Technology innovation and diffusion in “less than ideal” climate policies: An assessment with the WITCH model

This paper examines the dynamics of innovation in low-carbon energy technologies distinguishing between research and development and technology diffusion as a response to alternative climate policies. We assess the implications of second-best policies that depart from the assumption of immediate and global participation and of full technology availability. The analysis highlights the heterogeneous effects of climate policy on different energy R&D programs and discusses the contribution of important determinants such as carbon price and policy stringency, policy credibility, policy and technological spillovers and absorptive capacity.     

Expert views - and disagreements - about the potential of energy technology R&D

Mitigating climate change will require innovation in energy technologies. Policy makers are faced with the question of how to promote this innovation, and whether to focus on a few technologies or to spread their bets. We present results on the extent to which public R&D might shape the future cost of energy technologies by 2030. We bring together three major expert elicitation efforts carried out by researchers at UMass Amherst, Harvard, and FEEM, covering nuclear, solar, Carbon Capture and Storage (CCS), bioelectricity, and biofuels. The results show experts believe that there will be cost reductions resulting from R&D and report median cost reductions around 20 % for most of the technologies at the R&D budgets considered. Although the improvements associated to solar and CCS R&D show some promise, the lack of consensus across studies, and the larger magnitude of the R&D investment involved in these technologies, calls for caution when defining what technologies would benefit the most from additional public R&D. In order to make R&D funding decisions to meet particular goals, such as mitigating climate change or improving energy security, or to estimate the social returns to R&D, policy makers need to combine the information provided in this study on cost reduction potentials with an analysis of the macroeconomic implications of these technological changes. We conclude with recommendations for future directions on energy expert elicitations.     

Global fossil energy markets and climate change mitigation – an analysis with REMIND

We analyze the dynamics of global fossil resource markets under different assumptions for the supply of fossil fuel resources, development pathways for energy demand, and climate policy settings. Resource markets, in particular the oil market, are characterized by a large discrepancy between costs of resource extraction and commodity prices on international markets. We explain this observation in terms of (a) the intertemporal scarcity rent, (b) regional price differentials arising from trade and transport costs, (c) heterogeneity and inertia in the extraction sector. These effects are captured by the REMIND model. We use the model to explore economic effects of changes in coal, oil and gas markets induced by climate-change mitigation policies. A large share of fossil fuel reserves and resources will be used in the absence of climate policy leading to atmospheric GHG concentrations well beyond a level of 550 ppm CO₂-eq. This result holds independently of different assumptions about energy demand and fossil fuel availability. Achieving ambitious climate targets will drastically reduce fossil fuel consumption, in particular the consumption of coal. Conventional oil and gas as well as non-conventional oil reserves are still exhausted. We find the net present value of fossil fuel rent until 2100 at 30tril.US$ with a large share of oil and a small share of coal. This is reduced by 9 and 12tril.US$ to achieve climate stabilization at 550 and 450 ppm CO₂-eq, respectively. This loss is, however, overcompensated by revenues from carbon pricing that are 21 and 32tril.US$, respectively. The overcompensation also holds under variations of energy demand and fossil fuel supply.     

中国低碳车辆技术现状与发展趋势

为探讨道路交通部门节能减排的决策依据,在总结低碳车辆技术主要种类基础上,重点评述了车辆动力系统和燃料替代技术的低碳化发展现状与趋势,包括全生命周期能效和温室气体排放情况。为进一步支持车辆技术低碳化,除加强综合节能技术和混合动力技术应用、电池技术升级和燃料电池技术研发之外,需加快生物燃料二代技术的研发进程和煤基燃料路线中二氧化碳捕获和封存技术等低碳技术的应用。     

