STABILIZING atmospheric greenhouse gases (GHGs) in accord with the Paris targets will require very large reductions in energy related carbon dioxide (CO2) emissions. This can only be achieved through continuous, aggressive and ongoing innovation. Innovation of this sort depends, in turn, on rapid diffusion, adoption and adaptation, processes that are integrally linked with ‘upstream’ technological advance through feedback loops embedded in economic markets.

Policy makers sometimes seem to hope that ‘breakthroughs’ will emerge fortuitously to sweep existing technologies aside. Such hopes are misplaced, if not naïve, for two reasons. First, true breakthroughs – radical innovations – are rare and unpredictable, and no one knows how to foster them other than by spending more money on relatively fundamental research. This may be desirable; yet at the same time new technologies tend to be costly and unreliable, and offer relatively poor technical performance when first introduced.

Improvement comes over time periods commonly measured in decades: this was true of solar photovoltaic (PV) cells, invented in the mid-1950s; gas turbines introduced earlier in the twentieth century; and steam power going back to Newcomen and Watt in the eighteenth century. Over the next several decades, accordingly, the world should expect to work with what it has, existing technologies that can and will – because this is inherent in innovation – advance on technical measures of performance (e.g. efficiency) and reduction in costs (in most cases) through continuous, incremental innovation.

The difficulties will be great. They are practical difficulties, chiefly concerned with devising and implementing policies to foster upstream advance and at the same time strengthen the feedback loops that link applications experience with science, research and engineering, while avoiding lock-in of the sort that at present slows decarbonization of electrical power in wealthy countries.

As the world moves toward decarbonization, large-scale, system-wide, socio-technical-economic changes will play out. There will be much Schumpeterian creative destruction. Although cumulatively transformative, it is not very helpful to think of these processes as amounting to some sort of ‘transition’ – a too-comforting term that suggests manageability between stable states. Since the dynamics will involve continuing change, unpredictable and frequently disorderly, and since governance too is messy and unpredictable, it would be better to think in terms of migration; migrants, after all, often end up at other than their expected or desired destinations (and may then seek to move on).

 

What do we know about energy-climate innovation? Point 1: Profit-seeking businesses conceive, develop, and introduce most new technologies. As Edmund Phelps, 2006 Nobel laureate in economics, notes, ‘An awful lot of innovation just comes from business people operating at the grassroots having ideas on the basis of what they see around them. Nothing to do with science – it’s just creative mankind chipping away at things.’¹

Governments make two main contributions. They feed the knowledge base through funding for research and education. Second, procurement – for instance, of public works and infrastructure, of military systems – also stimulates innovation. Private firms exploit the publicly funded knowledge base and government purchases create initial markets for many emerging technologies; examples include the first PV cells and integrated circuits (ICs) and also the gas turbines that utilities so often now buy for electric power generation. The implication: Effective innovation policies will provide incentives for profit-seeking businesses. This is true worldwide, although mechanisms will differ from country to country.

Point 2: Most innovations carry high costs and perform poorly when first commercialized, meaning that the pace and extent of ongoing incremental advance determines whether or not innovations survive and continue to improve (or vanish from the marketplace). The first solar PV cells were inefficient (5-6%) and too expensive for applications other than space systems. Much the same was true of other transformative innovations rooted in solid-state physics, such as IC chips, and for gas turbines and jet engines. Gas turbines operate on a thermo-dynamic cycle patented in 1872, and several firms introduced industrial turbines in the first decade of the twentieth century; even less efficient than the steam engines of the time, they soon disappeared for lack of sales. Test-stand demonstration of jet engines followed in the 1930s, spurred by the coming world war. The first jet aircraft guzzled far more fuel than piston-engine planes – some could stay aloft for no more than 10 or 15 minutes – and needed major maintenance every few dozen hours. Yet, their military advantages were such that development continued and, as manufacturers learned over time to improve efficiency and longevity, costs came down and utilities began to buy turbines based on ‘cores’ designed for aircraft propulsion, first for peaking power and then for base load applications.

 

As cumulative technical advance reduces costs and improves performance, applications expand. For the technologies mentioned above – PV cells, ICs (and computers, smartphones, and so on), gas turbines – the gains have been accumulating for decades and should continue more or less indefinitely. This is the usual process of innovation, one in which breakthroughs such as the first PV cell or the first IC or first successful jet engine, simply mark the initial step on a long pathway, one that often branches as a result of subsequent developments (e.g., thin film PV cells, turbines designed specifically for utility service). The implication: Governments must support innovation over lengthy time periods, using multiple tools (including, e.g., procurement); it is not enough simply to support research.

 

Point 3: Energy differs from many other technologies in that, as a commodity, incentives for innovation are weak. Firms that supply energy – although not firms that design and produce goods and services that depend on and consume energy – cannot expect to differentiate their products. Price is what matters to customers, which means that costs are what matters to producers, distributors, and end-suppliers. By contrast, firms in other industries can focus on product features they expect will appeal to customers: ICs that draw less power, yielding greater smartphone battery life; passenger cars with heated seats and more horsepower; pickup trucks with powered tailgates.

