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Fast, Clean, & Cheap:
Cutting Global Warming’s Gordian Knot
© Ted Nordhaus, Michael Shellenberger, Jeff Navin,
Teryn Norris, and Aden Van Noppen, 2007
Any citation of this paper must mention that this article will appear in the
Harvard Law and Policy Review, January 2008.
The authors would like to thank the Nathan Cummings Foundation for
generously supporting the research and writing of this article.
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Table of Contents
I. The Goal: Decouple Energy Consumption from Greenhouse Gas Emissions _____ 4
A. A Pivotal Moment in the History of Energy Consumption ______________________ 4
B. The Urgency of Global Warming ___________________________________________ 5
C. The Real Problem: Lack of Innovation in Energy _____________________________ 6
II. The Failure of the Pollution Paradigm and the Regulation-Centered Approach__ 6
A. Assumptions Behind the Pollution Paradigm _________________________________ 8
B. The Failure of the Regulation-Centered Approach____________________________ 11
1. Obstacles to Innovation _________________________________________________________ 11
2. Regulation-centered approaches to global warming will result in modest, not deep, reductions in
carbon emissions. ________________________________________________________________ 13
3. Governments will set a low price for carbon, which will prevent clean energy technologies from
becoming cost-competitive. ________________________________________________________ 16
4. Developing nations like China will not sacrifice their economic growth to reduce its emissions. 20
5. Dramatic and rapid technological breakthroughs will not be primarily driven by the private sector.
______________________________________________________________________________ 21
6. There are not sufficient low cost clean energy alternatives. _____________________________ 21
III. Cutting the Knot: Towards an Investment-Centered Paradigm ______________ 23
A. The Case for Public Investment ___________________________________________ 23
B. The Historical Precedent for an Investment-Centered Framework ______________ 25
C. Investment for Tech Innovation to Bring the Cost of Clean Energy Down ________ 27
D. A Policy that Works Politically ____________________________________________ 28
E. The Role of Regulation_____________________________ Error! Bookmark not defined.
IV. Specific Recommendations ___________________________________________ 29
A. Establish a carbon price consistent with what present technology can accomplish. _ 29
B. Establish a dedicated source of public funding for clean energy investment that can
rapidly drive down the deployed cost of clean energy technologies. _________________ 29
C. Ramp Up: Invest $300 Billion In Research, Development, and Deployment Of Clean
Energy Technolologies. _____________________________________________________ 30
D. Insulate federal clean energy investments from pork-barrel politics. _____________ 31
E. Buy down the price of solar like we did with microchips _______________________ 31
F. Play the Field: Make Strategic Investments in Key Energy Sectors and Technologies
_________________________________________________________________________ 32
G. Create a framework for global carbon regulation tied to living standards. ________ 33
V. Conclusion ________________________________________________________ 33
Bibliography __________________________________________________________ 34
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Introduction
There is a dilemma at the heart of any effort to deal with global warming. If
policymakers limit greenhouse gases too quickly, the price of electricity and
gasoline will rise quickly, triggering a political backlash from both consumers
and industry. But if policymakers limit greenhouse gases too slowly, clean
energy alternatives will not become cost-competitive with fossil fuels in time to
prevent catastrophic global warming. This dilemma can be understood as a
"Gordian Knot," a concept we borrow from the Greek legend.
In that ancient story, King Midas used a complicated knot to tie his father’s ox
cart to a post. An oracle prophesied that the one who untied the cart, which
symbolized Apollo's father, Zeus, would rule the kingdom. For many years the
knot stymied many who attempted to untie it. Then, one day, the young
Alexander cut the rope with his sword. Alexander went on to become a brilliant
military commander and, eventually, King of Macedon.
The story is traditionally interpreted to mean that one can often solve seemingly
impossible problems with a single and simple bold stroke. But there is an
additional moral to the story: one must see old problems in new light in order to
find the solution. Alexander saw the problem not as untying the knot but rather
as freeing the ox cart from the post. Alexander's new perspective — what is
sometimes called a "gestalt shift" — was a prerequisite to cutting the Gordian
Knot.
And there is an additional meaning to the story. The oracle's prophecy was
specifically to untie the knot. In cutting the knot Alexander had to, paradoxically
and audaciously, violate the (conventional interpretation of the) oracle's
prophesy in order to realize it.
We believe that both a gestalt shift and a bold stroke are required to cut the
Gordian Knot at the heart of today's energy challenge. Global warming is widely
viewed as a problem of pollution, like acid rain, smog and the ozone hole, which
can be solved through new pollution limits. But unlike acid rain, smog and the
ozone hole, global warming threatens to impact economic development and
national security, and to do so at a global level.
And whereas dealing with the ozone hole required a simple and inexpensive
chemical substitute, global warming demands a totally different way of
producing energy. We were able to fight smog without replacing oil. We dealt
with acid rain without dismantling our power plants. And we will phase out
ozone-depleting chemicals without affecting any of our energy sources. But to
deal with global warming, we will need an almost entirely new energy
infrastructure. Creating a new energy infrastructure is more comparable to the
creation of the railroads, the inter-state highway system, personal computers, the
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Internet, the space program, and biomedicines than it is to installing catalytic
converters, installing scrubbers, or phasing out ozone-depleting chemicals.
In the end, it was impossible — and unnecessary — to untie the Gordian Knot.
All that was needed was to free the Ox Cart. What's required in the case of global
warming is that we free energy consumption from greenhouse gas emissions,
and thus from fossil fuels. Environmentalists have so focused on making dirty
energy expensive to make clean energy relatively cheaper, that they overlook
that there is a strategy to cut the Gordian Knot by making clean energy cheaper
more directly: major investments in technology innovation.
The good news is that making the transition from fossil fuels to clean energy will
not only avert dangerous levels of global warming, which threatens food and
water supplies, especially for the world's most vulnerable people. It will also
increase prosperity, strengthen national security, and increase international
cooperation.
But for this accelerated transition to a clean energy economy to occur, we must
first break free from three older ways of thinking and doing things: the politics of
limits, the pollution paradigm, and the regulation-centered framework.
I. The Goal: Decouple Energy Consumption from
Greenhouse Gas Emissions
Energy is the lifeblood of every society. Rising energy consumption is strongly
correlated with longer life spans and higher quality of life.1 But rising energy
consumption has also resulted in rising greenhouse gas emissions and global
warming, which threatens to trigger droughts, food shortages, and resource
wars. Moreover, America's dependence on fossil fuels has led to expensive and
dangerous military entanglements that have compromised America's economic
and military security. Given all of this, a top goal for humankind in the 21st
Century challenge will be to increase energy consumption so the world's poorest
people can climb out of poverty while moving toward more secure, and cleaner,
sources of energy.
A. Pivotal Moment in the History of Energy Consumption
In 2007, human beings consumed roughly 15 terawatts (trillion watts) of energy.
Humans will need to produce and consume roughly 60 terawatts of energy
annually by 2100 if every human on earth is reach the level of prosperity enjoyed
today by the world's wealthiest one billion people.2 Even were economies to
become 30 percent more efficient — an increase that few experts believe likely —
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the total terawatts needed to bring all of humankind out of poverty would still
need to roughly triple by century's end.
The case of China quickly puts to rest any idea that greenhouse gases can be
regulated away by making dirty energy more expensive. This year China passes
the U.S. as the largest emitter of greenhouse gas emissions.3 By 2050, the
contributors of emissions in order will be China at 25 percent, U.S. at 15 percent,
India at 11 percent, and EU at nine percent.45 The Energy Information
Administration (EIA) predicts that, under a business as usual ("BAU") scenario,
global emissions will grow 75 percent from 2003 until 2030, an increase of about
2.1 percent every year.6 China's emissions will grow 4.2 percent annually –
double the global average.
The EIA estimates that, between 2004 and 2012, China, India, and the United
States will build over 850 coal power plants which will put more than five times
as much carbon dioxide into the atmosphere as the Kyoto protocol aims to
reduce. Over 550 of those plants will be built in China.7 Coal provides about 70
percent of China’s energy, and China builds roughly one new coal-fired power
plant every week.8 China’s total coal-related emissions are projected to increase
by 232% between 2004 and 2030. 9
Total cumulative global emissions between 2003 and 2050 will be roughly 2,353
billion tons of CO2 emissions.10 America's cumulative CO2 emissions between
2003 and 2050 will be 341 billion metric tons while China's will be 451 billion.11
China has repeatedly made it clear that it will not restrict its emissions without
an economic reason to do so. Thus, the only way to achieve a rapid, inexpensive,
and quick transition to clean energy in China is to satisfy the public’s desire and
the government’s need for rising security, stability, and economic growth. This is
not to say that the Chinese government will never agree to emissions limits or a
tax on carbon. But any agreement to do so will need to be in China’s economic
interests.
