The need for a credible climate technology policy

Published in Green Alliance publication Conservatism in a changing climate: Security, prosperity and a low carbon future. Published in February 2010.

Climate change will transform the prosperity and security of 60 million Britons. This is true whether climate policy succeeds or fails. If it succeeds the transformation will be in the way we provide the energy services we need for prosperity. If it fails, the transformation will be in the way we live as rising temperatures undermine economic and political stability around the world.

The choice is ours. Either we can choose to change our energy system or events will change our lives and in ways that will please no-one. We know that the technologies to build a successful low carbon economy are already available or within reach. We also know that there are no fundamental economic barriers to deploying them although there will be deep changes in the structure of the economy.

The International Energy Agency (IEA)’s current World Energy Outlook projects global primary energy demand to grow by 1.6 per cent a year to 2030. By then fossil fuels will account for 80 per cent of the world’s primary energy mix with demand for coal rising faster than any other fuel. This will drive energy related carbon dioxide emissions up 45 per cent to 41GtCO2 a year.

Adding in the carbon dioxide emissions from agriculture, deforestation and land-use changes and those from all the other greenhouse gases leads to total emissions of 60GtCO2e by 2030*. The energy sector would be contributing nearly 70 per cent of the annual addition to the total carbon burden. At this rate, there would be no prospect of keeping the eventual rise in global temperatures below the 2C that world leaders have defined as the threshold of dangerous climate change.

Without an increase in energy services on the scale projected by the IEA sustaining the economic growth necessary to maintain economic and political stability will be impossible. But if that energy growth is delivered primarily by current fossil fuel intensive technologies, as projected, then avoiding the dangerous climate change which will also undermine economic and political stability becomes impossible.

This is a true dilemma. Choosing one of the horns means being driven to an equally unacceptable outcome by the other. Nor is searching for an illusory trade off between the horns a solution. This simply increases the risk of achieving neither a sufficient increase in energy services nor avoiding dangerous climate change. True dilemmas must be resolved by meeting both goals simultaneously, by using investment, innovation and ingenuity to step out from between the horns.

Resolving this dilemma successfully therefore puts a very high premium on technology policy. The effectively irreversible nature of climate change and the cumulative nature of the build up of carbon in the atmosphere add to this premium. Not only can we not afford policy failure, but we must achieve policy success within a very specific timeframe: global carbon emissions must peak before 2020 and then decline rapidly to succeed.

If we fail to deploy enough of the right energy technologies quickly enough to avoid the dangerous climate change threshold, we cannot make up for it later. This sets a much sterner test for low carbon technology policy than we are accustomed to meeting.

This test will not be met by resorting to the simplistic notion dominating today’s orthodoxy on technology choice. The view that government cannot pick winners and that technology choice must be left to the market is deeply entrenched in our political culture, especially among Conservatives. It takes its legitimacy from some very bad experiences in the sixties and seventies.

But it is equally true that markets are often not very good at picking winners. We have just had a brutal wake up call about the dangers of leaving systemic risks to be managed by the market in the financial world. Commercial technology failures tend to disappear from history rather quickly: nobody remembers them. Think Sony’s Betamax or the Sinclair C5.

The reality is much more complex. Governments sometimes pick technology winners, choosing radar before the Second World War or laying the foundations of the Internet, which markets then deploy widely. Building a carbon neutral energy system over the next few decades will require a much more sophisticated approach to policy than simply reiterating vacuous slogans.

In fact, both governments and businesses make strategic commitments that they then find difficult to unwind when circumstances change and a different strategy becomes necessary. This is particularly true in the case of the high capital, long-life investments, which form the basis of our energy system. Both governments and businesses are strongly resistant to deviations from business as usual.

The urgency of the energy-climate security dilemma means there is no business as usual. Stepping out from between the horns successfully will require a very different conversation on technology policy than that currently taking place between government and business. We have little experience with the design of the transformational policies that will be necessary to resolve this dilemma.

Transformational change cannot be accomplished by incremental policy measures designed to influence technology choice at the margins. Current policy is too reliant on a volatile carbon price driven by political agreements whose future is uncertain. This generates a risk environment that reinforces market conservatism for investors in energy technologies.

Since this is the exact opposite of what is needed to resolve the energy-climate security dilemma a more mature and better articulated conversation between energy investors and government must be created. This will need to identify much clearer priorities for action and a more reliable definition of the respective roles of government and business.

Above all, government needs to avoid the trap of trying to please all of the engaged constituencies. It is correct to say that there are no silver bullets to solve this problem. But it does not follow that it is therefore also correct to try to do everything. This simply increases the risk of doing nothing very much and letting events rather than choices determine outcomes. Whilst this might be a prudent approach on some issues, it is very unwise in dealing with a systemic risk as profound as climate change.

The top priorities are already clear. First among them is energy efficiency, which has a suite of advantages for both the economy and the environment. By improving productivity it goes straight to both the family and corporate bottom line. But it also buys time for the deployment of the other technologies we need to take us to a low carbon economy.

A low carbon world is one that will be increasingly dependent on electricity for the delivery of energy services. It is not a world in which millions of Britons will be driving vehicles powered by petrol or heating space and water with domestic gas boilers. Both must be replaced by electricity. This makes carbon capture and storage the second priority.

Unless we can use coal and gas to make electricity without adding to the accumulation of carbon in the atmosphere there is no way to maintain energy security without destroying climate security. Neither the renewables nor nuclear can displace enough coal and gas fast enough to avoid dangerous climate change. In fact, even if the world could build new nuclear power stations at fifteen times the present rate this would displace no coal at all from electricity generation before 2030.

The third priority is the very rapid development and deployment of electric vehicles. This is even more important for energy security than it is for climate security. Demand for oil will continue to rise faster than production can keep up. An ever-larger share of the world’s oil will come from politically unstable parts of the world. An accelerated deployment of electric vehicles will not only reduce carbon emissions and reduce the impact of price shocks on the economy; it will also significantly reduce the vulnerability of essential transport and logistics systems to potentially devastating interruptions.

Setting out and sticking to clear technology priorities is the first step to mobilising markets to play their proper role in transforming our energy system. The second step is to be equally clear about the role of government. Above all, this lies in providing the enabling infrastructure to support these technology priorities.

Building the infrastructure for a low carbon energy system resilient both to price and climate shocks will be as essential for economic success in the 21st century as was building the motorway network in the 20th century. That network would never have been built without government taking responsibility for its creation.

The smart grids, high speed rail links, vehicle recharging networks and carbon capture and storage infrastructure needed for the energy transformation will not be delivered without an equally committed effort from government today. Without confidence in the provision of this infrastructure energy investors will make incremental changes in technology at best.

No-one should be under any illusion that this change will be cost free. As well as the additional capital and operating costs for the initial deployment of low carbon energy technologies there will be significant social adjustment costs to address the changes of employment and skills patterns in the energy industries.

Deciding how the burden of these costs should be properly apportioned between taxpayers, consumers and shareholders will be at the heart of the politics of making the energy transformation. Unless we can summon the political will to make these choices, events will decide the future for us.

A credible climate technology policy must include a transparent rationale for that burden sharing. It is no more helpful to expect none of the burden to fall on taxpayers as to argue that most of it should. Successfully tackling a systemic risk as pervasive as climate change benefits taxpayers, consumers and shareholders. It is both morally and theoretically right that therefore all three should carry a fair share of the burden of managing that risk. The default mode, with systemic climate failure, as with systemic financial failure, shifts an unacceptable level of risk to the taxpayer.