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The Future of Global Climate Policy: Clean Energy Innovation Imperative (Part 3)

By Matthew Stepp, Clean Energy Policy Analyst at the Information Technology and Innovation Foundation and Jesse Jenkins, Director of Climate and Energy Policy at the Breakthrough Institute 

It is time to take stock of our current climate trajectory, and consider what it means for climate policy. In Part 1 of this week long series, we argued that our current climate trajectory means we must 1) redouble efforts to reduce CO2 emissions as quickly as possible, and 2) we must proactively build resilience to the uncertain impacts of a changing climate. Part 2 examined why voluntary economic contraction is a not a viable strategy for reducing emissions “as quickly as possible.” Part 3 explains why implementing a robust clean energy innovation strategy is the key way to making clean energy cheaper than fossil fuels, thus enable rapid adoption of low-carbon energy sources and drastically reducing CO2 as quickly as possible.

As we wrote in Part 1 and Part 2 of this series, our current climate trajectory and global political economy dictates that the only way we can limit potentially dangerous climate change impacts, above the dangerous impacts we’re already locked into, is to redouble efforts to reduce global CO2 emissions as quickly as possible. To rapidly decarbonize the economy requires greatly accelerating the replacement of fossil fuels with low or zero-carbon clean energy substitutes. Implementing the right strategies to do so raises numerous stark policy choices and issues.

The most fundamental issue is that energy is largely a fungible commodity – the electricity coming out of your wall socket doesn’t have any immediately tangible differences whether it comes from a coal plant or a wind farm. The only immediate difference is cost. This key reality means that the rate of adoption for new clean energy technologies is largely moderated by two principal levers:

(1) The level of public tolerance for paying for the cost of cleaner energy in the form ofhigher energy costs, subsidies, or reduced economic welfare; and

(2) The cost competitiveness of clean energy compared to fossil fuels.

To be clear, we’re not ignoring systemic moderating forces like regulatory and infrastructure barriers to clean energy. These barriers to adoption must be addressed in turn. But here we’re simply stating that as a matter of first principle, when choosing an energy technology, cost is the most immediately important factor.

As it stands today, clean energy is, by and large, more expensive than fossil fuels. (EIA analysis here, DOE QTR overview pg. 107-108, and EPRI technology assessment table 1-2 for starters). On their own, energy consumers and utilities will predominately choose lower cost fossil fuel technologies over more expensive clean energy substitutes. So accelerating the deployment of today’s clean energy technologies is moderated by the public’s tolerance for higher energy costs.

Determining how much publics are willing to pay for cleaner energy is a difficult social science question. But a survey of the literature by Evan Johnson and Gregory Nemet of the University of Wisconsin-Madison published last year found that households are willing to pay between $22 and $3,624 a year in response to climate policy. A wide range, to be sure. However, after eliminating the outliers, the majority of studies found that publics are willing to pay somewhere in the range of $100 to $300 per year extra for cleaner energy. This suggests that the public has a pretty low tolerance – on the order of a few extra dollars a month – for higher costs related to climate policies. While public tolerance for higher energy prices may vary in different political economies, it is always fairly limited.

We can see this basic dynamic play out all across the world. We are probably all familiar with a pretty recent example: the proposed national cap-and-trade legislation defeated in the Senate in the summer of 2010, which, according to its advocates, would have increased consumers’ energy costs by about the cost of one postage stamp per day. Yet the legislation ultimately met with defeat, despite this very limited projected impact on energy prices. In a more positive example, Australia recently enacted a national carbon tax. But the increase in energy costs amounts to about six cents per gallon of gasoline, once again illustrating the constraints political economies place on efforts to substantially raise energy costs to pay for or incentivize clean energy alternatives.

We can also see this limited tolerance in action through the numerous mandates requiring utilities to adopt renewable energy alternatives. For instance, many renewable portfolio standards (RPS policies) includes one or more “cost containment” provisions limiting the ultimate cost of compliance to ensure they do not expend the limited public tolerance for higher energy prices. In Oregon and Washington, for example, state RPS policies limit the cost of compliance to a 4 percent increase over an alternative, fossil fueled energy mix. The federal RPS included in the American Clean Energy Leadership Act, an energy bill considered in the Senate in 2009, would have implemented a similar 4 percent cap on total retail rate impacts. It also offered an alternative compliance payment of 2.1 cents per kilowatt-hour, which utilities could pay in lieu of purchasing or generating renewable electricity, effectively limiting the incremental cost of renewables above fossil fuels to less than 2.1 cents per kWh.

To make matters worse, we can expect this public tolerance to be even lower in emerging economies, where the vast majority of energy demand and emissions growth will occur in the coming decades. The millions simply struggling to gain access to energy will surely go for the least cost option as their ability to take on additional costs will be small to non-existent. Along the same lines, the governments of emerging economies won’t also be able to sustain high public subsidies for clean technologies, as some Western European nations have.

In response to this reality, an intense and robust climate communications effort may indeed help by incrementally increasing the public’s tolerance for higher energy prices in the name of climate mitigation. But should we expect these PR efforts to double or triple Americans’ apparently low tolerance? How about in developing nations that have trouble affording not only cheaper fossil energy, but medicine and food?

We should clearly pursue efforts to increase the public’s willingness to accept the costs associated with today’s investments in clean energy alternatives wherever and whenever such strategies prove effective. But we cannot expect public willingness to pay for climate mitigation or cleaner energy to ever be infinite, and we must plan for success within the constraints this entails.

With that in mind, we now turn to the second lever at our disposal: making clean energy cost competitive with fossil fuels.