The present moment is extraordinarily important because once China, India, and
other developing nations have built their coal-fired infrastructure, it will become
extremely expensive and complicated to shift them to cleaner fuels — unless
those cleaner fuels are cheap.
The urgency of this point can not be stressed enough. Failure to make clean
energy available as soon as possible for use by countries such as China may
result in catastrophic global warming by the second half of the 21st Century.
B. The Urgency of Global Warming
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There is today an emerging international consensus that greenhouse gas
emissions (the bulk of which are carbon dioxide) must be reduced by roughly 80
percent in the developed world, and 50 percent worldwide, by 2050 if we are to
avoid dangerous levels of global warming (Stern Review, 2006; United Nations
IPCC, 2007). During the 20th Century, total atmospheric carbon dioxide
increased from roughly 270 to 370 parts per million (ppm). Total atmospheric
carbon will pass 550 ppm by 2100 if nothing is done to change today's energy
trajectory. Many scientists believe that total atmospheric carbon dioxide must be
stabilized at between 450 ppm and 550 ppm if we are to avoid catastrophic global
warming impacts.
C. The Real Problem: Lack of Innovation in Energy
The central obstacle to achieving universal prosperity through clean energy is
that energy is the least innovative sector of the economy. Coal has been in
widespread use for 150 years, and oil for 80. Our houses, cars, clothes,
communications, and consumer technologies have all improved dramatically
over the last century, but our energy sources have not. While the price of solar
energy has declined 20 percent with every doubling of its production, it remains
between three to fifty times more expensive than coal and natural gas in most of
the world. Moreover, clean energy technologies such as solar and wind cannot
become anything more than supplemental energy sources until there are
improvements to battery and storage technologies, improvements to the grid,
and new transmission lines.
For thirty years elites in both the developed and developing world have
recognized serious national security, environmental, and economic problems
created by our dependence on fossil fuels, and yet our dependence on them has
only increased. While some view this as a problem of the fossil fuel industry's
corruption of the political process, the central problem is that fossil fuels are
today still far cheaper than cleaner forms of energy, and thus offer more rapid
prosperity for economies seeking growth, whether the U.S., Europe or China. For
clean energy to become cost-competitive with fossil fuels ("dirty energy"), a new
global politics focused on national security and economic development is
required.
II. The Failure of the Pollution Paradigm and the
Regulation-Centered Approach
Carbon dioxide is unlike traditional air pollutants. Unlike smog, it is invisible
and does not stink. It is naturally occurring and is the lifeblood of the earth’s
vegetation. And unlike carbon monoxide and ozone-depleting chemicals, it
cannot be easily replaced.
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The differences between greenhouse gases and other pollutants doom regulatory
efforts to failure. There is an economic reason and a political reason for this. The
economic reason is that emissions trading systems direct private investment
toward the least expensive emissions reductions. It does not direct investments
toward newer, more expensive, but potentially disruptive clean energy
technologies, such as solar energy and carbon capture and storage (CCS). Under
future emissions trading regimes, managers of firms will have an economic
incentive to purchase emissions credits as cheaply as possible, such as from
projects that burn methane from landfills, purchase forest land for sequestration,
buy wind energy, or make plants and buildings more efficient. The problem is
that very little of the 80 percent reductions in greenhouse gas (GHG) emissions
can be achieved through these inexpensive technologies alone.
Another economic and technical problem with the regulation-centered approach
is that many of the new technologies that are crucial to the creation of a new
clean energy economy -- such as new transmission lines and ways to store solar
and wind power -- will not receive investment capital from emissions trading
because they do not directly lead to reduced emissions.
The political reason that regulatory-only approaches — whether renewable
portfolio standard (RPS), cap and trade, or a carbon tax — cannot approach
large-scale emissions reductions is because their success depends on doing
something highly unpopular with the public, industry, and elites alike: raising
the price of energy. New energy regulations will increase the cost of gasoline and
electricity and everything else that requires energy for its production, from food
to homes to consumer products. Many industries — from building to
transportation to retail to manufacturing — not just energy industries, may have
genuine reason to fear and oppose price increases. Political realities make it
likely that emissions regulations will be repealed or weakened by Congress or,
more likely, enforcement agencies (e.g., the Environmental Protection Agency).
The most likely scenario is that legislation capping and allowing for the trading
of emissions will pass, but that it will set the price of carbon far below what is
required for clean energy to become cost-competitive and widely adopted so that
emissions can be reduced on the order of 80 percent by 2050. If carbon is priced
inaccurately due to political considerations, then the central assumption of the
regulation-centered framework –- that industry will find the optimal solution
once it is forced to absorb the costs of its externalities -- breaks down.
The regulation-centered framework therefore creates a Gordian Knot. If
government prices carbon high enough, either through an emissions cap or a tax,
to make currently expensive clean energy solutions, including solar and carbon
capture, cost competitive, then energy prices will rise dramatically and will likely
trigger a popular, industry, and elite backlash. But if government prices carbon
too low, private sector investments will flow almost exclusively to inexpensive
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emissions reductions, such as efficiency, rather than to potentially breakthrough
–- if currently expensive –- technologies, such as clean energy and carbon capture
and storage.
The Gordian Knot is not an argument per se against emissions trading, carbon
taxes, or other measures that raise the cost of energy. Rather it is an argument
against the regulation-centered approach. Without large public benefits — such
as lower prices for clean energy, energy independence, new jobs, and economic
growth — the regulation-centered approach cannot succeed in raising the price
of dirty energy high enough to make clean energy cost-competitive.
A. Assumptions Behind the Pollution Paradigm
It is tempting to look at greenhouse gases as just another air pollutant, and global
warming as just another pollution problem. After all, greenhouse gases come
from the same place as other pollutants, they are gases like other pollutants, and
their principal impacts are environmental, just like other pollutants. Just last
Term, for example, the Supreme Court examined the definition of an air
pollutant under the Clean Air Act and held that greenhouse gases obviously fit
the definition.12
Given all this, the vast majority of public policy proposals aimed at global
warming treat GHG emissions like any other pollutant: the proposals focus on
regulation, from carbon caps and emissions trading, to renewable portfolio
standards (RPS) mandating that utilities use clean energy sources to produce a
certain percentage of their output, to taxes on carbon. The regulation-centered
approach treats the challenge centrally as a) limiting emissions and b) increasing
the cost of dirty energy, rather than lowering the cost of clean energy.
Part of the appeal of the regulation-centered approach lies in its mathematical
elegance: to reduce emissions by 80 percent by 2050, the logic goes, we need
simply to set a cap on emissions that is then reduced annually at a fixed rate (e.g.,
two percent per year). Another appealing aspect of the regulation-centered
approach is that it worked well in dealing with acid rain in the United States, and
the widening ozone hole due to CFC emissions internationally.
Last year, the world celebrated the 20th Anniversary of the international treaty
that phased out ozone-destroying chemicals. For environmentalists, the Montreal
Protocol was a model for action on global warming. In the words of David
Doniger, the climate director of the Natural Resources Defense Council, "The
lesson from Montreal is that curbing global warming will not be as hard as it
looks."13
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And indeed, when one looks back at the pollution problems of old, none of them
were as hard or as expensive to solve as the affected industries claimed they
would be. Scrubbers on smokestacks, catalytic converters on cars, lead out of
gasoline, and alternatives to ozone-depleting chemicals — these technical fixes
came at a very low cost to the economy, industry, and consumers.
The same will be true, environmentalists say, when it comes to global warming.
All the alternatives we need — efficiency, conservation, renewables,
sequestration, and even nuclear — already exist. We just need to scale them up.
Sure, global warming is a bigger problem, they acknowledge. But it will be
solved just like we solved acid rain: by auctioning emissions permits and
allowing firms to trade them. To reduce U.S. emissions by 80 percent between
2010 and 2050, we simply need to reduce the total allowable emissions by two
percent each year.
By limiting the amount of emissions each year, and auctioning or giving away a
limited number of emissions permits to firms, governments will effectively create
a price for carbon dioxide emissions. This price will create value for reducing
emissions, and the free market — firms trading emissions permits for emissions
reductions — will find the most efficient way to reduce our greenhouse gases by
80 percent by 2050. And as dirty energy sources like coal and oil become more
expensive, clean energy sources will become cost-competitive and more widely
used.
Emissions trading is regarded as an efficient way for firms and the economy to
reduce overall GHG emissions because it taps the collective intelligence of
private investors and firms and avoids problems associated with having the
government “pick winners and losers” in the marketplace. Emissions capping
and trading works by giving firms a certain number of permits to pollute, a
number that is then reduced in subsequent years. For example, during the first
year of a cap and trade regime a coal-fired power plant could be given a permit
equivalent to 100 percent of its existing emissions. In order to achieve an 80
percent reduction over a 40-year period, from 2010 to 2050, the plant would
receive a progressively smaller emission permit each year until its emissions
were, in 2050, 20 percent of what they were in 2010. With emissions trading,
firms could choose to take measures to reduce their overall emissions directly, by
purchasing clean energy or adopting efficiency measures, or they could purchase
their emissions reductions from firms that decrease their emissions beyond what
is required by law and thus have credits to sell on the open market.
