Handicapping the High-Stakes Race to Net-Zero
by richard schmalensee
dick schmalensee, the former dean of MIT’s Sloan School of Management as well as former director of MIT’s Center for Energy and Environmental Policy, was a member of the President’s Council of Economic Advisers in the first Bush administration.
Published July 31, 2018
Nations have been dickering over the goals and timing of climate change policy for a quarter-century.
But the Intergovernmental Panel on Climate Change, which represents the informed consensus on the subject, makes no bones about ultimate objective. “A large fraction of anthropogenic [man-made] climate change resulting from emissions is irreversible on a multi-century to millennial time scale,” the group concluded in 2013. “Surface temperatures will remain approximately constant at elevated levels for many centuries after a complete cessation of net anthropogenic CO₂ emissions.”
The experts’ logic is unassailable. The greater the total net human-caused CO₂ emissions, the more serious the enduring climate- related damage, unknown as well as known. To contain this damage, climate policy must aim for zero net global human-caused CO₂ emissions — net-zero for short — sooner rather than later.
The Paris Agreement of 2015 was an important step toward that goal. Getting all nations (including, for now, the United States) to commit to limiting their emissions of CO₂ and other greenhouse gases (notably, methane, nitrous oxide and fluorinated gases) and to tightening those limits in future rounds of negotiation was a historic achievement. However, even if fully achieved, the intentions announced under the Paris accord would at best hold global emissions roughly constant through 2030.
Many advocates have tried to build political support for more stringent (and, in the near term, more costly) policies by stressing the risks that climate change poses and the damages it may cause. But at the present state of knowledge, the risks cannot be rigorously quantified, and nature has so far failed to provide adequately dramatic evidence of damages. While, for example, the Antarctic ozone hole served to generate sufficient political support to ban ozone-depleting chemicals, shrinking Arctic sea ice has not generated enough support to induce substantial reductions in global CO₂ emissions.
Reducing Tomorrow’s Costs Today
Although it is plainly difficult to change public perceptions of the benefits of limiting climate change, choices made today could reduce the long-term costs of getting to netzero. More subtly, the right choices could also prevent the rise of special interests with a potent stake in opposing stringent emissions reduction. To this latter point, policies that substantially reduce the value in use of particular assets would inevitably face serious opposition from their owners. So it is important to discourage investment in long-lived assets — think coal-fired power plants — that would be rendered less valuable by later policies that move aggressively toward net-zero.
This is no abstraction. Many energy-related investments made during the pre-2030 Paris commitment period, including power plants now under construction, will be affected by policies adopted after mid-century. Other investment decisions — such as those related to mass transit, broader aspects of urban design, and land use outside urban areas — may have even longer-lived impacts on the costs (and political difficulties) in getting to net-zero.
In addition, as I argue below, getting to net-zero in a timely fashion would require the accelerated development and large-scale deployment of new technologies in sectors with long-lived assets. Many policies that affect the rate and direction of technical change – including but not limited to government R&D spending levels and priorities, as well as tax incentives and policies to support the development of pre-commercial technologies – are likely to affect technological possibilities that endure for many decades. So it is important to begin now to support development of the technologies needed to reach net-zero.
Finally, choices of policy “architectures” – fundamental legal and administrative approaches to policy problems – tend to be long-lived. This is particularly true when individuals and institutions make investments that depend on the continuation of particular architectures for their economic viability.
To take an example unrelated to climate, the United States seems to be the only nation in the world in which health insurance is mainly provided through employers – an outcome that was more accidental than intentional. This system has given rise to an insurance industry with the incentives and clout to block fundamental change. It is important to avoid policy architectures in energy and elsewhere likely to create similar obstacles to getting to net-zero.
Here, I consider three key challenges that must be surmounted to get to net-zero relatively soon and at politically tolerable costs.
Growth in Emerging Economies
Emerging economies are generally trying to get rich the same way today’s advanced economies got rich: by burning fossil fuels. Between 2006 and 2016, emissions of carbon dioxide from OECD countries declined by 8.8 percent, while emissions from the rest of the world increased by 33.4 percent. China accounted for just under half of that increase.
This is a daunting trend. Emerging economies are home to most of the world’s population, and, thanks to cheap, omnipresent telecommunications, pretty much all of them can easily learn what they’re missing. If their leaders follow the path of least resistance, minimizing short-term costs to deliver maximum economic growth with the aid of fossil fuels, future generations across the globe will bear the formidable consequences.
In recent years, the economies that the IMF classes as “emerging” accounted for about 85 percent of the global population, but only about 32 percent of global carbon dioxide emissions. Emissions per dollar of GDP in the emerging economies is about half-again higher than in the economies the IMF classes as “advanced,” but GDP per capita in the emerging world is less than one-fourth of the advanced economy average.
Emerging economies must follow a much less carbon-intensive path to affluence than today’s wealthy countries followed. Because large-scale use of expensive renewable-energy supply technologies would slow growth, this will be resisted.
