This essay puts forward the argument that without several revolutionary ‘black swan’ innovations, technological advances will need to be supported by strategic planning and a restructured energy market to tackle climate change. The current market ‘lock in’ of high-carbon energies and high cost of low-carbon technologies mean that the potential for new technologies to gain widespread adoption are highly restricted.
by Jack Hamilton, 24th March, 2012
‘Environmentalists are fiddling while Rome burns’. This is the claim of Vinod Khosla, the founder of Khosla Ventures, a venture-capital firm that is currently investing over $1 billion into low-carbon technologies in the hope that a ‘black swan’ innovation will be a key to tackling climate change. In Khosla’s estimations the green technologies of electric cars, wind turbines and smart grids will not be enough and rather there needs to be a ‘1000%’ change if the whole world is to enjoy the energy-rich lifestyle of the Western world. Until the green technologies are available at a price which is affordable in the developing world, ‘everything is a toy’[i]. Others maintain that existing technology will be sufficient if market factors facilitate its widespread adoption. Joseph Romm, the editor of Climate Progress, argues that the way to tackle climate change is through the ‘accelerated deployment of existing technologies’ in order to move down the cost curve more rapidly than a breakthrough[ii]. These two opposing views set up two fundamental questions: are advances in technology alone able to tackle climate change and if this technology exists why has it not been adopted?
How can advances in technology tackle climate change?
Stop Falling Through the Grid
One example is the current inefficiency in the electricity field. Chris Huhne, former Secretary of State for Energy and Climate Change in the UK, stated that there will be a huge increase in the demand for electricity in the coming years. He claims that it could double by 2050 and that this demand needs to be met with an affordable low-carbon energy supply. Despite this he recognises that one fifth of the UK’s generating capacity will be lost over the next ten years due to aging power plants and the inefficient transport of electricity over long distances and relents that ‘our current energy system is not up to the job’[iii].
A new generation of demand-side products could help to lessen the dependence on fossil fuels. An example of this would be the ‘smart grid’. This new grid would be a massive two-way network that is flexible and secure. It would help to reduce the cost of grid failures and power outages as well as reducing the 20% of energy that is wasted by being transmitted through the old clogged arteries of copper wiring[iv]. The impact of real-time pricing has been shown to lower energy consumption at household levels as customers change their load. If they don’t need it, consumers are potentially helping the utility to avoid building a whole power plant by shifting their loads[v].
Putting Policy First
The dominant approach towards emissions reductions in the US transport sector has been to rely on technology to reduce emissions from personal transport. This is no minor issue. Transport in the US is responsible for around one third of the nation’s GHG emissions or around 8% of global emissions[vi].
Technology has failed to reduce carbon emissions as consumer choice remains firmly rooted in the high-emission options. Aggressive anti-mitigation lobbies composed of producers and marketers of energy-intensive goods and a weak polity governed by short-term choices means that the electorate remain largely misinformed about global environmental security[vii]. While social change can help to overcome the political barriers of climate policy the exigent nature of climate change may require a more rapid solution.
We Have the Technology: Blaming the Market Lock-In
Technologies could certainly help to reduce emissions and increase energy security in the areas in which they are implemented but are they enough to tackle climate change alone? It is not only Mr. Khosla who disputes their potential for widespread implementation. Many of the technologies that are put forward as solutions to climate change already exist.
Bjorn Lomborg claims that ‘technology isn’t the problem in the sense that if cost didn’t matter, then we can do it today. We could do it with 1950s technology’[viii]. This idea is backed up by auditors such as KPMG who point to the energy market as the catalyst for change rather than technological innovation. The firm states that the only factor required to make solar energy affordable is an economy of scale: ‘Even in a relatively small, cloudy and rainy country such as the Netherlands, there is an enormous potential for solar panels. If this entire potential were utilised, solar energy could provide three-quarters of the Netherlands’ electricity needs’[ix]. The argument is that market forces will allow for cost reductions to be achieved in low-carbon technology meaning that grid parity for energy can be achieved.
