Is climate policy a constraint or an opportunity for job creation?

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  1. Context

Do climate policies represent a constraint or an opportunity for job creation and employment growth? Two theses are recurrently put forward in the political debate. The first emphasizes the cost increase, especially the pass-through on energy prices for polluting industries, which would threaten international competitiveness and thus employment. The other stresses positive long-term effects that, besides reducing emissions, will boost innovation and thus long-term competitiveness.

A rigorous evaluation of climate policies, such as carbon taxes, must of course account for the expected decrease in pollutant emissions and energy consumption. However, to be complete, this evaluation must study broader indirect effects on industrial competitiveness and employment – the very ones that are likely to have a primary impact on the well-being of people involved in carbon intensive productions (Smith, 2015).

The concern of an immediate loss of competitiveness is felt particularly in France. This concern comes first and foremost from the fact that the recent Energy Transition Law caused a strong increase in the carbon tax (€ 22 in 2016, € 56 in 2020, € 100 in 2030). This is the argument that industrial lobbies claim to curb overly ambitious environmental policies, especially in a context of non-binding international agreements, such as those initiated by COP21. Also, unions are worried that unilateral policy may lead to the relocation of more polluting activities and thus jobs to countries that implement a less ambitious carbon pricing schedule, or an opportunistic strategy of non-intervention. The main argument of the US administration against international agreements on climate change has always been that, in absence of a well-designed enforcement mechanism, ‘carbon leakage’ —a lose-lose outcome in terms of job losses and higher emissions—becomes a real possibility. For instance, a border carbon tax adjustment has been proposed as an amendment to the World Trade Organization rules to make the enforcement of international agreements on climate change credible.

An alternative view on the effect of climate policies emphasizes the positive consequences for innovation and the creation of a comparative advantage in new sectors where demand is expected to increase rapidly. These green innovative activities would use relatively more skilled labor than polluting activities, and this could have a large multiplier effect on employment for local communities. To turn climate policies into an opportunity, governments could also consider using the revenues from the carbon tax to reduce the tax burden on labor. A drop in taxation on labor could lead to a substitution effect leading to net job creation.

The purpose of this policy brief is to provide a preliminary empirical answer to the question of whether climate policies are an impediment or, on the contrary, an opportunity for employment growth. In doing so, we compare the performance of France, a country for which we have detailed micro-data to test the effects of climate policies, with those of its main economic partners, Spain, Italy and especially Germany.

 

  1. Employment dynamics and energy prices in energy-intensive industries

With regards to the situation of France compared with that of the three major European countries, Germany, Spain and Italy, it is first necessary to look at the extent to which climate policies have changed in these four countries.

Admittedly, climate policies are multidimensional and therefore their effective stringency is difficult to compare. However, it is possible to use differences in energy prices for gas and electricity (the two main energy sources for these four countries) to proxy the effect of carbon pricing. Indeed, while the European Emission Trading System (EU ETS) sets, in principle, a single carbon price, national-level instruments have been introduced to subsidize renewable energies in all four countries. This has thus created a certain heterogeneity in policy stringency across these countries. In France, for example, the Social Contribution of Electricity Generation (CSPE) was introduced to finance EDF’s purchases of electricity produced with renewable energies. The impact of the CSPE has increased over time in a very clear way: 0.003 euro per kw/h in 2003, or 5% of the price of electricity for a medium-sized industrial consumer in 2003, compared with 0.019 euro per kw/h in 2015, or 31.6% of the price of electricity for a medium-sized industrial consumer in 2015.

Let’s first look at the evolution of electricity prices (Figure 1) and gas prices (Figure 2) for an average industrial consumer, in the four countries, between 2000 and 2015.[1] In all countries both prices are rising sharply. In France, the price of electricity increases slightly less than in other countries and the price level remains below the average price in other countries. Since the gas market is global, the price variation across countries is much lower than in the case of electricity. There is therefore a stronger tendency for price convergence for gas than for electricity. It should also be noted that the impact of the price of natural gas (and the highly correlated oil price) is much higher in Italy, Germany and Spain than in France, where electricity is produced mainly by means of nuclear power. Thus, France’s effective exposure to energy price shocks, either because of climate policies or because of rising gas and oil prices, is lower than in the other three countries.

Now let’s look at how employment has evolved in the industries most exposed to rising energy prices. Using the average energy intensity across countries, we define two groups of industries: one with high exposure and the other with medium exposure to price changes.[2] Since in France the price of energy has increased relatively less than in other countries, a smaller impact on employment should be expected. Figure 3 and 4 show exactly the opposite for the period 2000-2011. In fact, while employment in polluting sectors declined in all four countries, the decline is more pronounced in France than in Italy and Germany. Moreover, the level of activity in highly polluting sectors (Figure 3) and moderately polluting (Figure 4) is significantly lower in France (7% of total employment in 2011) than in Italy (13.1 % of total employment in 2011) or in Germany (10% of total employment in 2011). Obviously, these are only correlations and such a result may be ascribed to other structural factors, such as the degree of specialization in these industries or the innovativeness in clean technologies.

 

3. Electricity prices and employment in French firms

Because employment in polluting industries reacts more to energy prices in France than in other countries, we examine in greater details what happened to French companies using firm-level data. This allows us to formally test whether these job losses can be ascribed to the increase in energy prices rather than to other structural factors. A recent INNOPATHS study (Marin and Vona, 2017) estimates the elasticity of employment of French manufacturing firms following a change in the price of energy.[3]

Table 1 shows the main results of this analysis, which uses the historical experience of price increases in the 2000s to extrapolate the effects of the carbon tax provided for in the energy transition law. They are, in a way, not surprising. Rising energy prices (measured as a weighted average of the prices of different energy sources) effectively reduce employment in French manufacturing. The effects are significant: a 10% increase in prices reduces employment by 2.6%. Unsurprisingly, these effects are stronger in the more energy-intensive industries (3.4% job loss) and more exposed to international competition (3.1% job loss). To put these results in context, it should be noted that, according to this calculation, a carbon tax of € 56 per tonne of CO2 will lead to an average increase in energy prices of 20% and, therefore, these elasticities should be doubled. However, unreported results also show that these employment effects are upper bounds, at least for multi-plant firms that can use their internal labour market to mitigate the negative effect of the shock.

This negative employment effect should also be weighed against positive effects in terms of a decrease in the energy demand and reduction of emissions. Table 2 shows that these effects go in the right direction. A 10% increase in energy prices reduces demand by more than 6%, and reduces greenhouse gas emissions by more than 11%. These quite considerable effects offset the social cost generated by the decrease in jobs. However, further research is required to understand the extent to which this decrease in emissions is just a reflection of an increase in emissions embedded in the country’s import. Such analysis as well as an analysis distinguishing between short-term and long-term effects would clearly allow us to shed more light on the net benefits of a carbon tax.

