The clean energy market will not rise following normal economic rules of innovation – where the size of the existing market and expected price motivates innovation. Carbon is too cheap (so clean energy is not yet an attractive alternative) and the existing market for clean energy is too small. Governments must place a high price on carbon to redirect market forces to low carbon technologies – like for instance CCS.
This article is written by Christopher Short. He is Chief Economist at the Global CCS Institute and is responsible for advice on economic and policy issues relating to accelerating the development of CCS as a mitigation response to climate change.
In a summary report for renewable technologies (from may 2011), the IPCC reiterated that the demand for energy and associated services to meet social and economic development and improve human welfare and health is increasing and that overwhelmingly, this energy demand is met by fossil fuels. In 2008, more than 85 per cent of global primary energy supply came from fossil fuels, with coal and gas accounting for over 50 per cent.
Stabilising CO2 concentrations in the atmosphere at any given level, already at 393 parts per million and rising at an average 2.3ppm per year, requires annual emission be reduced more than 80 per cent below current levels eventually.
For the energy sector, this is likely to mean the complete decarbonisation of the energy system. Yet much of the policy discussion is focused on implementing carbon taxes or cap and trade schemes, with an often-unstated expectation that the technologies exist to achieve decarbonisation, or will emerge more or less spontaneously. Often, the debate is presented as if the only question is how high, and how fast does the carbon price need to climb in order to substitute existing fossil fuel technologies with clean energy technologies, whilst also maintaining economic growth.
This completely ignores the fact that the clean energy technologies available tomorrow depend on what is done today. Worse, it can lead to calls for delaying action on climate change in the hope that new technologies will somehow become available, or their costs will be lower in the future.
Like other economic activities, the challenge of creating, developing and demonstrating technologies is motivated, at least in part, by the expectation of future financial rewards. These expected rewards are determined both by the future prices as well as the size of the market. The larger the expected price, or the larger the existing market, the more resources and effort applied by the private sector to technology development.
Unfortunately, a key insight from the economics of innovation is that the existing market size always dominates the price incentive. And the existing market size for clean energy technologies, including CCS, is small relative to that of the existing fossil fuel technologies. Correspondingly, the R&D effort in clean energy technologies is relatively small. In a recent study, it was estimated that the share of patents for renewable energy technologies accounted for less than 0.5 per cent of all technology patents in the OECD countries (far smaller than the share for information technologies, biotech or nano-technologies, and smaller than nuclear and car pollution control). CCS research efforts, which has even fewer patents issued in the last decade, was too small to be recognised.
Governments have a role to shift both production and consumption activities towards low carbon technologies, but to also shift the allocation of research, development and demonstration between existing and clean energy technologies.
For CCS, the policy frameworks being developed by governments cover a range of activities including:
- accelerating the innovation and development of CCS technologies through:
- funding a demonstration program that seeks to understand and improve the operation of large-scale applications of CCS as well as demonstrate the safe and long-term effectiveness of CO2 storage; and
- increasing specific research and development activities around new capture technologies to improve performance and reduce costs;
- identifying viable geological storage areas;
- developing legal and regulatory frameworks to protect human and environmental health and safety;
- undertaking public awareness and consultation activities; and
- effectively and rapidly sharing lessons learnt.
With regard to funding for demonstration projects and for research, governments have made commitments valued at up to US$40 billion in order to support CCS. Of this US$11.7 billion has been allocated to specific large-scale demonstration projects and a further US$2.4 billion has been allocated to expand research and development activities.
Twenty-two projects account for 87 per cent of funding allocated to all large-scale projects to date.
Governments have a key role to play but private initiative is also required. Governments must initially redirect market forces towards CCS and other low carbon technologies before market forces can take over.
Establishing a price on carbon is necessary to support innovation activities, and the price must be high enough, or expected to increase sufficiently, in order to support on-going demonstration and innovation activities for CCS projects. But this must be done in conjunction with significant support for research, development and demonstration by the private sector.
The question is: is the current balance between the two drivers to decarbonise energy correct?
Source: May 2011, Global CCS Institute