If market forces are the solution to adopting low-carbon technologies, why has it failed so far in scaling up the production of these technologies to reduce the price? The reasons for this are the current market ‘lock in’ of conventional energies, the nature of the short term contracts involved and fluctuations in funding detracting future investment. These problems are compounded by the predatory practices of energy firms and the desire of industries to stick to their core missions to avoid financial risks.
Securing Market Penetration: Private vs Public
Market penetration by new technologies can take anywhere from fewer than ten years to more than seventy years for energy projects[x]. Incumbent technology systems act to ‘lock in’ conventional technologies despite the presence of superior substitutes. The utility industry in question invests less than 1% of its revenue in R&D putting it far behind most other industrial sectors. Utilities embrace change in a very slow and careful manner. In the words of Ron Pernick, ‘if utility were a lover, it would be better known for its dependability than its passion’[xi].
The current polices on energy support this ‘lock in’ as many are designed to cope with the rising demand for electricity rather than looming spectre of climate change. These policies support the development of new coal and gas power plants rather than promoting energy efficiency. To combat this there is a need to decouple profits from generation and include externalities to overcome this perverse incentive for utilities. Inconsistencies in policies have also plagued the implementation of efficient energy technologies. Unlike communications, which was deregulated in the US with a single pen stroke in 1984, generation and distribution have been deregulated in an uneven and jerky fashion[xii].
The market ‘lock in’ of conventional energies is also due to the impact that a paradigm shift may have on a private innovator. If private research was to create a paradigm-changing technological breakthrough there is the potential that the market design may be changed to benefit the public rather than the private innovator. This would reduce the incentive to fund R&D privately. It is therefore accepted that state support is required to achieve the optimum R&D level. Despite this, the investment in R&D remains low in most cases. The US devotes 0.5% of sales revenue in the electricity sector to R&D compared with 3.3% in the car industry and 15% in pharmaceuticals[xiii].
Relying purely on the market is clearly not the best way to ensure that paradigm-changing technologies are implemented and adopted in any widespread manner that may combat climate change. While Lomborg is a firm advocate of market forces providing the solution to climate change, it appears as if it complies with his disdainful remark that the current trend is ‘fashionality over rationality’[xiv]. The current fashion is to stick to the status quo for large utilities who do not wish to have to overhaul their systems. Technological development is therefore restricted by the pre-existing global system of investment cycles. The next twenty years will see an unprecedented increase in energy investment as the developed nations replace the power plants that were built in the 1960s and 1970s and the rapidly industrialising economies accelerate their construction of energy systems[xv]. A failure to provide an alternative to the conventional forms of energy will mean that the world will continue to be ‘locked in’ to carbon intensive development. This may be too late to tackle climate change.
Changing the Market: Including the Externalities
The market is clearly inadequate to push the technological revolution forwards by itself due to the ‘lock in’ of conventional energies. For technologies to provide an alternative to climate change the market must be altered. This can be achieved through strategic planning to include the negative externalities of high carbon energies through command and control methods and to incentivise the use of low carbon technologies through economic imperatives. The policies that are currently in place are insufficient to tackle climate change by themselves and so it is important to first look at the existing limitations.
In the current market, it is almost guaranteed that the regulations for low-carbon energies will not have been designed with the new forms of energy in mind. Paul Gipe describes an example in which wind turbines were classed as power stations and therefore were required to withstand an earthquake without experiencing a total mechanical failure[xvi]. It is justified that a power station at ground level should not topple but it is quite different when the structure is made of fifty tonnes of steel atop an eighty metre high tower. The consequences of an unmanned tower falling in a field are substantially different to the collapse of a nuclear power station full of workers. These current polices help to exacerbate the ‘lock in’ of conventional energy forms and thereby prevent the development and adoption of low-carbon technologies that would be more adept at tackling climate change.
The problem of the ‘lock in’ continues on the political stage through the power of lobbies. German successes in creating a renewable energy market were supported by powerful lobbying coalitions with links to both industry and political parties. Cross-reference this to the lobbies for conventional supplies of energy in the UK which proved to be too strong for the market to overcome the ‘lock in’ at any great scale[xvii]. The problems of the ‘lock in’ are further strengthened in the policy sector by inconsistent allocations of subsidies which dissuade potential investors. Unlike the consistent incentives for carbon-based technologies, policies encouraging renewables are changed frequently which arrests widespread adoption. The recent slashing of fit-in-tariff incentives available to solar installations in the UK provides a grave reminder of this[xviii]. This announcement arrived only one week after the Secretary of State for Energy and Climate Change had delivered a speech on the importance of Britain’s low-carbon future[xix].