Overall, these large job losses raise the more general question of the change in comparative advantage induced by climate policies in international markets. At a first glance, it seems clear that, unlike Germany, France has not been able to turn the challenge of the energy transition into an opportunity to develop a new comparative advantage. To corroborate this conclusion, the next section will turn back to aggregate data on green exports and the size of the green economy in these two countries.

 

4. The energy transition: an opportunity for creating green jobs

Previous results only consider effects on energy-intensive industries. Keeping constant the industry structure, they do not consider the positive effects of job creation in the new green sectors. The destruction of jobs in energy-intensive industries can be more than offset by job creation in green industries. From this perspective, the energy transition may contribute to reignite sluggish economic growth. The scale of this counterbalancing effects remains difficult to establish: green industries follow different growth patterns from energy-intensive industries as they are usually more exposed to trade and are upstream in the value chain.

With particular reference to the situation in Europe, the available data allows for a comparison only between Germany and France and for a time span limited to the financial crisis period (2008-2014). We compare these two countries on four dimensions: employment in the green sector (Figure 5), green sector exports (Figure 6), value-added in the green industry (Figure 7), and investment in green technologies (Figure 8). It appears that the number of green jobs is roughly the same in both countries, albeit with faster growth in Germany, but also that exports of green products are 3.8 times higher in Germany than in France. Green value added is almost twice as high in Germany, and investments in green technologies almost 3 times higher. Germany is therefore more competitive than France in green industries, probably because its capacity for industrial development and therefore growth of activity and employment, in this sector as in the others, is higher. A possible answer to this divergence between France and Germany comes from a recent study on the drivers of green employment in US regions (Vona et al., 2017). According to this study, green jobs require more qualifications than jobs removed from polluting industries, mainly in terms of technical skills and engineering. Local technological expertise, as measured by the number of patent applicants in the region and by the presence of a national research lab, is also positively associated with the creation of green employment. Given the well-established comparative advantage of Germany in engineering services and machinery industries, the evidence on US regions can contribute to explain the difference between Germany and France in the capacity to turn climate policies into an opportunity. In Germany, the capital goods industry plays a key role in the design of green production processes. Recent work, based on patents, shows that Germany has a comparative advantage today and future much stronger than France in three of the four key green technologies: wind turbines, batteries and photovoltaic panels (Zachmann, 2016). 5. Concluding remarks It is very likely that the energy transition will negatively affect industrial competitiveness in the short term and therefore employment in a proportion that is greater if the companies concerned already suffer from a competitiveness deficit, like in France. This evidence argues for a phased and gradual transition, which must take into account both the time required to build a comparative advantage in the green sector, and the immediate negative effects on the polluting sectors in an already negative economic situation. The use of border carbon tax adjustment, as suggested by, among the others, Helm et al. (2012), represents a way to slow down the carbon and job leakage, giving more time to the affected industries in developed countries to adjust. On the other hand, it is no less obvious that such a transition may bring with it the creation of skilled jobs and growth. As the evidence of US regions tell us, these offsetting effects on job creation are more likely to occur if climate policies are combined with industrial policies and R&D investments on low carbon technologies. 

 

References

Greenstone, M. (2002), ‘The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures.’ Journal of Political Economy 110(6), 1175-1219.

Helm, D., Hepburn, C., Ruta, G., (2012), ‘Trade, climate change, and the political game theory of border carbon adjustments.’ Oxford Review of Economic Policy 28(2), 368-394.

Kahn, M., and Mansur, E. (2013) ‘Do local energy prices and regulation affect the geographic concentration of employment?.’ Journal of Public Economics 101, 105–114.

Marin, G., Vona, F., (2017), ‘The Impact of Energy Prices on Environmental and Socio-Economic Performance: Evidence for France Manufacturing Establishments.’ OFCE working paper.

Martin, R., Muûls, M., de Preux, L., Wagner, U., (2014), ‘Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme.’ American Economic Review 104(8), 2482-2508.

Smith, V. K. (2015). ‘Should benefit–cost methods take account of high unemployment? Symposium introduction.’ Review of Environmental Economics and Policy 9(2), 165-178.

Vona, F., Marin, G., Consoli, D., (2017), ‘Measures, Drivers and Effects of Green Employment: evidence from US metropolitan and non-metropolitan areas, 2006-2014.’ SPRU working paper.

Walker, W. (2013), ‘The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce.’ Quarterly Journal of Economics 128(4), 1787-1835.

Zachmann, G. (2016), ‘An approach to identify the sources of low-carbon growth for Europe,’ Bruegel policy contribution n.16.

 

Tables and Figures

Table 1. Effects on employment of 10% increase of energy prices

Sector D% Employment
All Manufacturing Sectors -2.6%
Energy Intensive Sectors -3.4%
Non-energy Intensive Sectors -0.9%
Sectors exposed also to international competition -3.1%
Sectors not exposed to international competition -1.6%

Sources. Marin and Vona (2017).

 

Table 2. Effects on Energy Demand and CO2 Emissions

Sector D% of Energy Demand D% CO2 Emissions
All Manufacturing Sectors -6.4% -11.2%
Energy Intensive Sectors -6.6% -11.5%
Non-energy Intensive Sectors -5.3% -10.9%
Sectors exposed also to international competition -7.9% -11.4%
Sectors not exposed to international competition -5.4% -11%

Sources. Marin and Vona (2017).

 

Figure 1: Electricity Prices, industrial consumers

Figure 2: Gas Prices, industrial consumers

Figure 3: Share Employment High Energy Intensive

Figure 4: Share Employment Mid Energy Intensive

Figure 5: Green Employment

Figure 6: Green Value Added

Figure 7: Green Exports

 

Figure 8: Investments In Cleaner Tech

[1] Source Eurostat, http://ec.europa.eu/eurostat/data/database.

[2] Source EU-KLEMS, http://euklems.net/. The groups are rather standard in the literature and coincide with the more energy intensive industries. Highly polluting industries are: Chemistry, Metals, Manufacturing of other non-metallic mineral products, Coke and Oil Refining, Mining. Moderately polluting industries are: Food and Beverages, Leather and Footwear, Rubber and Plastics, Textile, Wood and Wood Products, Other Manufacturing Sectors including Recycling.