Looking ahead, emissions intensity in emerging economies will decline as their energy efficiency increases and their reliance on heavy industry decreases. But political pressure for rapid economic growth will not decline, and even moderate growth in those economies could more than offset serious global abatement efforts. To see this, suppose that, in the next decade or two, advanced economy emissions are cut in half, there is no population growth in emerging economies and emerging-economy emissions per dollar of GDP are cut by 31 percent (to the advanced economy average). Suppose, too, that GDP per capita in emerging economies rises to only 45 percent of the advanced economy average (roughly double what it is today). In this optimistic case, global emissions would still rise by about 1 percent.
There’s only one felicitous way out of this box: emerging economies must follow a much less carbon-intensive path to affluence than today’s wealthy countries followed. Because large-scale use of expensive renewable-energy supply technologies would slow growth, this will be resisted. It is not an accident that despite emissions-reduction intentions announced under the Paris Agreement, some 1,600 coal-fired power plants are planned or under construction around the world. Coal is often the cheapest way to provide electric power essential for economic growth — as well as, alas, the most CO₂-intensive way.
Giving emerging economies plausible paths to net-zero that are consistent with substantial growth would require new energy supply technologies that are carbon-free, economically competitive and deployable at large scale. This will almost certainly require a significant increase in R&D. For instance, I have argued (with colleagues) that further development of the photovoltaic technology based on crystalline silicon that is widely used in solar panels will likely leave it uncompetitive with fossil fuels for electricity generation in most circumstances. Work on promising alternatives now in the wings should be a high priority.
Because deploying new energy-supply technologies at scale takes decades, and because the benefits of fundamental research can’t easily be captured by the institutions that pay for it (thus reducing their incentives to invest), increased government support is essential. Given the importance of getting to net-zero as soon as possible and the difficult technical problems that must be solved to make getting there affordable, there is surely a good case for an intense effort with government leadership.
An instructive benchmark is Washington’s commitment to land a human on the moon in the 1960s for the less serious objective of preventing the Soviets from getting there first. In 1965 and 1966, NASA accounted for more than 4 percent of federal spending, which would translate to about $160 billion today. In contrast, the U.S. Department of Energy’s budget request for clean technology development in FY2017 was a paltry $9 billion.
Technologies that are potentially valuable in a carbon-constrained world — among them wave power and geothermal energy and — are either untried, immature or only suitable for special locations.
But, of course, government R&D spending alone has rarely, if ever, produced commercially successful energy-supply technologies. Private firms need market incentives to do the relatively expensive late-stage development required to produce commercial technologies. So it is necessary to support both R&D and the deployment of promising new technologies in the marketplace by ensuring a high and rising price on carbon emissions.
Even though poor nations will be the most important markets for competitive, carbon-free energy-supply technologies, they are unlikely to be able to develop them. If such technologies are to come on the market in a timely fashion, their development must be driven by wealthy nations. This would not be charity, since suppliers of these technologies should stand to earn substantial profits in the global marketplace. Constructing a low-carbon path to wealth that emerging economies will find attractive will be technically challenging but, considering the size of the market involved, potentially a big money-maker.
Intermittency in Electricity Supply
Studies of what has come to be called “deep decarbonization” generally conclude that it would be feasible to make significant cuts in CO₂ emissions from electricity generation by mid-century using current technologies — and at what the authors contend are reasonable costs. Reducing net emissions from electricity production to zero is quite another matter, however. The most mature, widely deployed carbon-free generation technologies are wind, solar, hydroelectric and nuclear. Political resistance in many nations to building more dams is substantial, as is resistance to nuclear plants using current-generation designs — though generation from both sources will no doubt expand in emerging economies. Other technologies that are potentially valuable in a carbon-constrained world — among them carbon capture and storage, biofuels, geothermal energy, nuclear fusion, waste-to-energy and wave power — are either untried, immature or only suitable for special locations.
In the scenario developed by the International Energy Agency and International Renewable Energy Association, wind and solar will account for just over half of world electricity generation by 2050.
Accordingly, in most deep decarbonization scenarios, wind and solar play leading roles in mid-century electricity supply. Both (particularly solar) exploit virtually unlimited energy resources and are growing rapidly and becoming more economical. In the scenario developed by the International Energy Agency and International Renewable Energy Association, for instance, wind and solar will account for just over half of world electricity generation by 2050.
But getting to net-zero seems likely to require going significantly beyond 50 percent wind and solar. The main problem is that wind and solar generation are intermittent, with output that is variable on time scales ranging from minutes to seasons, and imperfectly predictable. We know how to operate electric power systems with substantial intermittent generation at reasonable cost, as Germany and California have demonstrated. It is, however, almost universally agreed that we do not know how to operate systems dominated by intermittent generation at reasonable cost.
