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By Matthew Stepp on Apr 18, 2013 with 4 responses

Finding a New Direction in Climate Change Policy

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It’s clear that the world is losing the race against global climate change. The International Energy Agency put numbers to this fact in a new report, Tracking Clean Energy Progress 2013, which finds that, “the amount of CO2 emitted for each unit of energy supplied has fallen by less than one percent since 1990.” In other words, for all of the global growth in renewable energy in the last decade, the world continues to rely on fossil fuels to the detriment of more global warming. Of course, this has to change and change fast.

This past weekend, I participated in a day-long symposium at Villanova University aimed at discussing what kind of changes need to be made. The conference hook was brought on by Rutgers Law Professor Howard Latin who provided the keynote address based on a book he published late last year titled Climate Change Policy Failures that argues conventional climate policy approaches fought for during the last twenty years such as cap-and-trade, international negotiations, and emission regulations won’t successfully produce deep carbon reductions. Latin contends that these “incremental” policy approaches simply kick the emission reduction can down the road and offer little support for aggressive carbon cuts. It’s worth a read.

An interesting cross-section of economists, environmental lawyers, systems engineers, and policy analysts — including myself — were tasked with responding to Professor Latin’s keynote with their perspective on where do we go from here and how this is playing out in today’s policy debate?  I’m posting a summary of the policy portion of my remarks below as a means to not only keep the discussion going, but also to put into context some of the important policy debates ongoing in Congress.

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Overcoming the Iron Law of Climate Change Policy with Innovation
Looking to the future, for any climate policy to succeed one lesson is clear: As long as climate policy solutions impact economic well-being, there will be significant — and I argue nearly insurmountable — barriers to success. University of Colorado political scientist Roger Pielke Jr. calls this the Iron Law of Climate Change Policy and we should heed it. The more quickly we move away from myopically focusing on conventional approaches that don’t recognize this issue, the more likely we’ll address climate change.

Overcoming the Iron Law requires policies that develop and deploy low-carbon alternatives that are a cheaper and better choice for both policymakers and consumers. The most instructive example of this is cheap shale natural gas. For almost 30 years the federal government partnered with the gas industry to develop horizontal drilling installations, hydraulic fracturing, and the mapping technologies that make shale gas even possible. Targeted ‘non-conventional’ gas tax credits sustained development of emerging technologies when no market existed and the government charged a gas ratepayer surcharge to provide consistent funding for early research.

While I recognize that cheap natural gas is not a long-term climate solution, it’s still a good example of how to spur innovation in the energy sector.  The switch from coal to natural gas in the United States shows what happens when cheap, viable energy alternatives are made available. And according to a number of analyses, natural gas has done more to reduce annual U.S. carbon emissions during the past few years than renewables.

Implementing Clean Energy Innovation Policies
In fact, there are a number of important debates ongoing today in Washington that directly impact implementing a climate innovation strategy that shares similar characteristics to the natural gas story. I’ll point out three in particular.

Increase Support for Clean Energy R&D
First, public investments in energy innovation – like those that supported natural gas — are currently plagued by underfunded budgets. According to ITIF’s Energy Innovation Tracker – a public database of all federal investments in energy innovation — the Stimulus temporarily doubled energy research investments to $7 to $8 billion in 2009 and 2010. But this funding has already fallen to $5 billion today and Congress is debating additional cuts in addition to those implemented through sequestration. To put this level of investment in context, many leading organizations and thinkers propose that two to five times as much funding than today. The message here is that the public energy innovation budget is climate policy and it’s woefully underfunded for addressing global climate change.

Tie Innovation Funding to a Dedicated Revenue Source
Second, one way to provide more consistent funding for clean energy innovation is to tie public investments to dedicated revenue streams. For example, there are certainty merits to using a carbon tax as a revenue raiser. My colleagues at the Brookings Institution made a similar proposal last year. I proposed an innovation carbon tax after cap-and-trade failed in 2010. In fact, a modest carbon tax starting as low as $5 per ton of carbon dioxide could effectively fund energy innovation programs with modest budget increases.

But we shouldn’t put all of our eggs in the carbon tax basket. Implementing a carbon tax is nearly impossible in today’s political climate. If it were, the President would have proposed one in his budget this week for instance. Instead, if raising revenue is the goal, there are other opportunities to do so. For instance, Washington is debating using oil and gas drilling royalty revenues to fund a so-called “Energy Security Trust” which would conduct advanced transportation R&D. Though it’s meager in size and scope, it’s a test case for getting something larger passed through Congress.

