This week we read about energy and climate change policy instruments. The purpose of the blog assignment is to take a position on the use of joint vs. single instruments as a way to affect innovation. In the spirit of making our blog responses more interesting, I am attempting to take the contrary view to my peer (the only other student in the class this semester) and defend the use of single instruments as a good instigator of innovation.
According to Oikonomou et al (2010), there are four types of policy instruments for energy and climate policy: energy tax, subsidies for energy efficiency, labeling in buildings, white certificates, and carbon tax. They span four different types of measures – tax, subsidies, regulations, and certificates. The article claims that each of the five policy instruments do very little for innovation and for raising climate awareness. When the instruments are combined, only four combinations create any value greater than that of a single instrument. Three of these four combinations include subsidies for energy efficiencies, which seems to work as a balance to additional costs related to taxes, certificates, and regulations.
However, something interesting emerges when the combinations of the five instruments are tested for their contribution to diffusing existing technology or spurring new innovative technologies. Of course, all combinations lead to greater diffusion of existing technology but all four of the highest combinations for innovation include a carbon tax. Could it be that a carbon tax is an ideal way to drive innovation? The data in this study suggest that in combination with other instruments it leads to innovation. But what about as a single instrument?
A closer look seems to suggest that innovative technologies follow a carbon tax. For example, the Copenhagen Economic’s work for European Commission DG TAXUD finds global evidence of a link between taxes and innovations. The report references findings of a study in the quote below:
A recent study carried out by the OECD finds that current and future expected carbon prices appear to have powerful effects on R&D spending and clean technology diffusion. The study assumes a global carbon price reflecting the CO2 emission trajectories necessary to keep temperature increases below 2˚ Celsius. Under this scenario new technologies will contribute with ca. 50 percent decarbonisation where current rates are ca. 35 percent. These calculations are based on a detailed description of the energy sector (bottom-up) and the carbon markets combined with a general description of the global economy (top-down, CGE).
Frankly, it’s easier to find support that carbon tax and cap-and-trade (and other instruments) do NOT lead to innovation. So, this is a tough position to argue…it seems that policy rarely inspires innovation.
But, I will end by pointing out that the single instrument does have the advantage of economy and simplicity, and supposedly greater efficiency. Those characteristics make it an appealing option. It is difficult to project whether a carbon tax in the US would lead to greater innovation or just long-term higher costs for the energy consumer. Regardless, it is an interesting concept to consider.
Denise. Thank you for taking a contrary view. I don’t know that we are really that far apart.
It can certainly be said that policies at many times do not lead to innovation. For example a small carbon tax that is intended as a revenue source will not have much effect on a company’s decision. The company may just decide to pay the tax and continue their normal behavior. That would not lead to innovation. What policy can accomplish is shifting the market forces to encourage innovation. If the policy is enduring and strong enough, the financial incentive to find an alternative increases. At that point, the natural market forces engage and our great thinkers will find an alternative. The strong single policy support for nuclear power when combined with the incentive of economic gain by the utilities created rapid innovation.
I agree that if a tax is high enough, it could create incentive for change. However, I would question how efficiently our government would use the money. Often taxes just become a redistribution of wealth. Taxes almost always create an injured party. This could contribute to our partisanship problem and derail the effort to enact a policy to stimulate innovation.
I am in complete agreement with the advantages of economy, simplicity, and efficiency for a single policy. A quick look at our recent policies and the EU’s energy policy reveals complex multipronged instruments.
My conclusion that multiple policies are better for energy and climate innovation is based on the pressing nature of the issue being contrary to natural market forces (therefore needing policy to prompt the change) and the highly partisan government we currently have making it difficult to pass effective policy. Therefore, smaller less efficient policies need to be tied together to gain the needed effect.
Your position that policy may not stimulate innovation still fits with the statement the complimentary policies generally lead to more innovation but not universally. There are examples where policy (single or complimentary) does not help innovation which fits with being not universally true. The same can be said of large innovation following the single nuclear policy or innovation in the absence of policy which break the universal application of the statement but not the general statement.
Brandi. Thank you for the discussion on the methane problem from our live stock. I had a friend in CT that introduced me to the concept of generating electricity at the farm from manure. He was looking at selling and installing the technology for dairy farms and land fills. My friend never went into the business for the very reasons you mention above: high cost and maintenance. The dairy farms generally did not want to incur the cost. Perhaps the ability to sell credits would shift the market forces and entice the dairy farmers into making the investment.
I like that you chose to do this – you’re right – it does make things more interesting, and I’m really looking forward to what Robert has to say about it. I spent several years working for a company whose whole business model was really predicated on the adoption of a large-scale cap and trade system launching in this company, so I’m somewhat biased. But, I will say that it could have spurred innovation if designed and implemented correctly. Now, it’s difficult for me to say how much of that would have been a direct result of the cap and trade system itself since many of the climate bills that developed during that time had, as you point out, other energy efficiency subsidies and the like built in, too.
But, let me offer an example of a technological innovation that could be spurred by policy enactment, specifically cap and trade. Many of the projects we worked on involved installing an anaerobic digester to handle liquid manure from either hog or dairy cow operations. In the absence of a digester, most farmers we worked with were pumping their manure to a long-term storage pond in which the solids could break down aerobically (releasing methane and other gases directly into the atmosphere). Then, usually 3-4 times a year, the farmers would draw that manure out and land apply it to fields as fertilizer.
By installing an anaerobic digester, you capture that gas and put it to good use. Because we were working mostly with medium-sized (and smaller) farms, we opted to use a passive system that involved a lagoon cover and some piping. That gas was then collected and either flared off or fed through a generator on-site to create power for the farm. And yes, flaring the methane had its own greenhouse gas emissions, but because it combusts to carbon dioxide, the global warming potential compared to just the methane escaping was roughly 20 times less.
Many farmers we met wanted these systems, but they were expensive to install and presented a new level of maintenance with their manure handling protocols on farm than they previously had. With the promise of carbon credit revenue generated through these projects (which were registered as offsets* with the exchange), they became more financially feasible and attractive. The systems themselves provided many ancillary benefits to the farmers, including odor control, protection against storm water intrusion, etc. But, without the certainty in income, it was difficult to make the systems pay for themselves.
*Offsets are emissions reductions that occur outside the prescribed cap, and represent an opportunity for covered entities (the firms that have to reduce their emissions or purchase credits) to meet their reduction goals at perhaps a lower cost than internalizing the reductions at their own power plants or other operations (whatever the case may be).
So that’s one example I can point to where the business as usual practice of open-air storage lagoons won’t really change for farmers, despite all the additional benefits a covered system provides without the policy driving the demand for offset credits.