[3] This study is based on data from establishments in the manufacturing sectors in France during the period 1997-2011. Three databases are merged: the DADS database (to have a measure of employment, by type of qualification, in each establishment), the FICUS database (to build a measure of enterprise productivity, unreported in this note but available in the paper) and the ECAI database (to obtain measurements of the energy mix used and energy prices paid by a sample of French establishments in the manufacturing industry). The national price of different energy sources is used, weighted by the initial energy mix of the establishments, as an instrumental variable to isolate exogenous changes in energy prices unrelated to quantity-discounts. Our estimates are conditioned to a rich set of control including sector- and region-specific trends and establishment fixed effects. We also take into account the effects of European policy to set a carbon price, the ETS (Emission Trading Scheme). The employment effects of ETS are low, consistent with the low effective severity of this policy which has provided generous exemptions for more energy-intensive industries exposed to international competition (see: Martin et al. 2014).

 

Surprises and change

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The first serious efforts to develop new and renewable energy into viable energy options started in the aftermath of the oil crises in the late 1970’s. The then Carter administration launched multi-billion R&D programmes in the USA to start an alternative energy revolution. Likewise, the first deployment programmes of wind energy were initiated in the USA, which brought some 1 GW of Danish wind power to the Californian market with a hope of producing cheap electricity. At the same time, the first global energy scenarios1 were designed at IIASA near Vienna predicting a turn to an oil-free, mainly nuclear-based energy economy, flavored with solar energy.

In retrospect, many of these early efforts in clean energy were disappointments and didn’t meet the quick promise of turning the world energy economy around. Neither have we been able to foresee the many ‘surprises’ and disruptions that followed during the next 40 years, which together have pushed the new and renewable energy technologies to a market breakthrough.

There is not a single mastermind or grand policy plan behind the success of clean energies, but rather a sequence of interlinked incidences with amplifying effects and making use of enabling drivers such as advances in science and the U.N. climate accords. Not to mention the pioneering markets in Germany with strong policy links which provided generous subsidies to new energy technologies, which in turn induced huge learning effects and cost reductions.

One of the biggest surprises during the last decades was the transformation of China towards an innovation-driven economy. China played a crucial role in bringing down the cost of photovoltaics and wind power. During the last ten years, the price of PV has dropped by more than 90% thanks to the efficient, low-cost, and large-scale Chinese innovation system integrated into manufacturing. In addition, the scale of economies played a role. The Chinese scaled up production facilities tenfold from those typical in the USA and Europe. Remarkably, no major breakthrough in the core PV technology preceded this dramatic cost plunge. This ‘surprise’ came from outside the traditional research and technology development realm, which is often thought to deliver the disruptions.

A similar ‘surprise’ was the victory of the Danish wind power industry, which beat the billion-dollar U.S. wind programme in delivering competitive windmills to the market 40 years ago. The Danish success has been attributed to the effective networking amongst market actors, developers, and researchers, and their openness to share experiences whilst competing.

Some ‘surprises’ may have unpredictable consequences. For example, the U.S. shale gas boom took off in a quite short time period 10 years ago and brought very cheap gas into the U.S. market, displacing coal in power production. These changes were so large that they had a global impact; e.g. cheap coal started to filter into Europe. Unfortunately, the Emission Trading System (EU ETS) was incapable of preventing this and coal use has increased in many EU countries, contradicting the EU climate policy. Ironically, the strong price-driven fuel shift from coal to gas in the USA lead to relative CO2 emission reductions of about the same size as those in the European Union with strong climate and support-driven policies.

Above examples should not be misunderstood as a laissez-faire attitude, but as a cautious remark that future development is not linear. Neither is ‘surprise’ the only factor that created a change, but there are other important factors, many with a socio-economic and political dimension.

Actually the success of PV, wind, and shale gas described above is not just about a mere ‘surprise’, but a result of successful commercialization strategies, in which technology development and deployment measures were optimally applied. Policies played a role in the big picture as well, particularly in accelerating development and providing a framework for penetration. The dialogue between science and policy is also of importance. Scientists have valuable knowledge and insight, and could advise policy makers about future opportunities and threats, and urge actions, when necessary. The recent communication2 on the sustainability of forest bioenergy (policies) by leading European scientists serves as an example of such advice.

In a world of ‘surprises’, it is no wonder that the predictions on the future of new energy technologies include major uncertainties. Once a new technology starts to become cost-competitive and takes off, the future predictions tend to be too pessimistic, while when still being far from the breakthrough point, they are often too optimistic.  A prevailing positive development may also be stopped by a sudden unexpected ‘surprise’. This was the case with nuclear power caused by the Three Mile Island, Chernobyl, and Fukushima accidents, and the consequent rise of public opposition to nuclear and deterioration of its economics, which turned the hailed nuclear renaissance into a disaster, also reflected by recent scenarios3.

Technology disruptions and ‘surprises’ are vital for technology evolution. Therefore, understanding the nature of disruptions deserves attention. The present clean energy transition will trig a range of new innovations, e.g. in transport, in integration of renewable energy, and through digital economy. Consumers are much stronger involved in the change than previously, which emphasizes social innovations linked to digitalization, circular, and sharing economy, among others.

Perhaps the next ‘surprise’ originates from bottom-up movements and not from a specific technology per se, but from using a range of technologies and expertise together to make a systemic change. What kind of a surprise could Artificial Intelligence generate, not to speak about the distant possibility that one day AI >Human I?

Enabling ‘surprises’, not preventing them, may be important for a CO2-free future, meaning that nourishing a multitude of agents and ideas, which may lead to disruption, would be welcome. The inertia of energy economy is known to be large; it involves huge investments and conservative players. Here, governments may help by unlocking the lock-in to the past energy and avoiding path dependencies. Giving due attention to enablers, drivers, and pushers, which accelerate a change, is worthwhile. Understanding technology limitations is also useful, but we shouldn’t undermine the human ingenuity to overcome such obstacles.

 

  1. Jeanne Anderer, Alan McDonald, Nebojsa Nakicenovic, Wolf Hafele (Ed.). Energy in a Finite World, Paths to Sustainable Future, Ballinger Publishing, 1981.
  2. EASAC – the European Academies’ Science Advisory Council Multi-functionality and sustainability in the European Union’s forests. EASAC policy report 32, April 2017.
  3. International Energy Agency (IEA). World Energy Outlook 2017, November 2017.

Peter D. Lund is professor at Aalto University in Finland. He chaired the Advisory Group on Energy of the EU in 2002-2006. He is past chair of the EASAC Energy Panel. He also holds several visiting positions in China.

Can energy efficiency be market-based?

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Energy efficiency is widely recognised as the “first fuel” of decarbonised energy systems of the future, and is an unquestionable pillar of the EU’s ‘Energy Union’. It is one of the most cost-effective options to accelerate the transition to a low carbon economy and may enable achievement of other socioeconomic goals, such as boosting economic growth and employment, and reducing energy poverty. However, nowadays the current paradigm of European approach is aimed at removing market barriers and to make energy efficiency progress based on market instruments creating win-win opportunities for both supply and demand sides. Will this happen in the near future? Can we make energy efficiency a real energy resource in a competitive energy market?