In the case of acid rain, a 1990 amendment to the Clean Air Act capped the
amount of allowable sulfur and other emissions from coal-fired power plants
that were causing acid rain, and allowed the credits for emissions to be traded on
in the marketplace. This “cap and trade” mechanism was overwhelmingly
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successful in reducing sulfur emissions and came to be viewed as a model for
reducing carbon emissions.
Economists overwhelmingly favor clear and consistent incentives for firms.
Energy and environmental economists favor solutions that "internalize" into
prices the external "costs" of things like disasters, drought, forest fires, disease,
higher sea levels, and war caused by global warming and oil dependency. These
approaches all effectively establish a price for carbon. Once a price is established
for carbon, the thinking goes, the most cost-effective and efficient low-carbon
alternatives will emerge from the free, albeit newly constrained, marketplace. All
of these assumptions lead to the conclusion that action on global warming
demands raising energy costs and thus changing the behavior of firms and
consumers.
The regulation-centered model also assumes that new government regulations
are more politically viable than new government investments. The new
Democratic Congress, sensitive to charges that the Democratic Party is the party
of “big government” and “tax and spend liberals,” adopted in early 2007 a “payas-you-go” rule that requires that all new public investment and spending to be
paid for by new sources of revenue. Republicans, for their part, have shown a
willingness to make large public investments into national security and old
energy sources, but maintain a discourse against public spending, including
against spending on renewable energy. The political assumption among
regulation-centered advocates is that while cap and trade will increase energy
costs both for consumers and producers, it will do so gradually over many
decades, and imperceptibly.
This pollution regulation framework offered by environmentalists for dealing
with global warming is thus, for many policymakers, a reassuring one. For 15
years it has provided policymakers, the media, and the public with a mental
model for understanding how such a massive problem like climate change could
be solved in an organic way by the market, perhaps the most powerful
institution ever created by human beings. There's just one problem: it won't
work.
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B. The Failure of the Regulation-Centered Approach
1. Obstacles to Innovation
Energy is arguably the least innovative sector of the economy. The two dominant
energy sources, coal and oil, have been in widespread use since the midnineteenth century and early twentieth centuries, respectively. There are several
reasons specific to energy for this lack of innovation. Any strategy to spur public
investment and technological growth must consider and respond to these
concerns.
The first is it takes decades before new energy sources become profitable.
Energy production is what analysts call “lumpy,” requiring of large power plants
and investments. Energy companies and investors are thus deterred from
spending much of their revenue on risky, innovative, and costly ventures
without government regulation or incentive to reduce their risks. Private firms
tend to be focused on generating returns in the short term (~5 – 10 years) and not
the long term (~10 – 30 years).
Renewable resources such as wind and solar depend on the vagaries of the
weather, and most electricity systems are not set up to take advantage of their
incremental nature. National electric grids are tailored for large, centralized
plants. Many renewable electricity sources, such as wind, are located far from
current power lines, and their integration faces regulatory and technical
challenges. “As a result, the electricity system is operated inefficiently and wind,
solar and wave selling their output in the general energy market receive lower
than justified prices” (Neuhoff 2005: 9). Moreover, the transportation
infrastructure is geared to oil. Alternatives like biofuels or hydrogen depend on
public investment in public infrastructure (Grubb 2004). Meanwhile, the
comparatively small scale of renewable projects makes the cost of regulatory
compliance relatively more expensive than larger projects (Neuhoff 2005: 11)
One dramatic related consequence of the lumpy nature of energy production is
“technological lock-in,” the second obstacle to energy innovation. The classic
example is QWERTY keyboard. More efficient layouts for faster typing exist, but
none have been able to gain foothold. Other examples include the Windows
operating system, sometimes criticized by computer programmers as a
technologically inferior platform. In the case of energy, the dominant energy
sources -- coal, gasoline, and natural gas -- continue to exist, in part, because they
are "locked-in." These older technologies benefit from a range of factors, from
lower adoption cost to lower production cost than newer, cleaner energy sources
(Neuhoff 2005, 12).
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These old energy sources are also locked in politically: fossil fuel industries have
proven adept at controlling the political process through campaign contributions,
media and advertising campaigns to influence elite opinion, and other forms of
lobbying all aimed at locking older energy in and newer technologies out. Of the
roughly $33 billion invested each year into clean-energy technological
deployment (an amount that includes nuclear) is, in the words of the Stern
Review, “dwarfed by the existing subsidies for fossil fuels worldwide that are
estimated at $150 billion to $250 billion each year” (Stern 2006).
Third, energy is a commodity, and so there is little to no product differentiation
for newer, cleaner, and more technologically-advanced energy sources like solar
and wind. Whereas pharmaceutical and high-tech companies have an incentive
to invest heavily in R&D to invent new products, the energy sector will sell the
same product — electrons — in 2100 that it sold in 1900. While there has been
some very modest success selling “green power” to consumers, no serious expert
believes that demand for green power will be anything more than negligible in
determining future energy sources (Neuhoff, 2005: 19, EWEA, 2004).
Cell phones, handheld digital devices, and laptops were all built on public
investment, but they quickly became self-driven because they have high
consumer demands for innovation. Niche markets of consumers want more
sophisticated versions of these products, as proven by the 700,000 consumers
who purchased the $600 iPhone in one weekend.14 By contrast, very few people
are willing to pay more for low-carbon rather than for high carbon electricity.
Fourth, in contrast to consumer electronics and pharmaceuticals, it is difficult for
energy companies to capture their innovations through the patenting process.
Pharmaceutical companies can invest roughly 15 percent of their revenue on
R&D to develop new drugs because they can confidently patent specific drugs
and benefit from a market monopoly for a certain number of years. By contrast,
“it is far harder to define engineering patents in ways that cannot be
circumvented over time, and renewable energy technologies consist of a large set
of components and require the expertise of several companies to improve the
system” (Neuhoff 2005, 14). One recent review of the literature finds that firms
are often unable to capture the value of their investments because the knowledge
and learnings from R&D “spills over” to benefit other firms, creating a free rider
problem that acts as a disincentive to private investment in R&D by private firms
(Nemet 2007: 5)
Fifth, public investments in energy R&D are very low and have declined for 20
years, due to the declining cost of oil in 80s and 90s, the absence of an effective
national lobby for clean energy, the "policy lock-in" of the pollution paradigm
and regulation-centered approaches to energy, and other factors. Public
investment in energy research and development in the United States dropped
from an already modest $8 billion in 1980 to $3 billion in 2005 (in 2002 dollars).
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Private venture capital during the same period dropped from $4 billion in 1980
to a paltry $1 billion in 2005 (Kammen 2006).
This uncertainty is compounded by the volatility of public energy investment
policy and tax incentives. Private investment is greatly driven by expectations
about government action, whether regulation or investments, in the future. Past
energy policy has created the perception among energy investors that “what the
government giveth, the government taketh away” (Nemet, 2007). In wind, for
example, the average duration for incentive programs over the past thirty years
is merely 3.1 years, and overall energy R&D funding levels increased by a factor
of three within five years and were cut in half over the next five years. As a
result, there has been a decline in energy patents, which with the exception of
nuclear fission, are well correlated with declining investments into R&D (Nemet
2007: 42).
2. Regulation-centered approaches to global warming will result in
modest, not deep, reductions in carbon emissions.
This is due to a combination of technical, economic, and political constraints.
Technically, there simply does not yet exist the low cost, low carbon technologies
that could be quickly brought to scale to replace carbon intensive energy sources.
The environmentalist line that "we just need to scale up existing technologies" is
only partly true.15 It is true that some strategies for reducing emissions, such as
efficiency and conservation, can be scaled up immediately. But technologies like
solar and carbon capture and storage are still far more expensive than coal and
gas.
Pricing carbon at $35 – 100/ton — whether through cap and trade or carbon
taxes — can help us to get part of the way there. Carbon at those prices will drive
investments into efficiency and conservation, and will create incentives for
energy providers to build gas-fired rather than coal-fired plants. These measures
could result in emissions reductions on the order of roughly 20 – 30 percent by
mid-century — but only in the United States, not necessarily at a global level. To
achieve major reductions on the order of 80 percent in the U.S., and 50 percent
globally, we will need to replace coal and oil as energy sources almost entirely.
And that will require dramatic technology breakthroughs to bring down the
price of clean alternatives.