Economic consequences of the US withdrawal from the Kyoto/Bonn Protocol

Abstract

The US decision not to ratify the Kyoto Protocol and the recent outcomes of the Bonn and Marrakech Conferences of the Parties have important implications for both the effectiveness and the efficiency of future climate policies. Among these implications, those related with technical change and with the functioning of the international market for carbon emissions are particularly relevant, because these variables have the largest impact on the overall abatement cost to be borne by Annex B countries in the short and in the long run. This paper analyses the consequences of the US decision to withdraw from the Kyoto/Bonn Protocol both on technological innovation and on the price of emission permits (and, as a consequence, on abatement costs). In particular, the analysis highlights mechanisms and feedbacks related to technological innovation, technological spillovers and R&D which could be relevant and which modify some policy relevant conclusions. First, we identify two feedback effects which explain why our results lead to a less significant fall in the price of permits than in most empirical analyses recently circulated. We show that the US defection from the Kyoto Protocol, by inducing a decline in the demand and price of emission permits, lowers the incentives to undertake energy-saving R&D. As a consequence, emissions increase and feed back on the demand and supply of permits, thus implying a lower decline in the price of permits than previously estimated. At the same time, as a result of the reduced R&D investments and the augmented emissions, climate change damages intensify and require an increase in investments that are again coupled with a growth of emissions. By thus again increasing the demand for permits and reducing their supply, this effect enhances the previous mechanism. Notwithstanding the lower decline in the price of permits, the paper still identifies a smaller price than would occur with a US participation. Therefore, we emphasise in a second step the crucial role of Russia in climate negotiations due to a large increase in Russia's bargaining power.     

Economic consequences of the US withdrawal from the Kyoto/Bonn Protocol

The US decision not to ratify the Kyoto Protocol and the recent outcomes of the Bonn and Marrakech Conferences of the Parties have important implications for both the effectiveness and the efficiency of future climate policies. Among these implications, those related with technical change and with the functioning of the international market for carbon emissions are particularly relevant, because these variables have the largest impact on the overall abatement cost to be borne by Annex B countries in the short and in the long run. This paper analyses the consequences of the US decision to withdraw from the Kyoto/Bonn Protocol both on technological innovation and on the price of emission permits (and, as a consequence, on abatement costs). In particular, the analysis highlights mechanisms and feedbacks related to technological innovation, technological spillovers and R&D which could be relevant and which modify some policy relevant conclusions. First, we identify two feedback effects which explain why our results lead to a less significant fall in the price of permits than in most empirical analyses recently circulated. We show that the US defection from the Kyoto Protocol, by inducing a decline in the demand and price of emission permits, lowers the incentives to undertake energy-saving R&D. As a consequence, emissions increase and feed back on the demand and supply of permits, thus implying a lower decline in the price of permits than previously estimated. At the same time, as a result of the reduced R&D investments and the augmented emissions, climate change damages intensify and require an increase in investments that are again coupled with a growth of emissions. By thus again increasing the demand for permits and reducing their supply, this effect enhances the previous mechanism. Notwithstanding the lower decline in the price of permits, the paper still identifies a smaller price than would occur with a US participation. Therefore, we emphasise in a second step the crucial role of Russia in climate negotiations due to a large increase in Russia’s bargaining power.     

Exploring national decarbonization pathways and global energy trade flows: a multi-scale analysis

The role of fossils fuels in national economies will change radically over the next 40 years under a strong climate regime. However, capturing this changing role through national-based analyses is challenging due to the global nature of fossil fuel demand and resulting trade patterns. This article sets out the limitations of existing national-scale decarbonization analyses in adequately capturing global conditions and explores how the introduction of a global modelling framework could provide vital insights, particularly for those countries that are dependent on fossil fuel exports or imports.

The article shows that fossil fuel use will significantly decline by 2050, although gas will have an important transition role. This leaves large fossil fuel exporters exposed, the extent of which is determined by mitigation action in different regions and especially by the pathways adopted by the larger Asian economies. We find that global-scale models provide critical insights that complement the more detailed national analyses and should play a stronger role in informing deep decarbonization pathways (DDPs). They also provide an important basis for exploring key uncertainties around technology uptake, mitigation rates and how this plays out in the demand for fossil fuels. However, use of global models also calls for improved representation of country specifics in global models, which can oversimplify national economic and political realities. Using both model scales provides important insights that are complementary but that can challenge the other’s orthodoxy. However, neither can replace the other’s strengths.

Policy relevance:

In recent years, how global fossil fuel markets will evolve under different climate regimes has been subject to much debate and analysis. This debate includes whether investments in fossil fuel production still make sense or will be exposed in the future to liabilities associated with high carbon prices. This is important for governments who need to develop coherent policy in relation to fossil fuel sectors and their role as drivers of economic growth and in providing for domestic energy needs. This article argues that national analyses need to be fully cognizant of the global-scale transition, which can be informed by using a multi-scale modelling approach.     

Innovation benefits from nuclear phase-out: can they compensate the costs?