In the near-term, we can make clean energy cost competitive simply through subsidies, which artificially lower the cost of cleaner energy. For instance, New Jersey’s Renewable Energy Credits for solar have been on the order of $300 to $700 per MWh (or an order of magnitude above retail rates). But this causes an immediate issue, as subsidies are a public cost to consumers (albeit a less transparent cost than higher utility bills). If subsidy efforts succeed in driving wide-spread adoption, the cost of subsidies will concurrently increase unless the real costs of clean energy fall and subsidies fall along with it. For example, if the federal wind PTC stays constant at 2.2 cents/kWh in 2011 dollars and wind installations grow to provide 20 percent of U.S. electricity in 2030 (the stated goal of the wind industry), the public cost of the PTC would total more than $20 billion annually (assuming EIA estimates for 2030 electricity demand). That would make wind subsidies one of the largest single incentives across all government.

In short, as subsidized clean energy deployment mounts, public cost will rise, eventually to unsustainable levels – unless the unsubsidized costs of clean energy steadily fall alongside deployment.

That means we have to invest every public dollar wisely and use our limited public tolerance for subsidy or higher energy prices to maximum effect. The best way to do that is to invest in ways that drive down the real, unsubsidized cost of clean energy as rapidly as possible. In other words, we need to leverage each public dollar we spend to make clean energy cheap.

This brings up a key point because in many cases, we simply don’t have all the cheap, clean technologies we need. In fact, we need much better technologies than what we have now, especially if we expect to deploy them worldwide. Fortunately history shows us how to do this: through a more diverse and targeted set of policy tools aimed at supporting a robust and aggressive energy innovation system.

In fact, it easy to see how a well functioning innovation system can yield far more progress towards rapid clean energy deployment than communications efforts, as important as the latter is.  Take a look at utility-scale solar PV. According to the World Resources Institute (WRI), solar PV has dropped in cost by 90 percent in the last 30 years. If we had tried to accelerate decarbonization by deploying 1980s solar technology, it would have cost a staggering $53.5 trillion to scale up solar to provide just 11 percent of total global electricity supply, according to WRI’s numbers. Yet at dramatically reduced 2008 solar costs, that figure drops to by more than a factor of six, to $8.46 trillion. The power of innovation doesn’t stop there. According to WRI, if further innovation achieves the cost targets set by the US Department of Energy’s SunShot initiative, the cost of solar scale-up would be fall again by more than a factor of five.

It should be clear that innovation is essential to dramatically reduce the public costs required to drive the rapid adoption of clean energy. At the same time, it is difficult to imagine even the most effective climate communications efforts boosting public tolerance for higher energy costs by a factor of five or ten. While climate communication efforts are important, they cannot supplant a robust innovation effort as the central lever to accelerate clean energy adoption.

Unfortunately, efforts to build consensus around an innovation-centered approach to climate mitigation have been marred by at least two major mischaracterizations that have muddled the debate.

First, counter to what many folks believe innovation does not mean deployment with a little bit of R&D sprinkled in. A “deploy, deploy, deploy, R&D, deploy, deploy, deploy” approach either ignores the need to drive cost reductions in clean energy alternatives or assumes that the lion’s share of clean energy cost reductions will come via scale-up (while ignoring the public’s low tolerance for subsidies). This is fundamentally inaccurate. The large and growing literature on what is really behind “learning curves” – the complex processes of research, learning, new technology adoption, and supply chain improvements that typical lead to falling costs alongside expanding technology adoption – puts to lie the idea that deployment alone is all we need to drive down costs. What lies behind significant declines in the price of solar PV over the last thirty years, for example? Equal parts ongoing R&D and economies of scale, according to research from Univ. of Wisconsin-Madison’s Dr. Gregory Nemet. In other words, you need both robust R&D system and aligned incentives for market adoption that reward innovators who adopt cutting edge methods and continue to cut costs.

Second, innovation does not mean R&D alone. While public investments in R&D are an absolutely necessary part of a clean energy innovation approach, it is but one piece of the puzzle, something innovation experts have always been quite clear about.

The bulwark of an effective energy innovation system is the aggressive pursuit of new products, new services, performance improvements and cost declines across each stage of innovation and technology maturation. It includes major support for R&D for both radical new clean technologies like vehicle batteries that travel 500 miles or more on a single charge as well as includes steady incremental improvements in existing designs like on-shore wind turbines. The ecosystem supports the accelerated commercialization and demonstration of new clean technologies so potential breakthrough ideas don’t collect dust on a laboratory’s shelf. And the ecosystem includes deployment policies that should be explicitly designed to ensure that every dollar invested provides the best incentives for further innovation and cost declines. Deployment policies must play a key role in creating markets for clean energy, but we must ensure that those markets have the right structure and offer the right incentives to demand and reward continual improvements in the price and performance of clean technologies.

The ultimate goal of this system is to use limited public investments to support a variety of clean energy technologies on a path to subsidy independence and true cost competitiveness with fossil fuels, as quickly as possible. It ensures we not only smartly deploy clean technologies today, but make these technologies affordable enough for the rapid, widespread, global adoption needed to drastically cut emissions.

As it stands, America’s clean energy innovation ecosystem has significant weaknesses and is not running at top gear. The goal of climate advocates should be to strengthen the innovation ecosystem so it can develop cheaper options in a small fraction of the time it took solar PV to decrease in cost. If we take our climate outlook seriously, we have to focus just as seriously on efforts to strengthen and support the energy innovation ecosystem to make clean energy cheap. It’s our only realistic way to limit any further potentially dangerous climate change than what we are already locked ourselves into.

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