The Role of Market-Based Instruments (MBI)

Historically, the adoption of energy efficiency technologies and practices has often required public subsidies. Out of the public eye, the number of energy efficiency obligation schemes around the world (including white certificate programmes) is growing. A similar trend can be observed for the second type of MBIs – auctions (including tendering programmes), where bids are collected for funds to deliver specific energy savings. According to a recent IEA report, the number of MBIs has quadrupled over the last decade, while the value of investments triggered by MBIs has increased six-fold over the same time. As a result, global energy consumption was approximately 0.4% lower than it would have been otherwise. The IEA further expects that by 2025, energy savings induced by auctions will double to more than the current energy consumption of Poland.

Speaking about Poland

The Energy Efficiency Obligation imposed by Article 7 of the Energy Efficiency Directive requires that Member States ensure that energy suppliers and distributors achieve energy savings of 1.5% per year. In Poland, the obligation has been implemented in the form of a white certificate scheme. Polish experiences with white certificates can serve as an example showing that learning a lesson and a proper (re)design of the obligation schemes by the government may bring promising results. The first version of the scheme was introduced in 2011 and turned out to be complicated, unclear and costly. After major changes introduced in 2016, the application as well as measurement and verification procedures were significantly simplified. As a result, it is expected that the market value of white certificates in Poland in the years 2016-2020 will be approximately 1 billion euro, leading to an electricity price increase of 1.3% in 2020.

But is it more cost-efficient than grants?

At first glance, the answer to this question is positive. However, according to IEA, there is not enough evidence which would prove that efficiency outcomes delivered by MBIs are always more cost-effective than energy savings reached through other means, such as grants. Still, existing data show that savings can be made at a low cost. These observations suggest that not only further research, but also longer timeframes of obligation schemes’ operation are needed to profoundly address this question and design future energy efficiency policies in an effective and efficient manner.

Future outlook: pink glasses of MBIs’ designers

Policy-makers are acknowledging the potential of MBIs. In November 2016, the European Commission announced its “Clean Energy for All Europeans” proposals, which set a 30% energy efficiency target for 2030, to be achieved largely through strengthening and extending existing policy mechanisms, including Energy Efficiency Obligation Schemes (EEOS). Hailed as a great success by the EC, Article 7 is being amended to extend the obligation period beyond 2020 to 2030. The EC expects EEOS to generate the highest amount of savings by 2020 of a single measure notified under Article 7 (86.1 Mtoe), with much smaller savings reached thanks to fiscal incentives (49.0 Mtoe), energy and CO2 tax measures (34.4 Mtoe) and regulations and voluntary agreements (27.1 Mtoe). Recently, the targets proposed by the Commission have been pushed even further by the European Parliament’s energy and industry committee (ITRE). On 28 November 2017, ITRE supported a 40% binding overall target for 2030, with binding national targets, as well as strong rules on annual energy savings. In sharing experiences and expertise with a smart MBI design across countries, interaction between policy makers and researchers will be essential in ensuring these targets are successfully achieved.

Written by Ewa Stefaniak, Maksymilian Kochański, and Katarzyna Korczak
Warsaw University of Technology

Is the IEA still underestimating the potential of photovoltaics?

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Photovoltaics (PV) has become the cheapest source of electricity in many countries. Is it likely that the impressive growth observed over the last decade – every two years, capacity roughly doubled – will be sustained, and is there a limit to the growth of PV? In a recently published article (Creutzig et al 2017), we tackle this question by first scrutinizing why past scenarios have consistently underestimated real-world PV deployment, analyzing future challenges to PV growth, and developing improved scenarios. We find that if stringent global climate policy is enacted and potential barriers to deployment are addressed, PV could cost-competitively supply 30-50% of global electricity by 2050.

A history of underestimation

Any energy researcher knows that projecting energy use and technology deployment is notoriously challenging, and the results are never right. Still, the consistent underestimation of PV deployment across the different publications by various research groups and NGOs is striking. As an example, real-world PV capacity in 2015 was a factor 10 higher than projected by the IEA just 9 years before (IEA, 2006).

A main reason for this underestimation is strong technological learning in combination with support policies. PV showed a remarkable learning curve over the last twenty years: On average, each

doubling of cumulative PV capacity lead to a system price decrease of roughly 20%. With substantial support policies such as feed-in-tariffs in many countries including Germany, Spain and China, or tax credits in the USA, the learning curve was realized much faster than expected, which in turn triggered larger deployments. These factors together have led to an average annual global PV growth rate of 48% between 2006 and 2016.

Can continued fast growth of PV be taken as a given? We think not. Two potential barriers could hinder continued growth along the lines seen over the last decade, if they are not addressed properly: integration challenges, and the cost of financing.

Integration challenge: Many options exist

Output from PV plants is variable, and thus different from the dispatchable output from gas or coal power plants. However, power systems have always had to deal with variability, as electricity demand is highly variable. Thus, a certain amount of additional variability can be added to a power system without requiring huge changes, as examples like Denmark, Ireland, Spain, Lithuania or New Zealand show: In these countries wind and solar power generates more than 20% of total electricity, while maintaining a high quality of power supply (IEA, 2017).

Under certain conditions wind and solar can even increase system stability. In fact, the size of the integration challenge largely depends on how well the generation pattern from renewable plants matches the load curve. Accordingly, in regions with high use of air conditioning such as Spain or the Middle East, adding PV can benefit the grid: On sunny summer afternoons when electricity demand from air conditioning is high, electricity generation from PV is also high.

As the share of solar and wind increases beyond 20-30%, the challenges increase. Still, there are many options for addressing these challenges, including institutional options like grid code reforms or changes to power market designs in order to remove barriers that limit the provision of flexibility, as well as technical options like transmission grid expansion or deployment of short-term  storage (IEA, 2014a). None of these options is a silver bullet, and each has a different relevance in different countries, but together they can enable high generation shares from photovoltaics and wind of 50% and beyond.

Financing costs: international cooperation needed

Many developing countries have a very good solar resource and would benefit strongly from using PV to produce the electricity needed for development. However, because of (perceived) political and exchange rate risks as well as uncertain financial and regulatory conditions, financing costs in most developing countries are above 10% p.a., sometimes even substantially higher.

Why does this high financing cost matter for PV deployment? One of the main differences between a PV plant and a gas power plant is the ratio of up-front investment costs to costs incurred during the lifetime, such as fuel costs or operation and maintenance costs. For a gas power plant, the up-front investment makes up less than 15% of the total (undiscounted) cost, while for a PV plant, it represents more than 70%. Thus, high financing costs are a much stronger barrier for PV – the IEA calculated that even at only 9% interest rate, half of the money for PV electricity is going into interest payments (IEA, 2014b)!