Economically, the price of carbon dioxide would have to be set at exorbitant
levels for today's clean energy alternatives to become cost-competitive with coal,
gas and oil. The IPCC estimates that establishing a global carbon price of
$184/ton16 — a figure five times higher than what most legislation being
considered by the U.S. Senate would set it at — would still only result in a
reduction of global carbon emissions by 20 – 38 percent by 2030. To reduce
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greenhouse gases by 90 percent by 2050 in the United States through regulation
alone, carbon would have to priced at around $300 dollars/ton between 2010 and
2030, and at a whopping $600 - 800/ton between 2030 and 2050. To gain a sense
of the impact this would have on consumers, not to mention the economy as a
whole, consider that carbon priced at $700/ton would increase the price of coalgenerated electricity in the U.S. two and a half times.17
Reducing carbon emissions by 80 percent worldwide through regulatory limits
alone would require setting a very high price for carbon. For carbon capture and
storage to become economically viable, carbon would have to be priced between
$100 - 200/ton.18 For solar photovoltaic to become cost-competitive without other
subsidies, carbon would have to be priced at over $800/ton, according to U.S.
EIA (Table 1).
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Table 1: Price Carbon Must Reach to Make Clean Energy Alternatives CostCompetitive with Coal in the United States.
Carbon
Pricing
Scenarios,
2010
Coal
(Pulverized)
Solar
Photvoltaic [1]
Wind
Solar Thermal
[2]
Fuel Cell
Biomass [3]
Geothermal
Hydroelectric
[4]
Conventional
Nuclear
Advanced
Nuclear
Cents
per
kWh,
2010 [5]
Price of
Price above carbon to
coal
compete
(cents/kWh) with coal [6]
Price of
CO2
necessary
to
compete
with coal
4.84
0.00
$0.0
0
25.83
6.67
20.99
1.23
$807.3
$47.3
$219.97
$12.89
14.22
17.96
5.88
6.19
8.78
12.52
0.44
0.75
$337.7
$481.5
$16.9
$28.8
$92.01
$131.21
$4.61
$7.86
6.44
1.00
$38.5
$10.48
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
[1] Central Station Generator
[2] Central Station Generator
[3] Integrated Gasification Combined Cycle
[4] Conventional
[5] EIA AEO 2007 Levelized Generation costs for 2010
[6] $100 per ton price on carbon results in price
increase of $0.026 per kWh of coal electricity
(Table created by authors based on EIA data 2007)
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Politically, if action on global warming depends on voters and politicians
accepting higher energy prices, there will be very few results. That's because
voters consistently rank global warming dead last as a priority — and just as
consistently rank rising gasoline and electricity prices as a top concern.
Understandably, then, politicians care more about keeping energy prices low
than they do about global warming.
3. Governments will set a low price for carbon, which will prevent
clean energy technologies from becoming cost-competitive.
Tradable pollution limits and a price for carbon could result in some emissions
reductions — just not reductions approaching anything close to 80 percent in the
U.S. or 50 percent worldwide. Recognizing that voters care more about the cost
of energy than global warming, most policies under consideration in Congress
would price carbon at around $25 – 55/ton. At that low price, private investment
will flow toward the least expensive emissions reductions, such as burning
methane from landfills, purchasing forest land for carbon sequestration, shifting
from coal to natural gas, or retrofitting power plants and buildings so they
operate more efficiently. It may also direct investments toward wind, though
wind faces expansion obstacles from the lack of transmission lines between
windy rural areas and cities. Firms seeking to comply with the law will work to
get the most emissions reductions for the least amount of money. Thus, private
investment will not, for the most part, flow toward technologies like solar energy
and carbon capture and storage, which are currently more expensive but which
need to receive major investment for costs to come down.
This problem is consistent with past experience in Europe and the U.S. Europe
implemented an emissions trading regime to fulfill its obligations under the
Kyoto Protocol, with disappointing results. California’s experience demonstrates
how rapidly political opposition to aggressive environmental regulations can gut
them. And the American political experience shows conclusively that
Americans, in particular, are unwilling to accept high energy costs.
a. Lessons from Europe
The European emissions trading scheme (ETS) is the largest multinational
emissions trading system and it is a central piece of the European Union’s
strategy to meet its Kyoto targets. It was designed to reduce emissions from
large industrial and stationary sources and accounts for approximately 40 to 45
percent of the EU’s total carbon dioxide emissions, according to the EIA.
Polluters are allowed to buy and sell permits according to their needs. The goal
is to reduce total emissions by allocating a scarce number of permits whose rising
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price will encourage firms to abate emissions rather than pay to pollute. The ETS
requires individual country governments to set their own National Allocation
Plan and give away permits to polluting industry.
The ETS has not achieved its goal of significantly reducing the EU’s emissions
because European governments issued too many permits to polluters. In 2006
more than 90 percent of the industrial plants covered by the EU's trading scheme
were given a pollution allowance above their levels of emissions (Guardian
2007). The result was a collapse in the price for carbon, which reached a high of
€30 per ton in April 2006 before plummeting to €10 per ton the following month.
At that low price, few clean energy technologies will become cost competitive.
Europe's challenges were the consequence not of technical errors but rather of
reluctance on the part of government officials to raise energy costs to levels that
might hurt domestic industries or slow economic growth. Already some
European businesses, such as cement manufacturers, say that high energy prices
have put them at a disadvantage relative to foreign competitors. This will
continue to be a problem until the developing world prices its carbon.
Therein lies another aspect of the Gordian Knot. Developed nations will be
reluctant to price carbon too high, fearing a competitive disadvantage for
domestic firms relative to firms who operate in countries that do not restrict
greenhouse gas emissions. And even if developing nations like China and Brazil
do one day set a price for carbon, they will face the same Gordian knot as
developed nations. Investments will flow to areas that deliver the greatest
emissions reductions for the dollar, which also happen to be some of the least
promising in the long-term.
b. Lessons from California
California is regarded as a leader in environmental regulation and laws aimed at
accelerating the adoption of clean energy technology. However, the
implementation of these regulation-centered approaches has been mixed at best.
California’s Renewable Portfolio Standard has so far failed to meet its targets.
The state’s investor-owned utilities (IOUs) will likely not meet their 2010 target
of 20 percent renewables, in part because the IOUs will in many cases find it
cheaper to pay a penalty of 5 cents per kWh, which cannot exceed $25 million per
utility per year — an amount that is, in one analyst's words, “a small price to pay
relative to the cost of developing, building and operating renewables
technologies [especially] since the annual revenues of the state’s three IOUs in
2006 were $35 billion (Nemet 2007: 212).
California also demonstrates the Gordian Knot in the realm of ballot initiative
politics. In July 2006, California voters indicated to pollsters their willingness to
tax oil production to invest in clean energy alternatives.19 But just three months
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later they voted against proposition 87 by a 10-point margin. Focus groups with
swing voters in December 2006 revealed that even voters who strongly support
clean energy and are concerned about global warming simply did not want to
pay more for gasoline.20
The failure to properly enforce regulation-centered laws signals to business that
the regulatory climate remains uncertain, and thus discourages firms from
making large investments. Nemet points to the California mandate in 1990 that
required that 10 percent of all vehicles sold in the state in 2003 be zero emissions.
After automobile manufacturers sued California, the California Air Resources
Board repealed the Zero Emissions Vehicles (ZEV) Mandate. Such actions,
worries one analyst, “may be especially pernicious, in terms of creating
incentives for innovation, because it suggests that policies can change not only
due to the vagaries of political priorities, but also because potential innovators
decide that lobbying and litigating to soften government imposed targets may be
a more effective use of their resources than investing innovation to meet them”
(Nemet 2007: 214-215).
c. Lessons from National Politics.
Voters today may be more anxious about energy prices than they have been in
the last 25 years. When USA Today/Gallup asked how important gas prices are
to someone’s vote for Congress in October of 2006, 90 percent of voters said it
was at least moderately important, and 34 percent of respondents called gas
prices “extremely important" (USA Today/Gallup 2006). Voters thus oppose
efforts to increase the federal gas tax and elected officials can be expected to
resist public policy initiatives that will result in increased gas prices. A CBS
News/New York Times poll reported in April 2007 that 58 percent of Americans
oppose an increase in the federal gas tax. In an April 2006 Gallup poll, 64 percent
of Americans supported suspending all federal gasoline taxes. Gallup even found
that 70 percent favored government price controls on fuel prices, one of the
highest forms of government regulation.
Americans specifically say they do not want to pay more for electricity or
gasoline. When asked if the federal government should increase taxes on
electricity or gasoline to encourage conservation, Americans overwhelmingly
rejected the approach. A March 2006 ABC News/Washington Post Poll found
that 81 percent of voters oppose increasing taxes on electricity, and 68 percent
oppose increasing taxes on gasoline, to encourage conservation. Those numbers
actually went up, despite expensive national and local media attention about
global warming (the previous numbers were 79 and 67 percent respectively)
(ABC News/Washington Post, 2006, 2007).