Political Life-cycles vs Energy Life-cycles
Stability is a key issue in supporting low-carbon technology as the projects generally have a long lifetime. The problem is that most of the investment and industrial activity needs to take place at the start of their lifetimes. A parliamentary term can last for around four years. Bearing this in mind a vision of two terms into the future is seen as guesswork while looking twenty years into the future is merely a problem for another administration. Such short-termism needs to be overcome to tackle a problem such as climate change as new technologies will struggle to gain R&D investment or gain widespread dissemination while ostracised by myopia. If the technology in itself it insufficient thus far and the ‘free market’ is obstructed by ‘lock ins’ the solution can perhaps be found in governmental strategic planning.
The rate of innovation and the diffusion of new technologies is impacted upon by market conditions such as the scale and certainty of the market, the size of R&D investment and the rate of turnover in each sector. The balance of these factors determines where the barriers to the diffusion of innovation exist. UNFCCC frameworks have the potential to restructure the market to circumvent these barriers for low-carbon technologies. Setting international standards could help to restructure the markets away from the current ‘lock in’. A higher fuel tax may be largely after the fact. People have already ‘bought in’ to the current system with large amounts of user technology in their houses and vehicles. Fuel costs would have to be increased significantly if consumers were to reassess using their current facilities at all as the cost of fuel and electricity is usually a minor item in an overall budget[xx]. Tradable emissions permit systems such as REGGI and EU-ETS have shown some regional successes in incentivising the lowering of emissions which is facilitating movement towards low-carbon technologies. However, this movement is painfully slow and without one of Khosla’s ‘black swans’ the technologies are beyond the budgets of developing countries.
Is it already too late?
As the competition between current fuels and new technologies intensifies, the role and nature of energy is going to change and so is society. However, principle-agent problem means that by the time the shift in society changes, it may already be too late for many parts of the world due to the impact of climate change.
Out of €1.3 billion worth of projects under the EU’s Framework 6 research programme with Chinese participation, only €35 million went to Chinese researchers[xxi]. Collaboration on public R&D between developed nations is little better despite various cooperative agreements at the IEA. China estimates that 85% of its patents on high tech economic sectors are owned by companies in developed countries[xxii] and in the case of IPR some companies have strategically withheld technologies from emerging markets to maximise profits[xxiii]. This concentration of innovative capacity in developed countries does not reflect the diverse adaptation that the technology needs to meet the threat of climate change. Public technology transfer has generally taken a narrow approach of limited funding and capacity building with the private sector focusing on balancing market access with licensing to local industries. These approaches are unlikely to facilitate the speed at which technology needs to be transferred globally, especially to those without rapidly growing markets. For technology to combat climate change strong incentives must be provided for developing country innovation, cooperation and sharing rather than the narrow technology transfers that currently exist.
By 2050, eight billion of the nine billion people projected to be living on the Earth will reside in the developing world[xxiv]. For this reason developing countries will need to be at the heart of any process that redesigns the global ideal. Obtaining the necessary reduction in emissions requires developing nations to commit to binding national targets as well. However, for developing nations to give this commitment the developed world must first prove that low carbon, high economic growth is possible and that low carbon technologies can be affordable and available.
Marginal changes would not be enough to stabilise temperatures so that the most substantial risks from climate change can be reduced according to Dimitri Zenghelis, an energy expert at the think-tank, Chatham House[xxv]. Instead it requires a radically transformed policy path through strategic planning as well as technological revolution. Delayed actions and old technologies can only exacerbate the current problems while reducing growth and curtailing the future market choice. Khosla is correct in his assertion that the current technologies are not sufficient but unless he unfurls several revolutionary ‘black swans’ it will take more than mere advances in technology to tackle climate change.
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[i] ‘Betting on Green’, The Economist Technology Quarterly, 12 March 2011.