Clearly, reducing the financing costs is a major lever to enable PV growth in developing countries. Financial guarantees from international organizations such as the Green Climate Fund, the World Bank or the Asian Infrastructure Investment bank could unlock huge amounts of private capital at substantially lower interest rates.

Such action could help to leapfrog the coal-intensive development path seen, e.g., in the EU, US, China or India. Replacing coal with PV would alleviate air pollution, which is a major concern in many countries today – in India alone, outdoor air pollution causes more than 600,000 premature deaths per year (IEA, 2016a).

Substantial future PV growth possible if policies are set right

How will future PV deployment unfold if measures to overcome the potential barriers integration and financing are implemented? To answer this question, we use the energy-economy-climate model REMIND and feed it with up-to-date information on technology costs, integration challenges and technology policies. The scenarios show that under a stringent climate policy in line with the 2°C target, PV will become the main pillar of electricity generation in many countries.

energy-economy-climate model REMIND

We find a complete transformation of the power system: Depending on how long the technological learning curve observed over the past decades will continue in the future, the cost-competitive share of PV in 2050 global electricity production would be 30-50%! Our scenarios show that the IEA is still underestimating PV. The capacity we calculate for 2040 is a factor of 3-6 higher than the most optimistic scenario in the 2016 World Energy Outlook (IEA, 2016b).

We conclude that realizing such growth would require policy makers and business to overcome organizational and financial challenges, but would offer the most-affordable clean energy solution for many. As long as important actors underestimate the potential contribution of photovoltaics to climate change mitigation, investments will be misdirected and business opportunities missed. To achieve a stable power system with 20-30% solar electricity in 15 years, the right actions need to be initiated now.

References:

Creutzig, F., Agoston, P., Goldschmidt, J.C., Luderer, G., Nemet, G., Pietzcker, R.C., 2017. The underestimated potential of solar energy to mitigate climate change. Nature Energy 2, nenergy2017140. doi:10.1038/nenergy.2017.140. https://www.nature.com/articles/nenergy2017140

IEA, 2017. Getting  Wind  and  Sun  onto the Grid. OECD, Paris, France.

IEA, 2016a. World Energy Outlook Special Report 2016: Energy and Air Pollution. OECD, Paris, France.

IEA, 2016b. WEO – World Energy Outlook 2016. OECD/IEA, Paris, France.

IEA, 2014a. The Power of Transformation: Wind, Sun and the Economics of Flexible Power Systems. OECD, Paris, France.

IEA, 2014b. Technology Roadmap: Solar photovoltaic energy. OECD/IEA.

IEA, 2006. World Energy Outlook 2006. IEA/OECD, Paris, France.

Author

By Dr. Robert Pietzcker,  Post-doctoral researcher, Potsdam Institute for Climate Impact Research (PIK)

The EU energy system towards 2050: The case of scenarios using the PRIMES model

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By P. Capros, M. Kannavou, S. Evangelopoulou, A. Petropolos, P. Siskos, N. Tasios, G. Zazias and A. DeVita

Introduction

In November 2016, the European Commission presented the ‘Clean Energy for all Europeans’, (i.e. ‘Winter package’), a set of measures to keep the European Union competitive as the clean energy transition is changing global energy markets. The package proposes policies in line with the 2030 targets agreed by the European Council in 2014 regarding GHG emissions reduction, renewable energy and energy efficiency.

The PRIMES model, developed by E3M, has been used to build the EU Reference Scenario 2016 and support the Impact Assessment studies that accompany the Winter Package [1-4]. Figure 1 shows schematically that individual parts of the Winter Package where the PRIMES model has been used and the various scenarios considered. In addition to the proposals included in the Winter Package, additional framework related to the decarbonisation of transport and the effort sharing amongst Member States towards the reduction of GHG emissions has also been proposed in the context of the targets set by the European Council. PRIMES was also used in those assessments.

PRIMES is a partial equilibrium modelling system that simulates an energy market equilibrium in the European Union and in each of its Member States. The model includes consistent EU carbon price trajectories. It proceeds in five-year steps and uses Eurostat data.

Scenario description

Several scenarios were considered.  The main scenario, EUCO27 is in line 2014 European Council. It considers at least 40% cuts in greenhouse gas emissions (from 1990 levels), at least 27% share for renewable energy and at least 27% improvement in energy efficiency. Four variants to the EUCO27, considering different levels of energy efficiency improvements (30, 33, 35 and 40%) were also considered to assess the impact of the proposed legal framework on energy efficiency. Other scenarios related to the integration of Renewable Energy Sources (RES) and the functioning of the internal energy market were also developed and used to assess the various implications of the winter package.

All EUCO scenarios are decarbonisation scenarios, i.e. they are compatible with a 2oC trajectory and the EU INDC [5] submitted following the COP21 meeting in Paris in 2015. They achieve above 80% GHG emissions reduction in 2050 compared to 1990 levels, in line with the European Commission ‘Energy Roadmap 2050’.

Figure 1: Illustration of European Commission studies which used the EUCO scenarios

The main elements of the EUCO27 and EUCO20 scenarios are shown in Figure 2:

Figure 2: Climate and energy targets used for the EUCO scenarios

Table 1 shows the main policies used for delivering the climate and energy targets in all scenarios.

Policies ETS Increase of ETS linear factor to 2.2% for 2021-30 (2015/148 (COD)
Market Stability Reserve (2014/0011/COD)
Policies RES RES-E policies: new guidelines for auctions
Policies promoting the use of biofuels
Support of RES in heating
Policies efficiency Energy efficiency of buildings: new EED, enhancement of article 7
More stringent eco-design
Support of heat pumps
Best available techniques in industry
Policies transport CO2 car standards (70-75gCO2/km in 2030, 25 in 2050) and for Vans (120 in 2030, 60 in 2050)
Efficiency standards (1.5% increase per year) for trucks
Measures improving the efficiency of the transport system

Key findings

The projections obtained through the various scenarios reveal the following:

(A) Impacts on GHG Emissions (EUCO27)

The energy related CO2 emissions decrease primarily in the energy supply sectors, notably in the power sector, but also in the demand sectors.

The remaining non-abated emissions by 2050 are by order of magnitude due to  the non-CO2 GHG, the residual use of oil in transport and various small scale uses of gas in the domestic sector and industry

The reductions of emissions in the sectors that participate in the Emissions Trading System (ETS)  exceed those in the non-ETS sectors

The ETS drives strong emission reductions in the power sector and promotes the development of RES which benefit from learning-by-doing requiring low or no out-of-the-market support.

  

(B) RES penetration

Variable renewables (e.g. wind and solar)_ are expected to dominate the power generation sector. The projection shows variable RES capacity to more than double in 2030, from 2015 levels, and quadruple by 2050.

