Policy and Politics:
Goals of public policy related to energy follow a balance between environmental impact, cost and supply security called the triple bottom line of energy policy. However, a fourth factor – industry competitiveness – is a strong factor. The Paris agreement was largely driven by the last from a energy perspective.
Environmental impact is mostly last because it is based externality, however the London Smog is an example where that is not the case. Currently in China Security of Supply is number one However, in Beijing and Shanghai the environmental impact is a close second.
They provide useful statistics via the IEA, however, their forecasts are highly political. They reflect political interests including overestimation of nuclear power and Carbon Capture Storage (CCS), whereas they underestimated renewables.
The report is partially driven by transnational companies that can exert political power on the OECD because in that case they can behave similar to sovereign states.
Climate Change and public policy intervention:
CO2 emission represent a negative externality. To obtain an ideal equilibrium the social cost should be added to the private cost. The actual market equilibrium however is only based on the private cost.
The IMF estimate externalities to be 2 Trillion dollars whereas carbon prices recuperates about 50 billion dollars. Resulting in a Carbon price of around negative 60 dollars per tone.
The problem is that the discount rate is deciding. For instance Switzerland has a low social discount rate because values are stable whereas Lebanon recently emerged from a civil war and has a high social discount rate as people spend what they have before the next war takes it away.
The Kyoto protocol was a market solution to the environmental problem. It offered pollution rights that could be traded such that cheap pollution reductions would offer financial benefit. The cap of rights was based on scientific analysis of how much CO2 can be emitted without surpassing the goal.
The EU is the largest market and had large fluctuation. However, the financial crisis caused governments to flood the markets with allowances provided by Berlin, Paris and Brussels for their national companies to protect them from the crisis impact. Steel and concrete producers where making more money of carbon trading than their actual business.
In the end the carbon trade makes energy production slightly more efficient, but does not provide an effective solution to the increasing CO2 emission.
Marginal Emission Abatement Cost (MAC)
Irrational behaviour causes many products to have negative costs associated per ton of CO2 emission. For instance switching to LED reduced CO2 emission costs per ton by 160$. However, product standards (white light versus yellow light) hinders adaptation.
For low cost adaptions the problem is that markets forces play a role. For instance, Holcim – a Swiss concrete producer – is a global player that is important for Switzerland. Regulating it too much could cost its global competitiveness and therefore requirements are usually low.
For high cost projects R&D is necessary to reduce the costs in viable ranges. For wind turbines you need up to two years of full-scale tests before you know the efficiency. With 3 years of development and 1 year of pretesting this results in 6 years of time before a cost reducing technology can be used.
Many companies dwarf government R&D spending on energy technology. For instance Switzerland roughly spends 200 million, whereas Siemens spends roughly 2 billion or 10 times more.
Markets allow for the improvements of manufacturing process which drives prices lower, e.g. in solar technology.
In the energy sector we have several forms of lock-ins. For instance we have infrastructure lock-in as past infrastructure dictates future developments to a point. Learning effects improve infrastructure and makes it more cost efficient even if its overall efficiency than newer less developed technology. Carbon prices lead to short term efficiency as they merely favour the currently cheapest technology rather than the optimal technology. It is difficult not to pick the loosing technologies so lock-ins can hamper developments.
Germany made the decision to become the industrial leader in photovoltaic and thereby drove down the prices for photovoltaic. This is also in response to the loss semi-conductor business that collapsed during a price competition with Asia. However, China took over the manufacturing business and Germany now only produces the machines that produce the photovoltaic.
Now we are back to pre-Kyoto policy approaches to tackle climate change which is more policy driven. Technology allowed to drive down CO2 emissions which enabled a political race to be the one leading this technological wave which consequently drove the Paris negotiations.
80% of future development studies overestimate the cost of technologies by more than 25%. The learning effects in manufacturing are often underestimated and incumbent firms drive estimations to be slanted in their favour.
Another factor is China’s ten year industrial plans that allow China to focus on industries and provided them with financing which made China take over the solar panel productions. Without directed financing China could probably not have taken the solar production industry.
Elephants in the (climate change) room:
China and US coordinated their climate change policies which allowed the Paris agreement to be politically viable. Industry policy was a major issue. China wants to transform into a service economy, it doesn’t have the luxury like Europe to just letting things happen. Therefore China tries to drive policies that allow the shift. The Paris agreement allows the federal Chinese polity to force change upon the local polities that could otherwise resist change. Therefore the Paris agreement can be seen as a industry policy. China has an opportunity to move beyond combustion engines and directly go to electrical engines which could move global mobility markets.
An externality is an impact you have on other that you choose not to pay for. Further the externalities are mostly invisible and only impact on a cumulative basis.
A side note:
a) Technology is always political and nuclear is the most political technology. Military power drives technological political request. After the financial crises in 2007/2008 the British Government considered exiting the CERN research, but the military intervened to stay on the edge of technological development. Energy is always political because it is so fundamental to human activity.(paper mentioned later).
b) Decentralised energy is democratic (German Feeding Tariff / Energieeinspeisungstarif was based on democratic energy) and therefore solar energy on the roof is a unprecedented shift in how energy is politically used.
c) In a 100.000 inhabitants city in China a company moved out destroying 5000 jobs after the city did not change policy. Consequently 25000 jobs where lost and the city government completely collapsed. Companies have to be factored in by local governments whether they like it or not.