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The lesson some have drawn from these experiences is that advocates must
engage in public education efforts so that the voters care more about global
warming than energy prices. However, there is no evidence that such a strategy
is viable. Efforts to increase the public's concern with global warming as an issue
have largely been unsuccessful. Public awareness reached a new high in the
summer of 2006 with the publicity around Al Gore’s “An Inconvenient Truth.”
The Pew Center for People and the Press21 conducted a telephone survey of 1,501
adults between June 14 and June 19, 2006, a period timed to coincide with the
high point of the media’s interest in Gore’s movie. By far the most significant
finding was that the movie had done virtually nothing to increase the saliency of
global warming among voters. Pew researchers noted that “out of a list of 19
issues, Republicans rank global warming 19th and Democrats and Independents
rank it 13th.”22
While 41% say global warming is a very serious problem, 33% see it as
somewhat serious and roughly a quarter (24%) think it is either not too
serious or not a problem at all. Consequently, the issue ranks as a
relatively low public priority, well behind education, the economy, and
the war in Iraq.
By January 2007, global warming’s relative importance actually declined to 21st
out of 21 issues for Republicans, 17th out of 21 issues for Democrats, and 19th out
of 21 issues for independents.23
4. Setting a price for carbon is insufficient.
Most energy experts do not believe a carbon price is enough. "Getting those new
technologies on line will require more than price signals because no company on
its own will invest in the necessary speculative and costly research and
development concepts,” wrote Victor and Cullenward. "Ultimately, the belief
that prices alone will solve the climate problem is rooted in the fiction that
investors in large-scale and long-lived energy infrastructures sit on a fence
waiting for higher carbon prices to tip their decisions. In fact, many factors stifle
the implementation of novel low-carbon policies" (Victor and Cullenward 2007)
It is for this reason that everyone from the Stern Review to the IPCC calls for
major public investment. "[T]he presence of a range of other market failures and
barriers mean that carbon pricing alone is not sufficient," the Stern Review
concluded. "Technology policy, the second element of a climate change strategy,
is vital to bring forward the range of low-carbon and high-efficiency technologies
that will be needed to make deep emissions cuts." (Stern Review 2006: 308)
Socolow and Pacala, who are frequently cited in justification for regulationcentric policies, agree. "But a price on CO2 emissions on its own may not be
enough. Governments may need to stimulate the commercialization of low-
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carbon technologies to increase the number of competitive options available in
the future" (Socolow and Pacala 2006).
This kind of public investment will both drive the early stage innovation and
commercialization the private sector will by and large not engage in and draw in
greater private investment to commercialize and bring those technologies to
scale. MIT's John Deutsch writes, "Government support of innovation – both
technology creation and technology demonstration – is desirable to encourage
private investors to adopt new technology… Virtually every energy study
recommends that the federal government mount technology research,
development, and demonstration (R, D, & D) programs that require large and
sustained budgetary support, of course, funded by the taxpayer."
5. Developing nations like China will not sacrifice their economic
growth to reduce their emissions.
High carbon prices would translate into dramatic increases in the price of energy
and everything else that requires energy (which is to say, virtually everything).
Given that increasing energy use and consumption are highly correlated with
longer life spans and higher living standards in developing nations, a high
carbon price would represent a major obstacle to economic development for poor
countries.
Environmental leaders insist that once the U.S. acts, so will China. They point to
the fact that Chinese firms are earning billions selling emissions reductions to
European firms, thus giving China a stake in the success of global emissions
trading. Moreover, China is genuinely worried about global warming.
Nevertheless, there is no reason to believe that if China does eventually set a
price for carbon it will set it high enough price — at say $100 - $200/ton — for
carbon capture and storage facilities to become cost-competitive. Doing so would
dramatically slow the rapid climb that hundreds of millions of Chinese are
making out of poverty. But even if the Chinese government were to set a high
price for carbon as early as 2030, China will have already constructed hundreds
of coal-fired power plants — few of which will be compatible with carbon
capture and storage plans.
In the end, the only way the Chinese government will be able to substantially
reduce its emissions is if the price of clean energy and carbon capture
technologies come down enough to get within striking distance of the price of
fossil fuels — with or without a price for carbon.
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6. Dramatic and rapid technological breakthroughs will not be
primarily driven by the private sector.
Private firms will play an important role in bringing new technologies to market
— and carbon pricing will play an important role in making market conditions
more amenable to clean energy technologies. However, private firms will not
make the large, long-term investments in R&D and deployment, nor can they
create the public infrastructure (e.g., new transmission lines) needed for the new
energy economy. The energy sector is unlike the pharmaceutical, software, and
computer sectors. Energy R&D requires far larger sums of investment capital
than are required for other technologies, which helps explain why energy
remains one of the least innovative sectors of the economy (coal and oil being
very old fuel sources). Unlike those other industries, it is extremely difficult for
energy firms to protect their patents against reverse engineering. And even
pharmaceutical, software, computer and Internet industries all depended in their
formative decades on large-scale government investments in education,
infrastructure, and R&D.
7. There are not sufficient low cost clean energy alternatives.
When people say that “we already have all the alternative energy technologies
we need,” what they mean is that we have invented technologies that can
produce energy without emitting carbon. This is true only insofar as these
technologies exist, have been demonstrated in laboratory settings, and in the case
of things like solar panels, have been deployed over a number of years at a
relatively small scale. Other technologies, such as carbon capture and storage, are
at an even earlier stage of development.
What we have not yet succeeded in doing is producing clean energy technologies
at costs low enough to deploy widely such that they might actually represent a
real alternative to cheap, high-carbon conventional energy sources. "Many of the
technologies needed are already available or close to commercialization," the
International Energy Agency wrote in a major report last year. "But it will require
substantial effort and investment by both the public and private sectors for them
to be adopted by the market… Urgent action is needed to stimulate R&D, to
demonstrate and deploy promising technologies, and to provide clear and
predictable incentives for low carbon options and diverse energy sources"
(Mandil/IEA 2006: 3)
When we say “breakthrough” technologies, what we are referring to are
breakthroughs in the performance of current clean energy technologies and the
cost of deploying them. Without these breakthroughs, the costs of these
technologies are too high, and their performance and return on investment too
low, to justify private sector investment in their widespread deployment. This
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will likely be the case even with the higher carbon prices that the many proposals
currently being considered in the U.S. Congress would establish.
Moreover, even dramatically improving the performance of clean energy
alternatives and decreasing their price relative to conventional energy sources
will not be sufficient, alone, to see them widely deployed. Clean energy
alternatives like solar and wind will require significant improvement in the cost
and performance of battery and other energy storage technologies and probably
a new electricity grid as well, in order to be deployed at levels that might allow
them to displace conventional energy sources on a large scale.
Given the likelihood of low to non-existent prices for carbon in the developing
world for many decades to come, the technology challenge will require that we
very quickly drive the deployed price of low carbon alternative energy
technologies not just down to levels at which they are competitive in energy
economies with relatively high carbon prices, but down to levels wherein the real
cost of those technologies are cost competitive with coal in developing economies
with very low (or nonexistent) carbon prices.
It is for this reason that we argue that, in the end, the most important objective of
our efforts to address the climate crisis are to drive the real, deployed costs of
clean energy technologies dramatically downward as quickly as possible.
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III. Cutting the Knot: Towards an Investment-Centered
Paradigm
A. The Case for Public Investment
There is a key difference between what government does well in terms of
promoting technological innovation and what the private sector does well. The
standard distinction is that government is the appropriate funder of basic
research while the private sector is much better and much more efficient at
commercializing new technologies. However, there is a vast chasm between
basic research and commercialization where many promising technologies,
particularly energy technologies, die. This is known as the "technology valley of
death" (Grubb 2004). It represents critical early stage production and deployment
stages of commercialization. At these stages the private energy sector has not, for
a variety of reasons, done particularly well.
There are also a number of reasons particular to energy technology that further
increase risk. Energy patents are notoriously difficult to defend and easy to
reverse engineer. Fearing "knowledge spillover" – innovations that can't be
captured or monopolized by the companies doing the research — investors and
firms avoid making big, long-term investments in emerging technologies.
"Investors," wrote Stanford's David Victor and Danny Cullenward in
September's Scientific American, "tend to focus on technologies that are nearing
commercial application and potential profit.”
Finally, the commodified nature of energy (one electron is as good as another)
makes it difficult to develop new commercial products that can command a
higher price. While Apple enthusiasts lined up to shell out $600 for an iPhone,
very few consumers are willing to pay 2 to 3 times more for clean energy.
These challenges and others have resulted in huge barriers to the widespread
commercialization of new clean energy technologies by the private sector. And it
is for this reason that the vast majority of energy experts, as well as the largescale reviews of the technology challenge as it relates to climate, such as the
spring 2007 IPCC report, and the 2006 Stern Review, have called for exponential
increases in public investment in research, development and deployment of clean
energy technologies.