RES in heating and cooling also develop, albeit at a slower pace, driven by heat pumps and RES-based production of heat.

The biofuels in transport constitute the main growing market for bioenergy, as biofuels are essential for reducing emissions in non-electrified transport segments (the RES-T includes for electricity used in transport the RES used in power sector).

(C) Electricity supply mix

Due to the increased penetration of intermittent RES, gas-firing capacities acquire a strategic role for balancing and reserve, a role increasingly performed by storage technologies in the long term. Nuclear plant retrofitting is essential to maintain total nuclear capacity, as investment in new nuclear plants suffers from limitations (sites, financing, etc.).

Coal-firing generation is under strong decline with CCS not becoming a major option.

The model results confirm the importance of sharing balancing and reserve resources across the EU countries and the advantages of market coupling in the day-ahead, intra-day and real-time balancing. The scenarios assume minimization of costs over the pan-European market, which in the mid-term becomes fully integrated.

(D) Energy Efficiency

(E)    Renovation of houses and buildings, the Eco-design regulation, the application of the Best Available Technologies (BAT) in the industry are significant enablers to energy efficiency.

(F)     Electricity consumption hardly increases until 2030.  The energy efficiency improvement drives electricity savings in the short/medium term, and energy savings overall.   Transport electrification and increased use of electricity for heat purposes add significant load, but only after 2030.

 

  

(G) Developments in the transport sector

Advanced car technologies (mainly plug-in hybrids and battery electric vehicles) dominate the car market as a result of the CO2 car standards, which continuously tighten.

The biofuels, mostly advanced lignocellulose-based fungible biofuels in the long term, get a significant market share in the non-electrified segments of the transport sector (trucks, ships, aircrafts).

(H) Investments and electricity prices

Investment expenditures are likely to rise considerably in the decade 2020-2030 and beyond.

The projections do not see significant pressures on electricity prices in the medium term, but prices are likely to considerably increase in the long term, mainly due to increasing costs of grids and system services.

Moderate increase in total costs relative to the Reference in EUCO27 and EUCO30. There’s considerable increase in investment in the demand sectors when the energy efficiency ambition increases.  The induced technology progress can offset the increase in the energy costs in the long term. The investment expenditures are likely to rise considerably in the decade 2020-30, a crucial decade for the energy transition, also because of the necessity to extend power grids, upgrade power distribution, build vehicle recharging infrastructure and develop advanced biofuels.

The investment requirements in gas-fired plants are significant after 2025 and until 2050, in contrast to the continuous decrease in the rate of use. The investment in nuclear both for extension of lifetime and new plants is also significant.  The investment outlook is dominated by the massive development of variable RES, notably wind and solar.

On average, the prices of electricity in the EUCO scenarios do not increase in 2030 compared to the Reference projection.  The projections do not see significant pressures on electricity prices in the medium term. The electricity sector restructuring, the sharing of resources in the integrated EU market and the technology learning offset the impacts of ETS. The projection of rising electricity prices in the long term is mainly due to the increasing costs of grids, smart systems and system services. However, the prices increase significantly after 2030.

More information on the winter package scenarios is available online at https://ec.europa.eu/energy/en/data-analysis/energy-modelling

By Pantelis Capros, Professor in the School of Electrical and Computer Engineering, National Technical University of Athens and Director of the E3Mlab/ ICCS.

References

[1] European Commission (2016). http://eur-lex.europa.eu/resource.html?uri=cellar:923ae85f-5018-11e6-89bd-01aa75ed71a1.0002.02/DOC_1&format=PDF

[2] European Commission, COM(2016) 767 final/2, 0382 (COD) (2017) 1–116.

[3] European Commission, COM(2016) 761 final. http://ec.europa.eu/energy/sites/ener/files/documents/1_en_act_part1_v16.pdf.

[4] European Commission, Impact assessment on the revised rules for the electricity market, risk preparedness and ACER, Eur. Comm. Winter Packag. 5 (2016).

[5] The EU’s Intended Nationally Determined Contribution to the UNFCCC.

Technological innovation “trumps” politics

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Technological innovation, often induced by national and sub-national policies, is a key driver of global climate and energy policy ambition and action. Donald Trump’s decision to pull out of the Paris Agreement will hardly affect this trend.

US President Donald Trump recently decided to pull out of the Paris Agreement. Will this be the beginning of the end for an international agreement that took two decades to reach? To answer this question it is important to understand why the Paris Agreement was signed by 195 countries in the first place – only six years after the failure of the Copenhagen conference.

Many political analysts argue that – besides French diplomacy – the key driver of Paris was that emission reduction pledges are voluntary. While this might be valid, in a recent comment [1], we argue that another, often overlooked factor was decisive: technological innovation.

A paradigm shift in climate politics

In 2009, many low-carbon energy technologies were expensive and, even more importantly, analysists predicted rather slow cost declines [2]. Contrary to this prediction, innovation in renewable energies, battery technology, hydraulic fracturing, ICT based solution etc. massively decreased the cost of these technologies, so that today many low-carbon technologies are cost-competitive in many applications. Crucially, it was primarily national (and sub-national) policies that pushed these technologies down their learning curve and incentivized innovative activities.

These cost reductions have contributed to a paradigm shift in international climate politics, from an emissions to a technology focus, from minimizing the economic burden of climate change mitigation to seizing its economic opportunities (see figure). Politicians realize more and more that low-carbon technologies can cut costs while creating local industries and jobs. The core mechanism of international climate policy is no longer to negotiate national climate targets aimed at fair burden-sharing. The new core mechanism is to draft national policies that target low-carbon technological change.

 

Infographic

The interplay of politics, policy, technological change and climate change. (Figure from [1])

The challenges ahead

In other words, technological innovation served as driver of climate policy ambition. This is good news indeed. However, challenges remain: Cost-effective policies supporting the NDCs (Nationally Determined Contributions) need to be tailored to and implemented across many countries (including fossil-fuel subsidy reform and carbon pricing). Financial and technical support needs to be channeled to lower income countries. Importantly, ambition needs to be further increased as the current pledges are not sufficient to reach the agreement’s target of limiting the global temperature rise to well below 2 °C.

So what to make of President Trump’s decision then? In short: Pulling out of the Paris Agreement will not stop the technological mega-trend towards low-carbon technologies. Even the US low-carbon technology industry is unlikely to suffer from his decision in the short run, in part because states like California, but also many cities, are stepping in.

There are, nevertheless, potentially negative consequences [3]. First, the US looks likely to stop its contribution to the Green Climate Fund, which helps lower-income countries in their climate change mitigation and adaptation measures. Second, the announced budget cut for US-based research in low-carbon technology will have long-term negative effects on innovation. Third, some fear that the Trump decision might lead to a bandwagon effect with other countries also pulling out. Finally, implementing policies that incentivize a shift from fossil fuels (particularly coal) to low-carbon technologies will face local resistance in the US and other countries with strong fossil fuel industries. Local fossil fuel constituencies might try to capture politics, as we have seen in in the past with attempts to reform fossil fuel subsidies. They can now point to the US decision.