[ii] Joseph Romm, Mark Levine, Marilyn Brown and Eric Petersen, ‘A Road Map for U.S. Carbon Reductions’, Science, 279 (5351: 1998), pp. 669-670.
[iii] ‘Huhne: Renewable Energy Key to UKs Energy Future’ accessed at http://www.renewableenergyfocus.com/view/16409/huhne-renewable-energy-key-to-uks-energy-future/ on 18/03/2011 at 10:13.
[iv] Ron Pernick and Clint Wilder, The Clean Tech Revolution, HarperCollins (New York: 2008), p. 176.
[v] Peter Fox-Penner, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, Island Press (Washington D.C.: 2010), p. 40.
[vi] Sudhir Chella Rajan, ‘Climate Change Dilemma: Technology, Social Change or Both? An Examination of Long-Term Transport Policy Choices in the United States’, Energy Policy, 34 (2006), p. 669.
[vii] Ibid., p. 664.
[viii] ‘Solving Warming is About Innovation’, Lateline, ABC, accessed at http://www.abc.net.au/lateline/content/2011/s3153560.htm on 11/03/2011 at 09:04
[ix] KPMG, ‘Solar Energy: From perennial promise to competitive alternative’, Report 2562, KPMG Netherlands (August 1999).
[x] Miguel Mendonca, David Jacobs and Benjamin Sovacool, Powering the Green Economy. The Feed-in Tariff Handbook, Earthscan (London, 2009), p. 129.
[xi] Pernick and Wilder, The Green Tech Revolution, p. 180.
[xii] Ibid., p. 180.
[xiii] Karsten Neuhoff, ‘Large-Scale Deployment of Renewables for Electricity Generation’ in Dieter Helm, The New Energy Paradigm, Oxford University Press (Oxford, 2007), p. 312.
[xiv] ‘An Evening with Bjorn Lomborg and Dimitri Zenghelis’, London School of Economics Lecture, February 18, 2011, accessed at http://www2.lse.ac.uk/newsAndMedia/videoAndAudio/publicEventsVideos/publicEventsVideosPrevious.aspx, on 05 March 2011 at 10:11.
[xv] Shane Timlinson, Pelin Zorlu and Claire Langley, ‘Innovation and Technology Transfer: Framework for a Global Climate Deal’, E3G, E3G (London: November 2008), p. 5.
[xvi] Paul Gipe quoted in Karl Mallon, Renewable Energy Policy and Politics: A Handbook for Decision Making, Earthscan (London, 2006), p. 27.
[xvii] Barbara Praetorius, Mari Martiskainen, Raphael Sauter and Jim Watson, ‘Technological Innovation Systems for Microgeneration in the UK and Germany – A Functional Analysis’, Technology Analysis and Strategic Management, 22(6: 2010), pp. 745-764, p. 761.
[xviii] ‘Shell-shocked solar industry vows to fight government incentive cuts’, Business Green, accessed at http://www.businessgreen.com/bg/news/2035406/shell-shocked-solar-industry-vows-fight-government-incentive-cuts on 20/03/2011 at 12:51
[xix] ‘Energy Secretary Chris Huhne addresses CentreForum on the UK’s energy future’, CentreForum, accessed at http://www.centreforum.org/index.php?option=com_content&view=article&id=241:chris-huhne-blueprint&catid=35:recent-events&Itemid=59 on 20/03/2011 at 12:55
[xx] Walt Patterson, ‘Managing Energy: Rethinking the Fundamentals. Working Paper Three. Managing Energy Technology’, Chatham House, University of Sussex (Sussex: 2010).
[xxi]Timlinson, Zorlu and Langley, ‘Innovation and Technology Transfer’, p. 7.
[xxii] Jian Liu, ‘Innovation and Technology Transfer’, International Cooperation Department, State Intellectual Property Office of PR China (Geneva: 2008), accessed at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=130169 on 18/03/2011 at 13:15.
[xxiii] Timlinson, Zorlu and Langley, ‘Innovation and Technology Transfer’, p. 11.
[xxiv] Dimitri Zenghelis and Nicholas Stern, ‘Principles for a Global Deal for Limiting the Risks from Climate Change’, Environ Resource Econ, 43 (2009), p. 308.
[xxv] Ibid., pp. 307-311.