The lack of investment is not a minor barrier – most energy experts view it as the
primary barrier. "Probably the most significant barrier to ETI [Energy Technology
Innovation] is inadequacy of funds, especially for R&D, in relation to the
challenges that are faced by energy system" (Sims Gallagher et al. 2006: 221-222).
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John Holdren, the current chairman of the American Association for the
Advancement of Science, wrote, "Around the world, the energy sector’s ratio of
RD&D investments to total revenues is well below that for any other high-tech
sector of the economy… These investments will need to be boosted at least 2-3fold if the world is to meet the energy challenges it faces in the decades
immediately ahead" (Holdren 2006: 20). Others say it should be much higher.
"Using emissions scenarios from the Intergovernmental Panel on Climate Change
and a previous framework for estimating the climate-related savings from
energy R&D programs (Schock et al.., 1999), we calculate that U.S. energy R&D
spending of $15 – 30 billion/year would be sufficient to stabilize CO2 at double
pre-industrial levels [550 ppm]" (Kammen 2006a: 4)
The efficacy of this kind of public investment is well-documented. In the roughly
five years that the federal government guaranteed the market for microchips in
the 1960’s, the price of a microchip came down from $1000 per chip to $20. A
similar federal effort in the 1980’s saw similar improvements in price and
performance. According to Stern and IPCC:
"Extensive and prolonged public support and private markets were both
instrumental in the development of all generating technologies. Military
R&D, the US space programme and learning from other markets have also
been crucial to the process of innovation in the energy sector" (Stern 2006:
361)
"Government support through financial contributions, tax credits,
standard setting and market creation is important for effective technology
development, innovation and deployment" (IPCC 2007: 20)
The dramatic price and performance improvements in wind technology occurred
because Denmark guaranteed its market for wind energy in the 1980’s and 90’s.
"Development of the Danish wind and Brazilian biofuels industries each
required sustained government support over decades. The Danish subsidies
totaled $1.3bn, and Danish wind companies now earn more than that each year
(Carbon Trust, 2003). At current oil prices, Brazil may soon similarly recoup its
investment in biofuel technology" (Grubb 2004: 26 – 27). And the Japanese
government saw similar breakthroughs in the price of solar panels as result of its
intervention in the solar market in the 1990’s.
This is the kind of public investment that we desperately need to unleash the
power of private sector investment and innovation. Without it, faith that the
private sector will massively increase investment to deploy clean energy
technologies is unfounded.
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B. The Historical Precedent for an Investment-Centered
Framework
Large public investments into technology innovation and emerging industries
are not new. Most of America’s largest industries have benefited from strategic
public investment in their development: agriculture, aerospace, transport,
biotechnology, and energy. Farm land was granted to early American frontier
farmers, and agriculture has been publicly subsidized since the early 20th
century. Before the Civil War, Abraham Lincoln was best known for his
aggressive advocacy of publicly funded transit projects to allow for the
flourishing of modernization and industry: canals, roads, and later, famously,
railroads. Computer science, aerospace, and the highways were created and
invested in after World War II out of competition with the Soviets and justified
by national security concerns. And today’s highly mature energy markets are the
result of decades of subsidies for coal mining and oil drilling.
Government investments come in a variety of forms, from outright subsidization
to contracting and procurement to various tax deductions, credits, and other
mechanisms aimed at starting, finance, and otherwise supporting industries
deemed important either to national wealth creation, national security, or both.
The U.S. government invested directly in computer science scholarships and
fellowships, prizes, R&D, and microchips. The private sector did not create, and
could not have created, those high-tech markets.
Many successful new technologies cannot become commercially viable without
public investment in the form of government procurement. The Defense
Department's procurement of microchips allowed the technology to penetrate
the market and become cheap and powerful. It's not just microchip companies
like Intel that benefited from these public investments. All high tech firms that
depend on microchips, the Internet, and the computer sciences, from Dell to
Google to Apple, only exist thanks to these "tech-push" strategies. At the same
time, few believe that companies operating in the mature industry of consumer
electronics and information technology, like Dell, Google or Apple should
continue to receive large public investments. These established firms are able to
finance their own innovation, often by developing and selling high end, cuttingedge technologies to niche markets that, over time, become less expensive.
Personal computers and cell phones are often cited examples.
Moreover, past great technological revolutions did not occur via regulatory fiat.
The U.S. did not invent the Internet nor the personal computer by taxing or
regulating typewriters. Nor did the transition to the petroleum economy occur
because we taxed, regulated, or ran out of whale oil. Those revolutions happened
because we invented alternatives that were vastly superior to what they
replaced, and, in remarkably short order, a good deal cheaper. Adding scrubbers
to smokestacks to deal with acid rain, and adding catalytic converters to vehicles,
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are best understood as inexpensive technical fixes — not wholesale technological
revolutions.
In thinking about the history of U.S. technology policy we need to draw
conclusions about policy design not just from its policy outcomes but also about
the political preconditions, since if the past programs had lacked popular or elite
support, they would never have been enacted.
The first lesson is that public investments succeed when they gain and grow
strong support from both elites and the public. Cold War military leaders, for
instance, supported the expansion of airplane technology for security reasons,
which also helped establish elite support for the space program. By the time
President John F. Kennedy announced his intention to put a man on the moon
and bring him safely back to home, which cost over $135 billion in 2006 numbers,
there was already widespread public support for the aerospace industries, with
both job creation and national security being strong drivers of that support.
The second lesson is that these investment-centered policies succeeded politically
because they spoke to core American values, such as ingenuity, creativity,
perseverance, and competition. They were also urgent: the Manhattan project to
build a nuclear bomb was a race against the Nazis, whereas aerospace,
computers, and the Internet were motivated out a race with the Soviets. In the
case of the Cold War space program, the U.S. was literally in a "space race" with
the Soviets. The speed with which the U.S. built the railroads and the interstate
highway system, invested in microchips, put a man on the moon, and built the
Internet helped overcome bureaucratic obstacles to success. National security
and economic development became justifications for policymakers and
administrators to tunnel through various bureaucratic obstacles to success.
Today Americans overwhelmingly view energy independence with equal
urgency, viewing the situation in the Middle East and the price of oil as reasons
to accelerate our transition to a clean energy future. The investment-centered
framework for action on energy independence and global warming should speak
to existing fear but also bridge to feelings of enthusiasm and excitement.
The third lesson is that revolutionary new technologies are polymorphous —
they have multiple benefits. ARPANET was created primarily for
communication during the Cold War, but its development into the Internet
clearly held many more benefits, eventually transforming practically every
aspect of communication. Similarly successful public investment into clean
energy has the potential to create widespread, unanticipated benefits: it can
create jobs, increase national security through energy independence, reduce and
stabilize energy prices by diversifying energy supplies, secure America's place in
global innovation by taking part in the fast-growing clean energy technology
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market, and help to mitigate the effects of global warming by reducing
greenhouse gas emissions.
C. Investment for Tech Innovation to Bring the Cost of Clean
Energy Down
Anyone who read the media coverage of the spring 2007 IPCC report would be
forgiven for having thought that the U.N. had simply reiterated the longstanding consensus that global warming is happening and being caused by
humans. In fact, the 2007 IPCC report went much further, calling not just for
regulation but also for large public investments into clean energy. "Public
benefits of RD&D investments are bigger than the benefits captured by the
private sector," the IPCC report concluded, "justifying government support of
RD&D."
Similarly, the Stern Review on the Economics of Climate Change, the influential
report commissioned by the British government in October 2006, recommends
that governments boost their clean-energy investments from current global levels
of $34 billion (an amount that includes nuclear) to between $68 billion and $170
billion annually. Indeed, whether it’s the recommendations presented by the
IPCC, the Stern Review, Scientific American, or top energy innovation experts,
investment in technology is universally seen as a central element in overcoming
ecological crisis. “Funding for energy research,” Scientific American said in its
lead editorial in a special issue dedicated to clean energy, “must be accorded the
privileged status usually reserved for health care and defense.” In the 2002
Science article by New York University physicist Martin Hoffert and 16 other
leading energy experts that inspired the two of us to co-found the call for a "New
Apollo Project" on energy, Hoffert et. al argued that, "although regulation can
play a role, the fossil fuel greenhouse effect is an energy problem that cannot be
simply regulated away."
Advocates of the regulation-centered approach often claim that the technologies
needed to deal with global warming already exist and just need to be scaled up.
However, dramatic technological innovation in clean energy is needed for a
different reason: to reduce the price of clean energy. Over the last ten years a
consensus has emerged among energy policy experts seeking solutions to global
warming that what’s needed are “disruptive” clean energy technologies that
achieve “non-incremental” breakthroughs in price and performance
(Christensen, 1997; Nemet 2007: 72, citing Hanemann and Farrell, 2006).
