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  An Introduction to Climate Change Legislation

Table of Contents | Foreword | Preface | Executive Summary | Overview | Contributors | Participants and Staff

Climate Technology Deployment Policy

Richard G. Newell

Summary

There is a growing consensus among policymakers and stakeholders that an effective federal program to control greenhouse gas (GHG) emissions must have as one element polices to hasten the development and commercialization of low and no-carbon energy technologies, as well as technologies that improve end-use energy efficiency. Alongside policies designed to directly mandate GHG reductions, such as a GHG cap-and-trade system, policies that instead target the development and adoption of GHG-reducing technologies have been much discussed. While both general types of policies may have GHG reductions as their ultimate aim, technology policies are often framed in terms of technology-development activities or technology-specific mandates and incentives rather than primarily in terms of emissions.

IB 10
Climate Technology Deployment Policy


A wide range of climate-related technology policy options are currently being employed or have been proposed at the federal and state levels. It is useful to categorize these options roughly according to which stage of the technology-development process they target: research, development, and demonstration, or widespread commercial deployment. This issue brief focuses on technology deployment, while a companion brief (Issue Brief #9) addresses technology research, development, and demonstration, including options for funding, institutions, and research policy instruments.  

After exploring various rationales and motivations for implementing technology deployment policies as part of a strategy for addressing climate change, this paper examines relevant policy options, including standards (e.g., technology, performance, and efficiency standards), subsidies (e.g., tax credits, tendering, loan guarantees), and limited liability. A number of important messages emerge:


  • Pricing GHG emissions through a cap-and-trade or tax system would provide direct, cost-effective, and technology-neutral financial incentives for the deployment of GHG-reducing technology.

  • For technology policies to help achieve a given level of emissions reductions at lower overall social cost than an emissions-pricing policy alone, they must be targeted to addressing market problems other than emissions reduction per se. Thus technology policies are best viewed as a complement to rather than a substitute for an emissions pricing policy.

  • As complements to a cap-and-trade system, technology policies will tend to lower the allowance price associated with achieving a given aggregate cap level, rather than producing additional emissions reductions below the cap. As complements to a GHG tax, such policies will tend to increase the total amount of emissions reductions achieved by a given tax. Again, because the emissions price may not be a complete measure of cost, whether technology policies lower the overall cost to society of achieving emissions reductions depends on their being well-designed and targeted to addressing distinct market problems.

  • There are several specific market problems to which technology deployment policies could be efficiently directed, if the benefits of practicable policies were found to justify the costs in particular circumstances. These market problems include information problems related to energy-efficiency investment decisions, knowledge spillovers from learning during deployment, asymmetric information between project developers and lenders, network effects in large integrated systems, and incomplete insurance markets for liability associated with specific technologies.

  • Although market problems are often cited in justifying deployment policies, such policies in practice often go much further in promoting particular technologies than a response to a legitimate market problem would require. Therefore, while conceptually sound rationales may exist for implementing these policies, economists and others tend to be skeptical that many of them, as actually proposed and implemented, would provide a cost-effective addition to market-based policies. Critics point out that deployment policies intended to last only during the early stages of commercialization and deployment often create vested interests that make the policies difficult to end.

  • Others argue that mandating GHG reductions will be more politically feasible if government includes policies tied to the deployment of specific technologies. These policies may attract more support than a pricing policy because they often employ "carrots" (subsidies) rather than "sticks" (fees or mandates), provide a way to promote particular technologies that have strong political constituencies (such as biofuels), make the cost of reducing emissions and adopting new technologies less visible by spreading it to the general taxpayer, and may not have an explicit price attached to them (as do emissions prices).

  • Technology standards and subsidies can be viewed as different means to achieve the same ends (for example, increased energy efficiency, greater reliance on renewable energy). Just as there are important differences between an emissions-trading program and an emissions tax, however, standards and subsidies tend to differ in terms of who bears the cost, how their impact evolves over time, and what kinds of outcomes they guarantee (that is, whether they provide certainty about achieving certain deployment objectives versus certainty about achieving certain cost objectives).

  • Standards tend to guarantee that specific technologies will be deployed in a certain quantity (or as a minimum share of the market) or that certain performance criteria will be achieved, but leave the cost of achieving the standards uncertain. Technology subsidies, on the other hand, pin the incremental cost spent on technology to the level of the incentive and leave uncertain how much deployment (or what level of performance) will be achieved at that cost. Ceilings (and floors) on credit prices within a tradable standards system can blur these distinctions.

  • Regarding distributional consequences, the cost of imposing a standard tends to fall primarily on households and firms in the regulated sector. By contrast, the cost of providing subsidies tends to fall on taxpayers more generally. However, this distinction can also be altered somewhat through self-financing mechanisms such as "feebates" (to promote improved automobile fuel economy, for example, subsidies for efficient vehicles could be funded by fees on inefficient vehicles).

  • Different deployment policies also have different dynamic properties. The incentives generated by standards are typically more static in the sense that industry has no reason to exceed the standard, which eventually becomes less binding as technology matures (of course, as technology improves, policymakers may also respond by raising standards). Fixed subsidy levels, on the other hand, may continue to provide incremental deployment incentives, depending on the payment structure.

  • As with emission standards, the cost-effectiveness of technology-oriented standards can be increased by incorporating flexibility mechanisms such as credit trading, banking, and borrowing. Likewise, tendering, or reverse auctions, can help facilitate cost competition by making subsidy recipients bid for the minimum subsidy needed to deliver a specified quantity of new technology. This approach can help reduce the cost of technology deployment over time by ensuring that a given expenditure of public resources produces the maximum amount of deployment (or conversely, that a given deployment target is achieved at the lowest possible cost to taxpayers).

  • Loan guarantee programs may be conceptually justified if informational asymmetries exist in credit markets for relevant technologies. On the other hand, loan guarantees create implicit subsidies; as such, their benefits must justify their costs. Because loan guarantees insulate projects, at least in part, from default risk, they can create incentives for developers to take on riskier projects while doing less than they should to guard against preventable risks.

  • There may be a rationale for establishing a joint insurance pool or limiting liability for certain technologies like carbon storage if there is insufficient availability of private liability insurance or there are substantial potential difficulties in assigning liability. On the other hand, liability protection provides a form of implicit subsidy by insulating parties from potential damages caused by their technologies. Thus, if designed poorly they may reduce incentives for those parties to take appropriate actions to mitigate risks where possible.

  • Finally, a number of other polices may be critical in helping certain GHG-reducing technologies compete effectively to potentially gain a foothold in the marketplace. The successful deployment of new technologies often requires better information and verification methods; infrastructure planning, permitting, compatibility standards, and other supporting regulatory developments; and institutional structures that facilitate technology transfer, such as rule of law, judicial or regulatory transparency, intellectual property protection, and open markets. A balance must be struck, however, between enabling technologies to compete and constructing policies that preferentially support specific technology options or systems.

 

 

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