There is clearly an important role for government support of R&D aimed at solving this problem, with two natural objectives. The first would be development of economical, carbon-free generation technologies that are not intermittent. Perhaps cheap, compact nuclear reactors could be built and could achieve public acceptance, or perhaps carbon capture and storage can be made economical. The second objective is to develop technologies — such as batteries providing economical bulk energy storage — to deal with intermittency. Because of the importance of emerging economies in getting to net-zero, low cost must be a priority. And in light of the size of the markets involved, successful R&D efforts would have substantial commercial payoffs.
Because of policy inertia, it is important to push now (in both emerging and advanced economies) for pricing structures that do not give rise to interests that will oppose full decarbonization or make it needlessly expensive. For instance, even though residential solar generation is more expensive per kilowatt-hour than utility-scale solar generation, it is more generously subsidized in the United States. This has led to a residential solar industry that depends on these more-generous subsidies — subsidies that make solar power more expensive than it needs to be by diverting investment from utility-scale production. But firms that depend on those subsidies would strenuously oppose their removal.
A whole variety of market reforms could mitigate problems of generator intermittency and, by reducing overall costs, reduce the cost of electrification of vehicles and of building heating. These include real-time retail electricity pricing and construction of transmission lines that enable geographic averaging of generation and load. Prices in wholesale and retail electricity markets should properly reflect differences in value over time and space, which would have the effect of smoothing peak demand. Finally, as long as the stability of the electricity grid requires some backup fossil-fueled generation capacity, market designs must create an adequate return on investment for generators that are expected to be idle most of the time.
The more costly it is, economically and politically, to get to net-zero, the less likely the world will manage the feat in time to avoid unacceptably large permanent damage.
Diversity of Emissions Sources
While decarbonizing electricity generation is a necessary step toward net-zero, electricity generation accounts for only about one-third of human-caused CO₂ emissions. Transportation accounts for another fifth — and while road transport (about 15 percent of total emissions) could be electrified at some cost, electrification of air transport seems highly unlikely. More importantly, little attention has been paid to reducing the substantial emissions from industry and construction (about 20 percent), land use (about 13 percent) and various other sources, including cement production and building heating (about 13 percent).
The fundamental problem is that, aside from electricity generation and surface transportation, the global economy contains an enormous variety of emissions sources with widely varying economic and technical attributes. Even within residential energy use, which accounts for just under 5 percent of global CO₂ emissions, there is considerable variation in the cost of decarbonization, and there is even greater diversity within industry, construction, land use and other sectors.
There are two basic approaches to reducing emissions: direct regulation and market-based financial incentives. The great diversity of CO₂ emission sources implies that the comprehensive use of regulation would require an enormously complex system. It would be a miracle if such a system came close to minimizing total abatement costs.
Economists argue that a broadly applicable incentive-based system, ideally covering all emissions sources (including land use) and, ideally, all greenhouse gases, could reduce emissions at a much lower total cost than any alternative regime. Incentives to reduce emissions could be produced directly by a tax on emissions or through the market-determined price of emissions allowances in a cap-andtrade system.
But the argument for relying primarily on financial incentives has historically not been very persuasive. Democracies tend to adopt policies that yield benefits concentrated among the few and spread costs among the many. Thus we see income or electricity being taxed in many jurisdictions to subsidize renewables, rather than the more economically efficient approach of using taxes on greenhouse emissions to offset reductions in other distorting taxes (like the payroll tax). In addition, of course, many politicians around the world simply distrust markets.
Even in California and the European Union, where cap-and-trade systems for CO₂ have been established, so-called “ancillary” or “belt-and-suspenders” policies that target particular sectors or sources have also been deployed. Both jurisdictions subsidize renewables: the EU subsidizes energy efficiency, while California has a low-carbon fuel standard. To the extent that such policies affect behavior, they distort the patterns of investment and emissions abatement and so raise the total cost of abatement. Moreover, they reduce the carbon price implicit in the cap and trade systems, and thereby discourage productive investment and innovation in abatement technologies.
If it persists, this neither-fish-nor-fowl policy architecture will make the path to net-zero both longer and more expensive. A clear focus on incentives will not be easy to obtain as a political matter, but if the heavy lifting is left to the future, it will only become more difficult to achieve.
It’s no accident that significant direct emission regulation has been adopted even in jurisdictions that have embraced the use of cap-and-trade systems. A high carbon price is a visible irritant to the body politic, so keeping the price low and using carrots rather than sticks to reduce emissions is the path of least resistance. Nonetheless, moving away from direct regulation and toward greater reliance on carbon pricing is essential to reduce the cost of getting to net-zero.
Pay me now or...
The more costly it is, economically and politically, to get to net-zero, the less likely the world will manage the feat in time to avoid unacceptably large permanent damage. Because policy choices in the near term can have an appreciable impact on those costs, it is in the nation’s interest (as well as the world’s) for policymakers to play the long game. But stating the obvious, alas, doesn’t make it much easier to get from here to there.