New energy sources will not be able to compete with old energy sources
until their production is increased to the point where the price declines to
the levels of coal, natural gas, and oil. And for that to happen, a major
investment will be needed in these new energy sources (Nemet 2007: 72)
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Relying only on a high price for carbon without also making large public
investments in strategic deployment, others warn, “is likely to result in
distortions in other economic sectors and to increase the total costs of climate
policy to society” (Grubb 2004, cited in Neuhoff, 2005: 18). In assessing various
approaches to climate policy, one study concluded that “Investments in climate
friendly technologies can reduce GDP losses to the U.S. by a factor of two or
more" (Richels et al, 2007), a conclusion broadly echoed by the Stern Review, the
IPCC, and other analysts (Stern 2006; IPCC 2007; Edmonds and Smith, 2006;
Grubb 2004; Nemet 2007).
Some have estimated that half of all economic growth is due to technological
change (Jorgenson and Wilcoxen, 1990), while others credit technological
improvements for nearly all economic growth (Victor 1999). Investments in clean
energy technology are particularly promising because they both drive economic
growth and avoid (or reduce the cost of) the most expensive impacts of climate
change. Using an economic model aimed at calculating both the economic costs
of climate change and the costs of mitigation, Yale economist William Nordhaus
estimates that clean energy alternatives to dirty energy have a net value of
roughly $17 trillion in 2005 dollars (Nordhaus, 2007).
D. A Policy that Works Politically
America's national culture today remains far more supportive of a politics and
policy agenda grounded in accelerating the transition to a clean energy economy
than one grounded in reducing pollution emissions. Poll data demonstrates
strong public support for government research programs specifically. Though
Americans do not support higher gasoline or electricity prices to change
behavior, wide majorities also say they would be willing to pay higher gasoline
and electricity prices if the money was sure to go to achieving energy
independence and to clean energy.24 When both the benefits and costs of the
policy initiatives are listed, the support for investment far exceeded the other
options in the poll.
The programs would benefit industry as well. In contrast to a regulationcentered approach that seeks to impose costs on businesses, the investmentcentered framework defines existing industries as potential allies rather than
likely opponents. History provides a useful guide. Railroads were built by
private firms but were entirely paid for by American taxpayers. The first
Transcontinental Railroad, built in the 1860s, is widely considered by historians
to be the greatest American technological feat of the nineteenth century. Nearly
one hundred years later Congress passed and President Dwight D. Eisenhower
signed the National Interstate and Defense Highways Act into law.
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IV. Specific Recommendations
The following specific recommendations are offered as a starting point for
discussion. They are designed to drive home the scale of the problem and to
initiate a dialogue about the best way to proceed. The choices of how much to
invest, where to invest, and how to structure incentives for the private sector, are
complicated and will take considerable thought. What is clear is that a new
approach to the energy challenge is imperative at this point in time.
A. Establish a carbon price consistent with what present
technology can accomplish.
There is much argument presently about what level of carbon reduction
legislation under consideration in Congress should mandate. The grassroots
climate movement demands 80% by 2050. Most legislative proposals in Congress
undershoot that goal substantially. But with present technology, 80% reductions
by 2050, if such a cap was actually enforced, would result in a price for carbon
that would rise to between $600 and $800 per ton. This translates to more than
doubling the real cost of energy, an outcome that is both politically unsustainable
and economically devastating.
For this reason, even Senators Barbara Boxer and Bernie Sanders’ cap and
auction bill, the preferred vehicle of grassroots environmentalists and the Sierra
Club, includes a safety valve provision that would lift the cap if the carbon price
that it established became too expensive.
By contrast, if clean energy technologies do see significant breakthroughs in price
and performance, they will become cost competitive with conventional energy
sources at much lower carbon prices. Either way, expending extraordinary
political resources to establish caps over forty years that will either be
unsustainable without technology breakthroughs or irrelevant with them doesn’t
make a lot of sense. We’re better off establishing a carbon price in the shorter
term that can capture the 20% emissions reductions that can be achieved through
efficiency and shifting to cleaner conventional energy sources, and which can
drive much deeper carbon emissions reductions if and when the price of
alternative energy sources declines and their performance improves.
B. Establish a dedicated source of public funding for clean
energy investment that can rapidly drive down the deployed cost
of clean energy technologies.
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As noted above, whatever theoretical level a carbon cap is set at by Congress,
there will almost certainly be a safety valve that will functionally limit how high
the real price of carbon can rise. While we have no objection to setting caps that
are more restrictive, as long as there is a safety valve the cap is largely irrelevant.
What matters, then, is the maximum carbon price that the safety valve allows.
When arguing for caps that mandate deeper reductions, environmentalists argue
that the cost of complying with those caps will be much less than opponents
suggest. Safety valves call the question on this debate. Given this framework, the
cap is largely symbolic. The safety valve and the price and performance that
clean energy technology can achieve will ultimately determine the level of
reduction achieved.
Given this framework, the key to achieving deep reductions is to drive the real
price and performance of clean energy technology down as rapidly and as far as
possible. As noted above, it is our contention that targeted public investment is
the most likely path to this outcome. Carbon regulation is in fact the most likely
source for this revenue stream. Whether through auctions or carbon taxes,
federal carbon regulation has the potential to generate tens of billions of dollars
annually for public clean energy investments. These investments should include
dramatic increases in funding for basic research in the energy sciences, a ten year
commitment to buy down the price of solar technology and battery and other
energy storage technologies, and a commitment to build a smarter and more
efficient electricity grid that can support energy generation that is both more
distributed and, in many cases, more remote.
C. Ramp Up: Invest $300 Billion In Research, Development, and
Deployment Of Clean Energy Technologies.
There is an emerging consensus among energy experts that investment in energy
research, development, and deployment should be increased to $30 to $50 in the
U.S., and $50 to $170 billion worldwide, per year.25 We are proposing a ten-year,
$300 billion public investment into accelerating the transition to a clean energy
economy. The goal of the program is to bring the price of clean energy down to
the price of coal and natural gas in much of the world as quickly as possible.
However, other values should also be built into the structure of the investment,
such as labor, health, and other environmental standards.
One econometric calculation using input-output models for various sectors of the
economy found that an initial $300 billion public investment would trigger a
$200 billion in private capital into similar investments. (Perryman 2003). This
analysis is backed by various historical investment successes: just as past public
investment efforts into the railroads, the highways, microchips, the Internet,
computer sciences, and the medical biosciences triggered billions in private
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investment, and paid for themselves many times over, so will these new
investments into energy. This pattern remains apparent today in both biofuels
and biosciences.
The econometric analysis described above found that a $300 billion investment
would pay for itself in 10 years both through energy savings, economic growth,
job creation, profit taking, and thus additional revenue for the U.S. Treasury. The
total value of clean energy sources to the global economy was recently estimated
at $17 trillion (Nordhaus 2007). Paying for strategic national security,
infrastructure, agricultural, and energy investments is traditionally done out of
the general budget. The investments we are describing here can be paid for the
same way, or alternatively, through revenues generated by auctioning emissions
permits in a limited cap and trade system.
D. Insulate federal clean energy investments from pork-barrel
politics.
There are many models for doing this, from the Pentagon's (Defense Advanced
Research Projects Agency) DARPA, to the military base closing commission, to
the creation of public corporations and industry boards. Some of the best
thinking on this has been done by MIT's John Deutsch, who served as DOE
Director of Energy Research under President Carter and left the experience
concluding that what's needed is both more money for commercialization and
new institutions, such as a public Energy Technology Corporation:
Successful government action requires both more resources and a
willingness to change the conventional approach to government’s support
for energy technology commercialization… The ETC would select and
manage technology demonstration projects without favoring particular
fuels or supply over end use. [T]he ETC would be composed of
independent individuals with experience and knowledge about future
market needs, industry capability, and best use of indirect financial
incentives – loans, loan guarantees, production tax credits, and guaranteed
purchase – in order to run a project on as commercial a basis as possible.
The ETC would not be subject to federal procurement rules, and if financed
with a single appropriation, would be somewhat insulated from
congressional and special interest pressure (Deutsch 2005: 16).
E. Buy down the price of solar like we did with microchips
There is no silver bullet when it comes to clean energy alternatives. For that
reason, the Energy Technology Council must make investments in a wide range
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of low to zero emissions technologies, including wind, geothermal, efficiency,
carbon capture and storage, nuclear, solar, and advanced energy technologies.
However, this does not mean that all clean energy sources are created equal.
Solar has special potential, and merits special attention. Solar panels, like
microchips, have their own kind of "Moore's Law": the price of solar comes down
roughly 20 percent every time production capacity is doubled. Just as the
Department of Defense guaranteed the nascent market for silicon microchips in
the 1960s, bringing the price down from $1,000 to $20 per chip in just a few years,
the Pentagon should do the same with silicon solar panels. Experts say that for a
total cost of $50 to $200 billion, we could bring solar panels down to the price of
natural gas or even goal. (Grubb 2004; Neuhoff 2005; van der Zwaan, 2004). It
might be the best $200 billion ever spent by the U.S. military.