This paper investigates whether an inefficient allocation of abatement due to constraints on the use of currently available low carbon mitigation options can promote innovation in new technologies and have a positive impact on welfare. We focus on the case of a nuclear power phase-out and endogenous technical change in energy efficiency and alternative low carbon technologies. The research is inspired by the re-thinking about nuclear power deployment which took place in some countries, especially in Western Europe, after the Fukushima accident in March 2011. The analysis uses an Integrated Assessment Model, WITCH, which features multiple externalities related to greenhouse gas emissions and innovation market failures. Our results show that phasing out nuclear power stimulates R&D investments and deployment of technologies with large learning potential. The resulting technology benefits that would not otherwise occur due to intertemporal and international externalities almost completely offset the economic costs of foregoing nuclear power. The extent of technology benefits depends on the stringency of the climate policy and is distributed unevenly across countries.     

R&D Subsidies and Climate Policy: Is There a “Free Lunch”?

Because of the long-term nature of the climate problem, technological advances are often seen as an important component of any solution. However, when considering the potential for technology to help solve the climate problem, two market failures exist which lead to underinvestment in climate-friendly R&D: environmental externalities and the public goods nature of new knowledge. As a result, government subsidies to climate-friendly R&D projects are often proposed as part of a policy solution. Using the ENTICE model, I analyze the effectiveness of such subsidies, both with and without other climate policies, such as a carbon tax. While R&D subsidies do lead to significant increases in climate-friendly R&D, this R&D has little impact on the climate itself. Subsidies address the problem of knowledge as a public good, but they do not address the environmental externality, and thus offer no additional incentive to adopt new technologies. Moreover, high opportunity costs to R&D limit the potential role that subsidies can play. While R&D subsidies can improve efficiency, policies that directly affect the environmental externality have a much larger impact on both atmospheric temperature and economic welfare.     

Assessing decarbonization pathways and their implications for energy security policies in Japan

For countries without sufficient fossil fuel resources such as Japan, climate policies in the mid- to long term need to satisfy requirements not only for decarbonisation but also for energy security in the context of limitations on renewable energies and nuclear power. This study assesses the feasibility of decarbonization pathways to 2050 and their effects on energy security, considering the latest energy and climate policies in Japan using the AIM/Enduse model. The analysis illustrates that deep decarbonization by 2050 is technically feasible even without nuclear power based on three elements: energy efficiency improvements, low-carbon electricity and electrification in end-use sectors. These decarbonization pathways, in the long term, could also contribute to enhanced energy security, reducing import dependency to less than a half of the total primary energy and reducing import bills for fossil fuels by around 70% compared with the current level. Notably, renewable energies could play a strategically significant role in satisfying both climate and energy security requirements. In the mid-term (to 2030), however, although GHG emissions are reduced by 14–20% from 1990 levels, import dependency is relatively stable at today's levels, particularly without the restart of nuclear power. Given the limited potential for renewable energies in the mid-term, it is suggested that the availability of nuclear power will have negative impacts on carbon intensity and energy security, and policies to enhance the security of fossil fuels, including diversification of fuel sources and supply routes, will be required for the foreseeable future.

Policy relevance

Considering the scarcity of indigenous fossil fuel resources and the uncertain availability of nuclear power in Japan, renewable energy could play a strategically significant role in replacing unabated fossil fuels, which would contribute to satisfying both climate and energy security requirements in the long term. However, the renewable energy potential is insufficient to eliminate the requirement for fossil fuels by 2030; therefore the unavailability of nuclear power would affect energy security considerably. Thus, policies in the mid-term would still require enhancement of the energy security of fossil fuels, including the diversification of fuel sources and supply routes, as well as alleviation of the impacts of price volatility.     

Global energy security under different climate policies,GDP growth rates and fossil resource availabilities

Energy security is one of the main drivers of energy policies. Understanding energy security implications of long-term scenarios is crucial for informed policy making, especially with respect to transformations of energy systems required to stabilize climate change. This paper evaluates energy security under several global energy scenarios, modeled in the REMIND and WITCH integrated assessment models. The paper examines the effects of long-term climate policies on energy security under different assumptions about GDP growth and fossil fuel availability. It uses a systematic energy security assessment framework and a set of global and regional indicators for risks associated with energy trade and resilience associated with diversity of energy options. The analysis shows that climate policies significantly reduce the risks and increase the resilience of energy systems in the first half of the century. Climate policies also make energy supply, energy mix, and energy trade less dependent upon assumptions of fossil resource availability and GDP growth, and thus more predictable than in the baseline scenarios.     

