction of 50 new coal fired power plants across the continent. (See New York Times)

Are you denying that Europeans drive smaller cars because of higher fuel prices?

There is some evidence that higher energy prices drive modest conservation through both behavior changes and more efficient use of energy. But the situations in which this has been the case have typically involved dramatic spikes in energy prices -- such as those that occurred after the Arab oil embargo -- that dwarf the magnitude of proposed carbon pricing.

The run up in gasoline prices in the United States between 2005 and 2008 was equivalent to the imposition of a $400 per ton carbon price -- twenty times higher than the maximum allowable price in climate legislation currently proposed in the U.S. Senate and ten times higher than the maximum price achieved by the EU ETS since its inception. Yet the impact of a $400 per ton carbon price equivalent increase in gasoline prices in the United States was minimal, resulting in a very modest decline in vehicle miles traveled and a similarly modest shift in consumer preferences towards smaller, higher gas mileage cars.

But isn't that just because the higher prices were not long-term?

No. Denmark has had a carbon tax in place since the early 1990's. Danes drive small, fuel efficient cars today -- just as they did prior to the imposition of the carbon tax. They are not, however, driving electric cars. At the same time, Denmark has significantly shifted its power sector to renewables, primarily wind. But the primary driver of that shift has been direct government subsidies for wind powered energy that dwarf the carbon tax in the magnitude of the incentive to deploy wind energy.

But don't the economic models show carbon pricing resulting in technology innovation?

Combined climate and economic models don't actually demonstrate that carbon pricing will lead to dramatic energy innovation. Rather they simply assume both robust technological innovation and the existence of a generic "backstop technology" - which will become available at a predetermined carbon price in unlimited quantities - and then purport to demonstrate that emissions are reduced dramatically in response to the carbon price signal. In fact, virtually all economic modeling of the costs associated with reduced carbon emissions conclude that the pace of technological innovation will be the most important factor determining the cost of reducing carbon emissions.

So then are you against carbon pricing?

We favor pricing carbon if done right. It's critical to have a realistic expectation of what pricing carbon can and cannot accomplish. Pricing carbon cannot drive substantial energy technology innovation or substantial decarbonization of global and national economies. Carbon pricing will continue to fail to pull new technologies into the market at scale because doing so requires carbon prices to be prohibitively high.

However, pricing carbon (through either selling pollution permits or a carbon tax) may be a good way to raise revenue for more direct and substantial public investments in the development of low cost, low carbon technologies, and a rising carbon price may send a forward price signal to some private sector actors, pulling low carbon technologies into the market when they are reasonably cost-competitive with fossil fuels.

What would a technology-based alternative for dealing with climate look like?

Our proposal is to focus climate and energy policy centrally around making clean energy technology cheap, in real, unsubsidized terms. Policy must focus on driving down the cost and improving the performance of low carbon technologies. Doing so involves making substantial and direct public investments in the development, demonstration, and deployment of a broad suite of clean energy technologies.

This approach is consistent with the history of both energy technology innovation and virtually all technology innovation over the last century or more. Nearly every low carbon technology we have today - wind, solar, nuclear, even high efficiency gas turbines - was developed and deployed with substantial and sustained support from governments. Private firms played an important role -- initially as contractors and later in response to various subsidies and incentives -- but in almost every case, governments have led the way with targeted public investments.

But if we choose to do this technology-based alternative, what obligation will developing countries have to act?

Developing countries, like China, made it amply clear at UN talks in Copenhagen that they are not going to agree to emissions caps as part of some global warming treaty. To the extent they deploy more low-carbon power sources above their business-as-usual projections, they will do so only if the price comes down significantly.

What are the historical precedents for this proposal?

The two developed economies with the greatest success decarbonizing their energy systems, France and Sweden, did so through the direct state development and deployment of nuclear (and in the case of Sweden, hydro) power. Germany, Japan, and Denmark, three leaders in developing and deploying clean energy technologies similarly did so largely through direct public investments in solar, wind, and battery technologies. Successful attempts to decarbonize economies will, in the future as in the past, be supply-focused rather than demand-focused, will directly invest in desired low carbon technologies, and will be led by public sector investment.

Aren't you just proposing to subsidize clean energy rather than penalize dirty energy?

No. Large, new, open-ended subsidies are no more workable than the carbon pricing model. Whether proposed policies raise the price of dirty energy through carbon pricing or other regulatory measures or lower the cost of clean energy through subsidies and whether the public pays the price for those policies through higher energy prices or higher taxes, the political constraints upon such policies are the same. Heavy subsidies and high carbon prices or energy taxes will fail for the same reason.

Rather than offering open ended subsidies, public technology investments would be better served to adopt a procurement model, where governments or public/private collaboratives serve as a demanding consumer for new clean energy technologies, constantly procuring at the leading edge of a range of new technologies through a competitive bidding process that incentivizes firms to improve the performance and drive down the costs of their technologies. The primary objective of this approach is to rapidly reduce the real, unsubsidized cost of clean energy technology, not simply deploy as much above cost clean energy power as possible.

How do we know that investments in better energy technologies will result in reduced emissions?

We don't. No policy -- regulation, tax or investment-focused -- can guarantee emissions reductions. What we can safely predict is that as long as clean energy technologies cost substantially more than conventional energy technologies, efforts to cap, price, or otherwise regulate carbon emissions will fail. Public investments in clean energy technology are a necessary precondition, not a guarantee, of reduced global carbon emissions.