Overcoming resistance

To overcome local resistance, it is important to strengthen local low-carbon constituencies, i.e. both economic and political actors forming around low-carbon technologies. Creating local jobs in low-carbon technology production, assembly, installation and maintenance is a powerful lever. The cheaper these technologies get, the more likely this is going to happen. Therefore, innovation can also serve as a driver to overcome this type of resistance.

Just one day after Trump’s decision, China and India announced that they will exceed their Paris pledges (mostly driven by higher-than-expected renewable energy installations). This leads us to conclude that the Paris Agreement will prevail. Technological R&D, at ETH and elsewhere, is crucial if we are to strengthen the new technology paradigm further.

 

By Prof. Tobias Schmidt and Dr. Sebastian Sewerin, Energy Politics Group, ETH Zurich

This blog was originally posted on ETH Zurich’s Zukunftsblog.

Further information

[1] Schmidt, Tobias S., and Sebastian Sewerin. “Technology as a driver of climate and energy politics.” Nature Energy 2 (2017): 17084. Link: https://www.nature.com/articles/nenergy201784 Free access (read only): http://rdcu.be/s2LQ

[2] See e.g., McKinsey’s Marginal Abatement Cost reports of 2007 and 2009

[3] On June 13, ETH Zurich’s Center for Security Studies (CSS) organized an event where these questions were debated by Dr. Tim Boersma (Columbia University), Dr. Severin Fischer (CSS) and Prof. Tobias Schmidt.

Bringing into focus the financing challenge of the low-carbon innovation

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For some time in discussions about a global transition towards a low-carbon economy the unacknowledged elephant in the room was the financial sector. Various estimates from the International Energy Agency and others suggest that annual investment in a low-carbon energy system to mid-century will need to average USD2-3 trillion, with two thirds of that comprising a shift in investment from high-carbon to low-carbon infrastructure, and the other third being extra low-carbon investments. The 100 trillion dollar question about the elephant, which is now at least being increasingly acknowledged, is how such a dramatic shift in investment finance can be achieved.

Part of the problem for the investors who will need to make this shift is that it is not yet clear precisely which technologies should be the recipient of this investment. Innovation in new energy technologies, and corresponding changes in business models and consumer behaviour, are proceeding at a bewildering rate; however most projections indicate that current (financial) commitments fall short in achieving a 2° world. Trying to understand such innovation, and where it may lead, is at the heart of the INNOPATHS project, which was presented to a full house in Brussels on June 22 as part of Sustainable Energy Week.

An early output from INNOPATHS, the construction of which is being led by Aalto University in Finland, is a Technology Assessment Matrix, the purpose of which is to provide online insights into how technologies are developing, what their potential might be in terms of cost and scale of deployment, and how they might fit into the low-carbon energy system of the future.

Stimulating investment on the scale required to come anywhere near the 1.5-2oC temperature target of the 2015 Paris Agreement will require, in addition to technologies that offer large-scale energy efficiency savings or low-carbon energy supply, measures that will address institutional, regulatory, informational and business constraints on investment, as well as a supportive policy environment to pull through low-carbon investment that do not yet meet normal criteria of risk-adjusted rate of return.

These are among the topics addressed by the finance workstream of the INNOPATHS project, led by Utrecht University in the Netherlands, ETH in Switzerland and The Potsdam Institute for Climate Research in Germany, the first workshop of which will be held in Utrecht in September. Here, experts from the financial sector will meet and discuss the challenges ahead with energy company representatives and policy makers. These topics were also the subject of the recent meeting of the European Commission’s High-Level Panel of the European Decarbonisation Pathways Initiative, which will be producing a report in 2018 on research needs in Europe to ensure that the European Union can make the most of the many economic and other opportunities offered by deep decarbonisation of the energy system.

Another initiative that brought the financial sector into full focus was the workshop at UCL on July 5th, organised by the European Horizon 2020 Green-Win project, entitled ‘The Risk Transition: shifting investment to a low carbon economy’. The Keynote Speaker was Russell Picot, Special Adviser to the Financial Stability Board’s Climate-related Financial Disclosures Task Force, the final report and recommendations from which were published on June 29. Its areas of core recommendations were governance, strategy, risk management and metrics and targets. While the suggested measures were intended to be voluntary at present, it is clearly possible that they will become mandatory as experience with how best to disclose climate risk is acquired and the need for the great energy transition investment becomes appreciated as increasingly urgent.

INNOPATHS finance workstream colleagues also contribute to the New Pathways for Sustainable Finance process, led by the Brussels-based institution Finance Watch, the Global Alliance for Banking on Values, and Mission 2020, which over the next few will explore a financial market design conducive to a low-carbon transition and specific actionable areas to be addressed by 2020.

Such projects, initiatives, events and publications at least mean that the various parts of the elephant of transition finance for a low-carbon future are being recognised put together, so that the shape of the whole challenge ahead is becoming apparent. What is now required is determined action on the various insights that are being generated being the temperature targets of the Paris Agreement slip quite out of reach.

By Paul Ekins, Professor of Resources and Environment Policy and Director, UCL Institute for Sustainable Resources 

INNOPATHS: Building a shared vision for the EU energy transition

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What are the major challenges that emission intensive sectors face in order to transition towards decarbonization? What technical and organizational innovations can they rely on? What are the key actors involved in the decarbonization process? Who is set to lose, and who is set to benefit, from this major restructuring of EU economies?

Such questions, amongst others, were addressed during six Stakeholder Workshops organized at the CMCC Foundation (Euro-Mediterranean Center on Climate Change) offices in Venice on May 3rd and 4th, 2017, as part of the INNOPATHS project. These six workshops, focused on six sectors of particular importance to the low-carbon transition – power, buildings, transport, agriculture, industry and Information and Communication Technologies (ICT) and allowed for the exchange and discussion of views from invited sector stakeholders on the key actors, technologies and policies of relevance in each sector, and the enablers and barriers to the energy transition.

Discussions in the workshops were very lively. All workshops concluded that a successful decarbonization of the EU economy depends on the presence of well-designed, stable policy instruments, tailored for sector-specific needs and appropriate across diverse EU member states. A key requirement for this is the continual engagement of and dialogue between the policy-making community, technology developers, researchers and the European citizenry. It was noted that, in some cases, institutions and policy instruments were successful in incentivizing innovation through rules, laws and incentive mechanisms. In others, however, they slowed down and sometimes blocked the innovation process for example with the bureaucratic burden, effectively making the decarbonization process more difficult.