Carbon capture and storage: combining economic analysis with expert elicitations to inform climate policy

The relationship between R&D investments and technical change is inherently uncertain. In this paper we combine economics and decision analysis to incorporate the uncertainty of technical change into climate change policy analysis. We present the results of an expert elicitation on the prospects for technical change in carbon capture and storage. We find a significant amount of disagreement between experts, even over the most mature technology; and this disagreement is most pronounced in regards to cost estimates. We then use the results of the expert elicitations as inputs to the MiniCAM integrated assessment model, to derive probabilistic information about the impacts of R&D investments on the costs of emissions abatement. We conclude that we need to gather more information about the technical and societal potential for Carbon Storage; cost differences among the different capture technologies play a relatively smaller role.     

Prospects for steam coal exporters in the era of climate policies: a case study of Colombia

Continued global action on climate change has major consequences for fossil fuel markets, especially for coal as the most carbon-intensive fuel. This article summarizes current market developments in the most important coal-producing and coal-consuming countries, resulting in a critical qualitative assessment of prospects for future coal exports. Colombia, as the world’s fourth largest exporter, is strongly affected by these global trends, with more than 90% of its production being exported. Market analysis finds Colombia in a strong competitive position, owing to its low production costs and high coal quality. Nevertheless, market trends and enhanced climate policies suggest a gloomy outlook for future exports. Increasing competition on the Atlantic as well as Pacific market will keep coal prices low and continue pressure on mining companies. Increasing numbers of filed bankruptcies and lay-offs might be just the beginning of a carbon bubble devaluing fossil fuel investments and leaving them stranded. Colombia largely supplies European and Mediterranean consumers but also delivers some quantities to the US Gulf Coast, and to Central and South America. Future coal demand in most of these countries will continue to decline in the next decades. Newly constructed power plants in emerging economies (India, China) are unlikely to compensate for this downturn owing to increasing domestic supply and decreasing demand. Therefore, maintaining or even increasing mining volumes in Colombia should be re-evaluated, taking into account new economic realities as well as local externalities. Ignoring these risks could lead to additional stranded investments, aggravating the local resource curse and hampering sustainable economic development.

Key policy insights

• The climate policies of most of Colombia’s traditional trade partners target steam coal as the more emission-intensive fossil fuel, with many countries implementing or considering a coal phase-out.

• Coal exporters should re-evaluate their operations and new investments taking into account this new policy environment.

• To prevent a race to the bottom among coal producers that would favour weak regulation, climate policy makers should also consider the local social and external costs of coal mining, including on health and the local environment.

     

Global implications of joint fossil fuel subsidy reform and nuclear phase-out: an economic analysis

This paper uses the OECD’s global recursive-dynamic general equilibrium model ENVLinkages to examine the mid-term economic consequences and the optimal energy supply mix adjustments of a simultaneous implementation of i) a progressive fossil fuel subsidy reform in emerging and developing economies and ii) a progressive phase out of nuclear energy, mostly affecting OECD countries, China and Russia. The analysis is then transposed in the context of climate change mitigation to depict the corresponding implications for CO2 emissions, to assess the interactions between the two energy policies, and to derive how the associated costs are affected by the different policies. The phase-out scenario projects a nuclear capacity halved by 2035 as compared to the Baseline, corresponding to $120 billion losses in value-added of the nuclear industry for that year. The nuclear phase-out leaves GDP and real household consumption marginally affected in energy importing countries. A multilateral subsidy reform is more likely to affect international fossil fuel prices and alter patterns of global energy use. The fossil fuel subsidy reform, when implemented together with nuclear phase-out, more than offsets negative consequences on household consumption but still leads to a decrease in global CO2 emissions. The combined policies help save the equivalent of current energy consumption in the Middle East. Combining a climate policy, an effective fossil fuel subsidy reform, even with a lower nuclear share in the power mix, brings about multiple benefits to OECD countries which reduce their energy bill and achieve large climate change mitigation at lower cost.     