Reforming Regulations and Incentives to Drive Innovation
Third, carbon regulations and technology incentives like those advocated for by many leading climate and environmental organizations are certainly helpful to driving technology adoption and in some cases even incremental innovation. But I believe we should again recognize the Iron Law here. Significantly regulating industries that don’t have an affordable, viable alternative may result in the same issues that a high carbon tax would create: higher costs to consumers and reduced economic growth. Similarly, relying on blunt technology incentives to deploy clean energy incurs significant costs to tax payers and isn’t a long-term policy option or an option that most developing countries can leverage to deeply cut carbon emissions.

Instead we should expand our regulatory and incentive structures to drive technological innovation. We shouldn’t be providing blunt-force regulatory tools that deploy for the sake of deployment; rather we should structure our policies to drive the development and deployment of better technologies. A good example of this was the short, but recent debate in Washington on how to reform the Production Tax Credit. Instead of giving subsidies to the same wind technologies year after year, the debate briefly focused on ways to advance better technologies and ramp down subsidy dependence over time.

In conclusion, addressing climate change requires reformulating our stale approaches of the past twenty years to drive innovation. Along these lines, a number of energy innovation policies are beginning to emerge in the debate. They need more attention and support. The climate won’t wait any longer.

  1. By mk1313 on April 18, 2013 at 5:28 pm

    Naive, to say the least. So long as the true cost of energy, or anything else for that matter, is hidden from the consumer no meaningful change will happen. This idea that energy has to be cheap is not realistic. It has been for a short period of time but that doesn’t necessarily mean it will be so into the future. Realistic pricing is what is needed. A declining subsidy model that supports new technology but quickly declines so the consumer must pay the full cost would result in both the innovation needed and prevent us from falling into the fossil fuel trap we are in. Truth is, so long as economics places no value on the life support/biotic components of the environment, this will inevitably lead to devastation.

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  2. By Guest on April 19, 2013 at 10:39 am

    The outcomes of climate policies does not become apparent in 10 or 15 years and an investment seeks payback period of less than 10 years. How do you balance it? Technology push is a good option as in the case of fracking. Such approaches are extremely effective when upstream adjustments can be made without any implications to downstream processes. NG whether it comes from conventional approaches or through hydraulic fracturing neither requires different pipelines nor any adjustment in the burners. In contrary technologies that are targeted to make fundamental shifts requires large investments in infrastructure (which is hard to come by due to financial uncertainties and also due to regulatory uncertainties) and social acceptance (would I drive an electric car?). There is no doubt that R &D funding is inadequate but carbon tax is not a good solution. It only increases the burden on consumers. They finance a research whose outcomes will be patented and again consumers pay to use the technology. The cost of innovation will probably be lowest in using approaches like the ‘cap-and-trade.’

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  3. By Shashi Dhungel on April 19, 2013 at 10:41 am

    The outcomes of climate policies do not become apparent in 10 or 15
    years and investments seek payback period of less than 10 years. How
    do you balance it? Technology push is a good option as in the case of
    fracking. Such approaches are extremely effective when upstream
    adjustments can be made without any implications to downstream
    processes. NG whether it comes from conventional approaches or through
    hydraulic fracturing neither requires different pipelines nor any
    adjustment in the burners. In contrary technologies that are targeted to
    make fundamental shifts requires large investments in infrastructure that is hard to come by in the current financial and regulatory uncertainties environment and social acceptance (would I drive an
    electric car?). There is no doubt that R &D funding is inadequate
    but carbon tax is not a good solution. It only increases the burden on
    consumers. They finance a research whose outcomes will be patented and
    again consumers pay to use the technology. The cost of innovation will
    probably be lowest in using approaches like the ‘cap-and-trade.’

    [link]      
  4. By Lewis J. Perelman on April 24, 2013 at 11:36 am

    Stepp is basically right that accelerated technology innovation is much needed. and he also is right that subsidizing deployment of existing, inadequately cost-effective technologies is wasteful and economically unsustainable.

    But Washington (along with other national governments) is financially strapped, with discretionary spending increasingly cannibalized by the burdensome combination of an aging population, shrinking workforce, and costly health care, retirement, and other entitlements.

    So the expectation by Stepp and several of his colleagues that the federal government will or can come up with the kind of increased funding they seek for energy innovation seems ever more unrealistic.

    A “Plan B” strategy is needed as an alternative to simply adding more money to national government-led programs. As outlined in my recent book (http://www.energyinnovation.perelman.net), that Plan B needs to focus on restructuring innovation mechanisms to achieve better, faster results with existing funds and/or new but different resources. Among other reforms, that alternative strategy would emphasize decentralized, “open” science and innovation, international collaboration and crowdsourcing, encouraging private philanthropy and investment, and targeting government funds on competitive prizes or other rewards for proven success.

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