One long-standing obstacle has been the sense among homeowners that they will
not get the full value of their solar panel investment if they move before they pay
off the panels. Solar installation firms have so far sought to allay this concern by
pointing to evidence that home value increases with solar panels, and by offering
to move the systems to new homes. The solution might be a Homeowners Power
Act that would consist of a) a revolving fund that would pays the full cost for
homeowners to install a home solar system, b) full net metering, allowing
homeowners to sell power back to the grid at peak prices, and c) a mechanism
for solar homeowners to pay the equivalent of their monthly electric bill back
into the revolving fund.
F. Play the Field: Make Strategic Investments in Key Energy
Sectors and Technologies
Energy policy experts emphasize that there are no silver bullets in energy.
Indeed, meeting our present and future energy needs will require greater energy
diversity. Experts emphasize the need for a "silver buckshot" approach that
consists of investing in innovation, including deployment, of many new energy
technologies (Grubb; Socolow and Pacala; Nemet 2007; Neuhoff; Edmonds 2007).
Indeed, given the need to reconcile increased consumption with lower emissions,
the effort must be to making many different kinds of investments into many
different sources of energy. Anyone thus hoping to develop a new energy
agenda must constantly grapple with complexity with an open mind to new
technological possibilities, and its myriad of implications. Delving into each
specific renewable technology is beyond the scope of this essay, but targeted
investments in solar, wind, geothermal, and ocean energy, as well as efficiency
mechanisms, carbon capture and storage, nuclear technology, and biofuels will
be important and prudent steps for the near future. Additionally, the nation
desperately needs an upgraded infrastructure of batteries and transmission lines
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to deliver clean energy to the grid; those technologies should receive substantial
public support as well.
G. Create a framework for global carbon regulation tied to living
standards.
China, despite much criticism from environmentalists, has already done more to
mitigate the environmental impacts of its development than has any developing
nation in history. The establishment of nascent carbon prices in developing
countries should be based upon benchmarks associated with improving living
standards in those countries, the attainment of real reductions in carbon
emissions in the developed world, and major progress in bringing down the
costs of appropriate clean energy technologies. As economic development
progresses, living standards improve, and the costs of clean energy technologies
come down dramatically, modest carbon prices in the developing world will
become both tenable and sufficient to drive the transition to low carbon
alternatives.
V. Conclusion
The energy challenge has been framed thus far as a forced choice between
poverty and environmental ruin. With a choice like that, it is no surprise that the
world has failed to make real strides towards a cleaner energy future. Global
warming and energy independence are new challenges that require new ways of
thinking. The outmoded regulation-centered approach, which seeks to impose
costs on polluters, is completely inadequate to deal with this new challenge.
Instead, America should take the bold step of cutting the Gordian Knot by
pouring public funds into new technologies. Unleashing the creativity of our
greatest minds on this problem is likely to produce brilliant results not only for
the environment, but for our economy, national security, and status in the world.
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Notes
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cohesion.rice.edu/NaturalSciences/Smalley/emplibrary/120204%20MRS%20Bo
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2 Smalley, supra note 1, at 414.
3 Rob Collier, “A Warming World: China about to Pass U.S. as World’s Top
Generator of Greenhouse Gases,” San Francisco Chronicle, May 5, 2007.
4 IEA, Energy Technology Perspectives, 2006
5 EIA, “International Energy Outlook 2007,” Chapter 7.
6 EIA, Annual Energy Outlook 2006; China will amount to 68.2% of the
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“International Energy Outlook 2007,” EIA, May 2007: Table A13.
7 Analysis done by Mark Clayton, "New coal plants bury Kyoto," Christian
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8 Richard Balzhiser, “The Chinese Energy Outlook,” National Academy of
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“Pollution from Chinese Coal Casts a Global Shadow,” New York Times, June 11,
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9 “International Energy Outlook 2007,” EIA, May 2007: Table A10. China will
amount to 68.2% of the developing world and 42.6% of the world’s total
emissions from coal. “International Energy Outlook 2007,” EIA, May 2007: Table
A13.
10 According to IEA, 2050 annual global emissions will be 58,022 million CO2
compared to 24,532 Mt CO2 in 2003. To calculate cumulative emissions during
this period, we assume that the average annual increase between 2003 and 2050
is constant.
11 Assume BAU United States contributes 15% of global emissions in 2050, or
8,700 Mt CO2 (IEA) compared to 5,813 Mt CO2 in 2003 (EIA)
12 See Massachusetts v. EPA, 127 S. Ct. 1438, 1460 (2007).
13 Andy Revkin, "From Ozone Success, a Potential Climate Model," September 18,
2007.
1
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“Estimates put iPhone sales at over 700,000: Device sold out in most stores by
Monday afternoon,” Seattle Post, July 2nd
15 See, for instance, David Hawkins, "Passionate But Confused," Grist.org,
September 28, 2007. http://gristmill.grist.org/story/2007/9/28/11254/2676
16 United Nations Intergovernmental Panel on Climate Change, "Summary for
Policymakers," April 30 – May 4, 2007, p. 9.
17
William Nordhaus, A Question of Balance: Weighing the Options on Global
Warming Policies, (New Haven, CT: Yale University Press) 2008.
18 Scolow and Pacala
19 Katherine Hunt, "Prop. 87 divides Californians along party lines," San
Francisco Chronicle, November 3, 2006. "According to the Field Poll released on
Nov. 2, the No side has opened up a slim four percentage point lead at 44% to
40%, a reversal of the Oct. 4 poll when the Yes side was slightly favored, at 44%
to 41%. In the Aug. 2 poll, Prop. 87 led by a five to three margin, with 52% in
favor and only 31% against."
20 Focus Groups conducted by American Environics for Earthjustice, December
2006.
21 The Pew Center is funded by the same foundation that invests tens of millions
annually into environmental causes. A 2001 New York Times article named Pew as
the largest grant maker to environmental causes: $51 million in environmental
causes in 2000 alone. Douglas Jehl, “Charity Is New Force in Environmental
Fight,” New York Times, June 28, 2001.
22 Pew Research Center for People and the Press, “Partisanship Drives Opinion:
Little Consensus on Global Warming,” July 12, 2006, accessible at www.peoplepress.org.
23 Pew Research Center for People and the Press, “Global Warming: A Divide on
Causes and Solutions: Public Views Unchanged by Unusual Weather,” January
24, 2007.
24 An April 2007 CBS News/New York Times poll that showed 64 percent of
Americans would be willing “to pay higher taxes on gasoline and other fuels if
the money was used for research into renewable sources like solar and wind
energy.” A Gallup poll taken at the same time found that when asked a battery
of questions about what the government should do to address global warming,
65 percent of Americans said the government should be “starting a major
research effort costing up to $30 billion per year to develop new sources of
energy,” the highest scoring item in the battery. An August 2006 Los Angeles
Times/Bloomberg poll asked Americans to identify the “best way for the US to
reduce reliance on foreign oil.” A majority, 52 percent, cited “having the
government invest in alternative energy sources, such as wind and solar power,”
the top choice by a two-to-one margin. The highest levels of support in a March
2007 Gallup poll were for spending government money on the new energy
sources. Proposals for “spending more government money on developing solar
and wind power” was supported by 81 percent in 2007, up from 77 percent in
2006. Gallup found that “starting a major research effort costing up to $30 billion
14
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per year to develop new sources of energy” was supported by 65 percent of
respondents, the largest level of support of the items tested.
25 While there is a strong consensus that public investment in energy R&D and
deployment should increase, the amount recommended varies from a doubling
or tripling (Holdren 2006) to a fourfold increase (Davis and Owens 2003; Schock
et al 1999). Nemet (2007) argues that all of these estimates are too low, pointing
out that one estimate of impacts of a fourfold increase (Schock et al. 1999)
assumes a mean climate stabilization target at between 650 and 750 ppm CO2,
and incorporates a 35 percent probability that no stabilization will be required,
which would have CO2 levels reaching 1000 ppm by the end of the century.
Nemet reconfigured the Schock et al. model to reach a target of 550-ppm atmospheric
level of carbon, 100 ppm below what IPCC and Stern conclude would lead to drastic and
irreversible consequences, and finds that the optimal R&D invesment would be between
$11 and $32 billion annually in 2005 dollars, or roughly 5-10 times more than current
energy R&D. That investment level would also act as “insurance” against electricity
blackouts, oil price shocks, and air pollution (Nemet 2007: 54). This would be a large
increase, but Nemet points out that such an increase would at 2.6% of total energy
revenues, compared with pharmaceuticals, software, and computer industries, which
invest 5 – 15 percent of their revenues annually (Nemet 2007: 58).
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