The value of bioenergy in low stabilization scenarios: an assessment using REMIND-MAgPIE

This study investigates the use of bioenergy for achieving stringent climate stabilization targets and it analyzes the economic drivers behind the choice of bioenergy technologies. We apply the integrated assessment framework REMIND-MAgPIE to show that bioenergy, particularly if combined with carbon capture and storage (CCS) is a crucial mitigation option with high deployment levels and high technology value. If CCS is available, bioenergy is exclusively used with CCS. We find that the ability of bioenergy to provide negative emissions gives rise to a strong nexus between biomass prices and carbon prices. Ambitious climate policy could result in bioenergy prices of 70 $/GJ (or even 430 $/GJ if bioenergy potential is limited to 100 EJ/year), which indicates a strong demand for bioenergy. For low stabilization scenarios with BECCS availability, we find that the carbon value of biomass tends to exceed its pure energy value. Therefore, the driving factor behind investments into bioenergy conversion capacities for electricity and hydrogen production are the revenues generated from negative emissions, rather than from energy production. However, in REMIND modern bioenergy is predominantly used to produce low-carbon fuels, since the transport sector has significantly fewer low-carbon alternatives to biofuels than the power sector. Since negative emissions increase the amount of permissible emissions from fossil fuels, given a climate target, bioenergy acts as a complement to fossils rather than a substitute. This makes the short-term and long-term deployment of fossil fuels dependent on the long-term availability of BECCS.     

Optimal Technology R&D in the Face of Climate Uncertainty

This paper explores optimal near-term technology R&D in the face of uncertain damages caused by the buildup of greenhouse gases. The paper puts particular emphasis on understanding how optimal near-term R&D expenditures might vary based on the technologies pursued in the R&D program. The exploration is conducted in the context of varying impacts from R&D on the global abatement cost function. The R&D planning problem is considered first within a theoretical framework and is then pursued in a stylized application using the DICE model. The paper provides intuition into the circumstances under which near-term technology R&D might increase or decrease under uncertainty, thereby serving as a hedge against climate uncertainty.     

Asian Development Bank's support for clean energy

The Asian Development Bank's (ADB) support for the development of the clean energy sector in Asia and the Pacific is examined, together with its implications for mitigating climate change. A key question is whether financing has shifted from fossil fuel projects to renewable energy and energy efficiency in the past decade (2000–2009). Financial data from the ADB – a multilateral source of significant financing in the region – are assessed, and 127 technology-deploying projects and 199 technical assistance projects are evaluated. The assessment suggests that clean energy assistance has gained momentum during the last few years, peaking in 2008, implying a considerable shift in energy investments from conventional fossil-fuel projects to clean energy. Although private sector involvement has been central to the ADB's investment policy, only 30% of funding has been channelled into this sector over the past decade. The reporting of clean energy investments has also progressed within the ADB by including renewable and energy efficiency components in conventional energy projects and other investments, which was not previously accounted for. Nevertheless, the ADB needs to address several challenges in the future, including sustaining funding for clean energy, strengthening private sector investments and improving financial reporting.     

Potential Scale-Related Problems in Estimating the Costs of CO2 Mitigation Policies

The scale-related problem addressed here relates to a difficulty in substituting away from fossil fuels as part of a policy designed to mitigate climate change. The replacement of fossil fuels by renewable forms of energy is a widely advocated means of reducing the build-up greenhouse gases in the atmosphere. However, the substitution, on a large-scale, of renewable, non-fossil fuel energy sources for fossil fuels requires using vast amounts of land to produce energy. It is shown that, with the exception of nuclear energy, almost all non-fossil fuel energy sources are highly land using, or land-intensive. In particular, the widespread substitution of renewables such as biomasses, wind, solar, and hydro for fossil fuels would require adapting large amounts of land to energy production, land which may have good alternative uses. Thus, the economic feasibility of producing, globally, relatively small amounts of renewable energies is not a good indicator of the feasibility of producing them on a large scale. This implies that substantial reduction in the use of fossil fuels requires the discovery and development of new non-land intensive energy technologies.     

Optimal carbon dioxide abatement and technological change: should emission taxes start high in order to spur R&;D?

Many European politicians argue that the EU should set tougher emission targets than what is required by the Kyoto protocol, and moreover, that emission trading with other countries outside EU should be limited so as to keep emission quota prices high. One of the arguments, frequently cited for such a policy, is the need for technological development. However, the literature on climate change and technological innovation does not unambiguously support the need for setting high emission taxes today. In this paper we investigate the relationship between emission taxes and technological change further by modeling innovation activity explicitly. In our model both the amount of R&D and the amount of carbon abatement are decided in a decentralized way by the market as a response to an emission tax. Moreover, we introduce several distinct failures in the market for new innovations, among others, insufficient patent protection and intertemporal knowledge spill-overs. Our findings suggest that governments should under some circumstances set a higher carbon tax today if we have technological change driven by R&D than if we have pure exogenous technological change. Based on numerical simulations these circumstances are (a) positive intertemporal knowledge spillovers and/or (b) weak patent protection.