Pannell Discussions

No. 161, 16 November 2009

Climate policy: an alternative approach

In Pannell Discussion 160, I argued that the current global approach to policy for climate change mitigation is doomed to fail. What's the alternative?

The huge majority of serious discussion about climate policy assumes that policy has to tackle emissions head on by making them more expensive, by imposing either a cap on emissions (as in an emissions trading scheme) or a carbon tax. Technology development is sometimes recognised as a relevant component of climate policy, but usually its inclusion seems to be a bit of an afterthought.

An exception to this is the Asia-Pacific Partnership on Clean Development and Climate, which includes Australia, Canada, China, India, Japan, Korea, and the United States. This partnership is focused very much on development of cost-effective technologies for mitigating climate change. It was established during the reigns of George W. Bush and John Howard, and so, as a climate policy, it is rather tainted by these associations. I've no idea how effective it is as an institution, but I'll be arguing below that its focus on technology development is exactly the sort of thing that should be the centre-piece of climate policy, not a side-line.

I'm not alone in this view. Nordaus and Shellenberger (2009) have been running a spirited campaign to promote their "new framework", which emphasises that public funding for technology development should be the core plank of policy.  

"Rather than focusing on emissions reduction targets and timetables, the new framework makes rapid reductions in the real, unsubsidized cost of clean energy technologies the explicit objective of climate and energy policy. ... Rather than seeing private interests and markets as the primary driver of innovation, this framework recognizes public investment as the key." (Nordaus and Shellenberger, 2009, p. 14).

They recognise that it is politically infeasible to increase the cost of current technologies by enough and in enough countries to avert whatever climate change is coming, so they suggest that we focus on developing new carbon-neutral technologies that are cheaper than the current carbon-intensive ones. It's a simple, logical and sensible argument. Bjorn Lomborg has been running an argument rather like this since The Skeptical Environmentalist (2003).

We hear lots of arguments that developed countries should lead the way with emissions reductions, and proposals that developed countries should pay money to developing countries to help them with their abatement, but Nordhaus and Shellenberger have a completely different (and, in my view, much more realistic) concept of the role of developed countries.

"Rather than insisting that developed economies 'go first' by achieving symbolic but largely irrelevant emissions reductions, the new framework sees developed economies as critical laboratories that will finance and invent the low-cost technologies that will make deep global emissions reductions possible." (Nordaus and Shellenberger, 2009, p. 14).

One of the nice things about this approach is that, unlike cap and trade or a carbon tax, it makes sense no matter what your views are about the climate change issue.

1. If you believe that climate change is an urgent problem that will probably have huge impacts, public investment in technology change is the best chance to avert it. Unlike a cap/tax, you don't need global cooperation to do it. Unlike a cap/tax, it has some chance of leading to dramatic reductions in emissions in all countries. Unlike a cap/tax, it is cheap enough to garner broad political support, even in countries that face high abatement costs or where there is a high level of skepticism about the seriousness or tractability of the issue.

2. If you think that climate change is probably not a very serious problem, but there is a small chance of highly adverse outcomes, public investment in technology development makes sense as an insurance policy. Unlike a cap/tax, it would be cheap enough to be worth buying as a form of insurance.

3. If you think that climate change has been way over-hyped and is not an important problem, support for public investment in technology change would make sense as a way of reducing the cost of climate policy. (This assumes that commitment to some sort of climate policy is unavoidable, so, for a person in this category, it makes sense to choose the least costly option that can win political support.) Unlike a cap/tax, investment in technology change could have major benefits even if it turns out that climate change is actually a huge beat up. To a substantial extent, those benefits would probably flow to the countries that made the investment in technology change, whereas under a cap/tax system the countries that invest the most lose the most.

It is true that the approach does rely on governments being able to deliver such a scheme -- including being able to pick winners -- and that it is not guaranteed to deliver the required technologies. However, government investment in major programs of technology development does have a hugely successful track record -- think of the Manhattan Project, the Enigma code-breaking project, agricultural research. I judge that the probability of success is high. On the other hand, the probability of success for an approach that relies mainly on a cap/tax is close to zero, in my judgment (see PD160). A cap/tax approach cannot succeed unless it leads to radical improvements in technologies, so in reality, public investment in technology change is just a much less expensive and more direct way of trying to achieve the same thing.

Economists have tended to argue that putting a price on carbon emissions is essential to achieve sufficient abatement of emissions (e.g. Pezzey et al., 2008). Even in theory, this is not necessarily correct. If investment in technology development results in new carbon-neutral energy options that are clearly financially superior to existing carbon-intensive energy options when adopted at large scale, then no carbon price would be necessary to promote adoption. Adoption would be voluntary and comprehensive even without a carbon price. People moved rapidly to adopt cheap modern DVD players without there needing to be a cap or tax on the use of old video tape players.

A carbon price might be a good thing to have in developed countries, but not mainly because of its impact on behaviour, which will be modest. Nordhaus and Shellenberger argue that a carbon price would provide a convenient mechanisms to generate funds to invest in technology development.  

"Rather than attempting to establish and maintain high carbon prices globally in order to provide sufficient incentives to private interests to invest in energy technology innovation, this new framework focuses on establishing modest and politically sustainable carbon prices in developed economies to both fund public technology innovation and provide the needed market pull once those technologies are cost-competitive." (Nordaus and Shellenberger, 2009, p. 14).

In reality, the level of carbon price that is realistic to expect in key countries is so low that it won't make much difference to adoption of new practices with lower emissions. It might serve to speed up adoption a bit, but not transform its final level. Thus, if climate change does turn out to be a serious problem, and if technology development does not succeed in generating dramatically improved technologies, then efforts to prevent climate-change impacts will fail, irrespective of the imposition of a carbon price.

I am convinced that this alternative approach is superior to the road we are currently on, and I've commented to this effect in a number of Pannell Discussions over the past five years.

David Pannell, The University of Western Australia,

Further Reading

Nordhaus, T. and Shellenberger, M. (2009). The Emerging Climate Consensus, Global Warming Policy in a Post-Environmental World, here.

Pezzey, J.C.V. Jotzo, F. and Quiggin, J. (2008). Fiddling while carbon burns: why climate policy needs pervasive emission pricing as well as technology promotion, Australian Journal of Agricultural and Resource Economics 52, 97–110


p.s. 16 Nov 2009. "... they suggest that we focus on developing new carbon-neutral technologies that are cheaper than the current carbon-intensive ones. It's a simple, logical and sensible argument." Doesn't this depend on the variable costs of the current carbon-intensive technologies? If they are low relative to fixed costs (e.g. coal fired power stations), the generator's profit maximising strategy is to continue production until maintenance costs mean the replacement of the facility is considered. I understand that this is why the brown coal-fired power stations in Victoria are still generating, although some of them have apparently had multiple bankruptcies; the capital cost has been written down. - David Godden.

Yes, fair comment. At some point they’ll need replacement, but it might not be very soon. That’s OK. - DP

Pannell Discussions are brief pieces on issues and ideas in economics, science, the environment, natural resource management, politics, and agriculture.

160. Tokenistic climate policy  19 Oct 2009

162. CSIRO and Clive Spash  23 Nov 2009

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