Given the commodity nature of energy, it is easy enough to argue that prices are too low to induce much innovation. Certainly a price on carbon would, if high enough, stimulate much technological improvement and application expansion. Yet, efforts to establish such policies have come to little, and the Paris meeting probably marks the end of much beyond the sort of local and regional initiatives the world has recently begun to see. Furthermore, no one can know what price levels would be needed to cut GHG emissions quickly and rapidly, while even in wealthy countries high energy prices would mean hardship for many and, in poorer countries, would be devastating for billions. The implication: Governments will have to subsidize energy innovation heavily to drive needed advances into the marketplace.

Point 4: The Mission Innovation initiative announced in Paris by twenty governments, including that of India, will be more effective if it targets innovation broadly, including diffusion and incremental gains, rather than narrowly focusing on research, which is how it has mostly been read. Much the same is true of the private sector Breakthrough Energy Coalition publicized by Bill Gates and others. Yet, even if restricted to R&D – which costs far less than downstream development, testing, and applications-oriented engineering – the sums announced can only be viewed as falling well short of the needs.

 

The Mission Innovation statement calls for a doubling of ‘governmental investment in clean energy innovation.’ According to the International Energy Agency (IEA), spending by member countries on ‘public energy technology research, development and demonstration’ (RD&D) totalled about $ 17 billion in 2014. IEA members account for the great bulk of world spending on energy-climate RD&D (led in 2014 by the United States at $ 6.3 billion, followed by Japan at $ 3.3 billion, with France and Germany the only other countries reporting public RD&D expenditures of more than $1 billion). By almost any standard of comparison, these totals seem modest, and would be so even if doubled.

For context, consider air transportation, an industry that accounts for a minor share of energy related GHG emissions, less than 2.5% of the world total (or 10-11% of transport related emissions, the bulk of which stem from road vehicles). Airlines nonetheless go to some length to publicize their commitments to lowering energy consumption and CO2 emissions – easily understandable since jet fuel accounts for one-third or more of their operating costs (depending on price levels), expenditures that translate quite directly to profit and loss statements. Thus when shopping for new equipment, airlines press airframe manufacturers (Airbus, Boeing) and jet engine firms (Pratt & Whitney, Rolls-Royce, General Electric) to reduce fuel consumption. The resulting innovations carry high price tags.

When deliveries of Pratt & Whitney’s geared turbo fan began late in 2015, after nearly 30 years of development (slow-paced because oil prices were low over much of the period), the R&D costs alone were reported at $10 billion. For this sort of expenditure, airlines anticipate fuel burn to decline by around 15% (depending on routes flown). R&D costs for Boeing’s 787 came to a good deal more, in part because of the plane’s troubled launch and early teething troubles. Built largely from lightweight composite materials – less weight means less fuel per passenger-mile – R&D spending for the 787 has been put at $28 billion. And to reiterate, air transportation is one among a great many sources of CO2 emissions, and nowhere near the top of the list. The implication: Even a doubling of public spending on energy-climate RD&D will result in total expenditures that seem modest relative to the need (and to private-sector spending).

 

Point 5: Technologies diffuse internationally chiefly through channels created by private firms in the ordinary course of doing business. While national innovation systems differ, many countries today have the human and organizational skills needed both to innovate and to absorb and adapt new technologies, along with the requisite financial resources and market conditions. Examples include Brazil’s migration to sugarcane ethanol and a road vehicle fleet adapted to this fuel, consequences of mostly indigenous innovation. Other illustrations include high-volume manufacture of PV cells at low costs in China and rapid penetration of both solar and wind power in parts of Europe. As these sorts of country-level and regional-level dynamics proceed, technology diffuses internationally through the day-to-day activities of profit seeking firms. Technologies move (as artifacts, as knowledge) within multinationals (within and between divisions), among unaffiliated firms linked by contractual agreements (both vertical and horizontal), and through joint ventures and strategic alliances (taking many forms).

The implication: Governments should rely on private-sector channels for diffusion of energy-climate innovations. These channels can be expected to function more effectively – because of profit incentives – than efforts organized and managed by governments, non-profits, or intergovernmental organizations. Innovative policies will strengthen private sector channels without seeking to replicate them, while also protecting public interests.

 

Decades of debate and discussion over responses to climate change have overlooked or oversimplified the dynamics of innovation, diffusion, adoption, and adaptation. It is wishful thinking to expect some sort of energy technology ‘breakthrough’ to emerge from research. Innovation is a continuous process best viewed in terms of learning: technological learning; organizational learning; policy learning. What will be needed in the years ahead are practical strategies and structured priorities that capitalize upon and provide incentives for private firms, guided by realistic road maps rather than the wish lists that too often emerge from governments. To have any real hope of reducing GHG emissions sufficiently to approach or meet the Paris targets, governments will have to identify and pursue better functioning innovation policies. The effort should be at the heart of the post-Paris agenda.

 

Footnote:

1. Howard R. Vane and Chris Mulhearn, ‘Interview with Edmund S. Phelps’, Journal of Economic Perspectives 23(3), 2009, pp. 109-124; quotation from p. 123.