Several sector-specific challenges were also discussed.

In the Power Sector, stakeholders agreed that there is a broad consensus on the key generation technologies that will play a role in the transition (e.g., solar PV and gas as a transition mid-term option), although the specific combination and trajectory over time will vary by member state. The real game changers, however, will be the ‘enabling’ technologies – particularly electricity storage – which have the potential to turn the current energy system on its head, by allowing the system to move beyond instantaneous matching of generation and demand. The development of new institutions, and particularly new business models, to support the deployment of these technologies is crucial.

The Buildings Sector faces tremendous challenges, including retrofitting the existing stock for energy efficiency and integrating ICT technologies. Buildings owners and occupants are often unaware of the benefits that could be achieved by investing to increase energy efficiency, and lack of access to finance to pay for high up-front costs with long payback times (over 20 years) compounds the issue. Co-ordination issues in multi-ownership and multi-occupancy buildings are also strong. Government policy must play a crucial role. To address these challenges, it was suggested that it is necessary to foster the retrofitting and the deployment of renewable energy in entire districts, and, to strictly enforce regulation, to invest in making the public aware of the benefits of retrofitting and energy efficiency, and to ensure that the construction industry is better skilled at delivering energy efficiency options.

In the Industry Sector it was argued that much greater potential for energy efficiency gains would come from less rather than more energy-intensive sectors. Indeed, due to the large operating cost energy consumption represents, energy-intensive industries (such as chemicals, steel, cement, and glass) are already incentivized to be as energy efficient as possible. Conversely, in less energy-intensive sectors, such incentives are less strong.  In these sectors, such as food processing, energy efficiency is often overlooked as a potential source of competitive advantage. For this reason, it is crucial that the government help firms identify and accept energy saving opportunities.

Reducing emissions in the Transport Sector was described as a ‘battleground’, with transport effectively being ‘the problem child of climate policy’ due it its diversity: freight, aviation, public and private transport. In this sector the development of new, low carbon business models will be crucial, but other aspects related to social and cultural perceptions (e.g. status effects) also play an extremely important role. Stakeholders disagreed on the most important level of governance – EU, national, or local – for achieving low-carbon transport.

Stakeholders agreed that ICT solutions will be core to the decarbonization of the sectors discussed above. A crucial concern is the amount energy that ICTs themselves consume. However, many of the barriers in this sector are social rather than technical. For example, the potentially overwhelming choice of ICT hardware and applications on the market, and what services these technologies perform and how, may confuse consumers as to which combination is suitable for them, and prevent them making any choice at all.

A significant challenge in the Agriculture Sector is that the principal GHG emissions are Nitrous Oxide (N2O) and Methane (CH4) produced by biological processes, rather than carbon dioxide (CO2) from fossil fuel combustion. There are therefore limits to the reduction of such emissions whilst demand for agricultural produce remains high and grows. A shift in human diet towards vegetarianism is unlikely to become an important driver of emissions reduction given the current and expected future trend of global meat consumption.

These workshops represent the beginning of what will be a continuous process of stakeholder ‘co-design’ embedded in the INNOPATHS project. While the process will be a complex one, continuous engagement and a connection between different actors – from EU policy makers to individual citizens –  will help ensure that crucial aspects of the low-carbon transition are not overlooked, and are appropriately considered in achieving the core aim of INNOPATHS – the development of generating new, state-of-the-art low-carbon transition pathways for the European Union.

By Elena Verdolini, Scientist, Euro-Mediterranean Center on Climate Change (CMCC), Alessandra Mazzai, Communications Officer, Euro-Mediterranean Center on Climate Change (CMCC) and Paul Drummond, Senior Researcher, UCL Institute for Sustainable Resources

Uncertain Innovation – Guiding Public R&D Investment Decisions for the Low-Carbon Transformation

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How to integrate uncertainty into public energy R&D investment decisions, and what comes out of it? 

On 9th May 2017, Prof. Erin Baker (at UMass Amherst), Prof. Valentina Bosetti (at Bocconi University) and I published an article in Nature Energy entitled ‘Integrating uncertainty into public energy research and development decisions’.

In this paper, we analyzed a range of studies and expert reports on public energy Research and Development (R&D) investments considering uncertainty to uncover common threads and trends. Figuring out where to invest dollars or euros to best spur innovation is difficult. Because of this, we outline the elements of a decision making framework, pulling together the current state of knowledge on cost-effective R&D investments across a range of energy technologies. We also identify energy technologies that appear to be “win-win bets” across a range of expectations about costs, integrated assessment models, and decision methods.

We found that public R&D investments into new ways of storing electricity and capturing carbon to store underground should increase, as both technologies provide flexibility in the energy system. Utility scale electricity storage allows for the increased integration of often-intermittent renewable energy sources into electricity grids. Carbon capture and storage (CCS), provided it is delivered in a widely-applicable commercial form within a reasonable timeframe, allows a little ‘breathing space’ in addressing climate change, as it can reduce emissions from coal power, which remains a major contributor to CO2 emissions and an important source of power in countries with growing energy demands.  When used in conjunction with biomass-fired power plants (using sources such as wood pellets or corn stover), it can produce ‘negative’ emissions, sequestering the CO2 the biomass drew from the atmosphere whilst the biomass was growing.

We also found that the proportion of R&D funding devoted to solar power as well as advanced batteries for use in low-emission vehicles should also increase if R&D budgets decrease (even though research shows that investments in low-carbon R&D should increase, decreasing R&D budgets are a real possibility given recent developments). Solar power has huge potential, and low-emission vehicle technologies – particularly better batteries for electric vehicles – will allow us to reduce emissions from transportation, which now makes up a quarter of the US greenhouse gas emissions.

These findings are relevant for the second ministerial meeting of the Mission Innovation initiative, which will be held in Beijing on 6-8th June 2017, partly to discuss the future focus of energy technology investment. Mission Innovation is a global initiative comprising of 22 countries and the European Union, which aims to “dramatically accelerate clean energy innovation”. As part of the Initiative, launched at the Paris climate change conference in 2015, participating countries committed to doubling their clean energy R&D investments over five years.

It is important to note that the studies analyzed consider the fact that public R&D investments help economies by reducing energy costs and by reducing emissions that are damaging the environment, but they do not account for additional benefits of R&D, including reducing the health costs from outdoor air pollution and in some cases creating new industries or making old ones more competitive.  We hope that this work managed to pull together research that can help Europe to continue to address climate change meeting the pledges made by many of the current EU countries, including the UK, to double public energy R&D investment while increasing competitiveness through good bets on energy technologies.

By Laura Diaz Anadon, University Lecturer (Assistant Professor) in Public Policy at the Department of Politics and international studies at the University of Cambridge