Energy Innovation and Infrastructure: Policy Complements to Pricing Bads

Transcription

1 Energy Innovation and Infrastructure: Policy Complements to Pricing Bads Nick Johnstone, Ivan Haščič and David Benatia OECD Environment Directorate ( Presentation at OECD-E3G workshop on the Low Carbon Transformation OECD, April 3rd

2 Climate Change Mitigation and Adaptation Technologies (Number of patent applications - claimed priorities, worldwide) Source: Haščič, I. et al. (2010), Climate Policy and Technological Innovation and Transfer: An Overview of Trends and Recent Empirical Results, OECD Environment Working Papers, No

3 SEK per kg NOx Prices matter and spur innovation The Effect of the NOX Charge in Sweden Marginal Abatement Cost Curves of Taxed Emitters Emission intensity in kg NOx per GWh Source: Hoglund-Isaksson (2005) cited in OECD (2011) Taxation, Innovation and the Environment Note: based on observations from 55 plants in the energy sectors over the period

4 Pricing as a Necessary but not Sufficient Condition Difficulty of targeting environmental bad directly and excessive administrative costs i.e. environmental policy and transaction costs Secondary non-environmental market failures i.e. information failures, split incentives, network externalities Credibility of policy-induced price signals over the longer term may not be sufficient for risky investments Inertia in the market which can favour incumbent firms and technologies deadweight of past may correlate with environment-intensity 4

5 Principles of environmental policy design in order to encourage 'green' innovation Stringency how ambitious is the policy objective relative to BAU Predictability how certain and credible is the signal given by the policy Flexibility how much space is provided to identify new technologies and methods 5 5

6 The Role of Policy Flexibility: The Effect on Patented Environmental Inventions Stringency Alone Stringency & Flexibility Model 1 (No Year FE) Model 2 (Year FE) Note: Figure shows the estimated importance of different characteristics of environmental policy framework (policy stringency, policy flexibility) in encouraging inventive activity in environmental technologies. Measured as the number of patent applications (claimed priorities) deposited during Source: OECD (2011) Invention and Transfer of Environmental Technologies 6 6

7 The Role of Policy Predictability: Effect of Volatility in Public R&D on Inventive Activity Model 1 (No FE) 0.00 R&D Volatility R&D Level Model 2 (FE) Note: Figure shows the estimated response to a 1% increase in the level and volatility of public R&D in encouraging inventive activity in environmental technologies, measured as the number of patent applications (claimed priorities) deposited during in a cross-section of OECD countries. Source: Kalamova, Johnstone and Hascic (2012) in V. Constantini and M. Mazzanti (eds.) The Dynamics of Environmental and Economic Systems 7 (Springer, forthcoming). 7

8 The Need for a Mix of Policies: Sequencing and Complementarity in AFV Technologies Standards Fuel prices Fuel prices 4 3 Public R&D Public R&D Standards Electric Hybrid Note: For ease of interpretation elasticities have been normalised such that effect of R&D=1. Unfilled bars indicate no statistical significance at 5% level. Source: OECD (2011) Invention and Transfer of Environmental Technologies. 8

9 Policy Impacts and Distance from Market To induce a 1% increase in electric vehicle innovations, the alternatives are: Increase R&D by 14% (i.e. $26 mln instead of $23 mln per year per country, on average) Increase fuel price by 63% (i.e. $1.30 instead of $0.80, on avg) To induce a 1% increase in hybrid vehicle innovations, the alternatives are: Increase R&D by 53% (i.e. $35 mln instead of $23 mln per year per country, on average) Increase fuel price by 5% (i.e. $0.84 instead of $0.80, on avg) 9

10 Climate Change Mitigation Costs With and Without Research on Backstop Technologies Note: Assumptions concerning backstop technologies based on expenditures on technologies which are under research but not yet viable (e.g. advanced biofuels, nuclear and fuel cells) Source: OECD Economics of Climate Change Mitigation. Based on research undertaken by V. Bosetti 10 et al. (2010) in

11 Directing Change Without Picking Winners Since technology-neutral pricing of externality is not sufficient = > necessity to be prescriptive (at least to some extent) => main challenge for policy makers Some general principles: Support a portfolio of technologies to diversify risk of getting it wrong Benefits of chosen portfolio should be robust with respect to information uncertainty (i.e. ancillary benefits) Identify local general purpose technologies which complement a variety of emission-reducing strategies 11

12 Breadth of Sources of Environmental Innovation 12

13 Intermittency and Targeting of Incentives 13

14 Challenge of Increased Penetration of Renewables The most important renewable energy sources (wind, solar, ocean/tide) are intermittent Generation potential is subject to significant temporal variation (minutes, hours, days, seasons), which is uncertain and often correlated, and negatively correlated with peak demand (in some cases) This means that increased capacity of renewable energy generation is not a perfect substitute for dispatchable generation capacity (e.g. fossil fuels) Challenge of LOLP becomes greater as share rises note that some countries have targets > 40%, where capacity credit starts to converge to zero 14

15 Means of Overcoming Intermittency Reduce correlation of variation in intermittent sources and/or allow for ex ante/ex post adjustment. How? o Back up dispatchable sources (include some hydro) o Spatial dispersion of sources (within type) and diverse portfolio of sources (across types) o Improvements in load management and distribution o Trade in electricity services (states, countries) o Investment in advanced energy storage o Malleability of demand (e.g. smart grids) Benefits hypothesised to vary at different levels of penetration of intermittent renewable power 15 15

16 Public R&D on Advanced Energy Storage and Advanced Grid Management Wind Solar Tide/Ocean Storage Grid Management Note - IEA Totals $2010 Million 16

17 Patented Inventions in Advanced Grid Management (Claimed Priorities ) 17

18 Determinants of Productivity of Wind Power Plants (Wind Power/Wind Capacity) Europe (21) Global (31) Wind Speed *** *** Dispatchable Power ** *** Grid Capacity *** *** Electricity Trade *** ** Storage *** *** Fixed Effect Yes Yes Obs R² within R² between R² overall Prob>F

19 Capacity in GW Benefits of Investing in Transmission Capacity: Capacity Requirements 50 WPEN_EUR Product WCAP_ABS WCAP_congpath WCAP_denspath WPEN_EUR 19 19

20 Benefits of Investing in Transmission Capacity: Effective Capacity Factor Product ECF_EUR_ABS ECF_EUR_congpath ECF_EUR_denspath 20 20

21 $2009 billion Benefits of Investing in Transmission Capacity: Value of Capital Stock mean of cost_denspath mean of cost_congpath mean of cost_densify mean of cost_congestion 21 21

22 Thank You! ( 22