Even if we have better and cheaper clean energy technologies won't there still be major costs associated with replacing our existing carbon based infrastructure?

Absolutely, the cost of replacing existing energy technologies early will be significant even if the replacement technologies are much cheaper. That's all the more reason to drive down the cost of the replacement technologies. It will be hard enough to replace fossil fuel technologies with alternatives that are reasonably cost competitive. It will be impossible if those alternatives cost two, three, or even five times as much. Moreover, much of the challenge associated with stabilizing atmospheric carbon levels involves meeting future demand with low carbon alternatives, not replacing existing capital stock. Cheap alternatives vastly increase the likelihood that we will build a low carbon energy infrastructure for a growing global population that will need dramatically more energy over the next half-century and beyond.

Even if you are right about the need to invest in technology, governments around the world are already running huge deficits. Where will all the money come from to finance major investments in developing and deploying clean energy technology?

The cost of a major public program to invest in clean energy technology is substantially less than the costs associated with current cap and trade and carbon pricing proposals. Current proposals pending in the U.S. Congress will transfer hundreds of billions of dollars from consumers and businesses to incumbent energy interests over the next decade in exchange for what will be, in the very best case, very modest emissions reductions. These costs don't show up in budget deficit calculations but they represent a vastly larger cost to the U.S. economy than would a serious public investment and deployment program.

By contrast, $30 to $50 billion annually in public investments to develop and deploy cheap clean energy technology constitutes one quarter or less of the cost of proposed cap and trade legislation over the next decade. In contrast to current congressional proposals, and in contrast to the EU ETS, a direct public investment program will actually deploy new clean energy technology while accelerating the pace of innovation.

Won't the losers in the transition to a clean energy economy fight your approach just as hard as they've fought efforts to regulate or price carbon?

No effort to build a clean energy economy will be uncontested. Incumbent energy interests will always represent an obstacle to that transition and policies designed to drive that transition will almost inevitably end up compensating those interests in one way or another. But an investment-centered strategy has the advantage of explicitly and directly tying compensation to investments in clean energy. Oil companies are among the best candidates for public investments in bio-fuel technologies, utilities for investments in carbon capture, and automobile manufacturers for investments in hybrid, battery, and fuel cell technologies.

But in the end, such efforts, like those at present, will almost certainly be contested. However, if we are going to have that fight, we are better off having it over making investments in a public good - clean energy technology that is affordable and abundant for all - than taxing or otherwise increasing the regulatory price of a commodity that almost every global citizen depends upon. And indeed, virtually every public in the world is substantially more supportive of investing in clean energy than taxing or otherwise increasing the regulatory costs of dirty energy. Such preferences cannot simply be written off as a preference for painless remedies rather than painful ones. Even when asked about support for gas or other energy taxes, voters consistently prefer taxes that are dedicated to investing in clean energy over those that are intended to shift behavior through penalizing consumption of dirty energy sources.

Aren't you just proposing to take the easy way out by counting on new technologies to save us rather than coming to terms with the fact that we are all going to have to sacrifice and live with less in order to deal with climate change?

All serious strategies to dramatically reduce carbon emissions count on new technologies, they just differ in where they imagine those technologies will come from. Carbon pricing strategies assume, against virtually the entire modern history of technology innovation, that higher energy prices will result in private firms investing in innovation to develop the technologies we need to decarbonize our economy. They just assume that private firms will do the innovating and that pricing will motivate it. In contrast, we actually specify the process through which that innovation will occur and design policy explicitly for that objective.

But isn't that why we, in the developed world, need to lead the way by reducing our consumption?

Even radical redistribution of global wealth will not raise global living standards to even marginally acceptable levels without substantial economic growth and hence, much greater energy use. Consider that even if we were to lower living standards for the developed world to $15,000 per capita, the so-called happiness threshold, and redistribute the remaining wealth of the developed world to the rest of the world, per capita living standards today among the 5 billion people who do not live in the developed world would rise to only about $6,000 per capita. Raising all projected 9 billion global citizens to the happiness threshold by 2050 would require a tripling of world GDP and with it a substantial increase in global energy use at the same time that we must reduce global emissions by fifty percent.

No scenario for stabilizing, much less reducing, global carbon emissions is possible without the virtually complete decarbonization of the global energy supply and this will, in fact, require technology to "save" us.

But do we have time to wait for better technologies?

What we don't have is time to waste. That is why it is critical that we take much more pro-active steps to accelerate clean energy technology innovation. Without better technologies we are unlikely to take effective action to reduce carbon emissions. We have already wasted over twenty years arguing about climate science, carbon caps, and the internalization of environmental impacts through a price on carbon. In the meantime, global carbon emissions have continued their inexorable rise and the world has made scant progress developing better and cheaper low carbon technologies, much less deploying them.

It is indeed ironic that many of those who insist that we don't have time to "wait" for technological innovation themselves suggest that serious action to address carbon emissions will have to wait until some set of, as yet, unspecified climate catastrophes motivate global publics and policymakers around the world to embrace costly action to address the issue.

Our choice is not, as proponents of staying the current course would suggest, between acting to cap (or price) carbon emissions, and delay. It is between continuing to demand impossible actions or investing intelligently to overcome the primary obstacle to progress -- the inadequacy of today's low carbon energy technologies. It is our hope that the world will soon make the rational choice.