Strategic Clean Technology Policies for Climate Change – STRATECHPOL

STRATECHPOL was a project within the Marie Curie International Incoming Fellowship scheme for Experienced Researchers of the FP7 People Programme. The project was developed by Dr. Carolyn Fischer (USA), under the direct scientific supervision of Prof. Carlo Carraro.

Globally, policies that subsidize green “goods” (such as renewable energy) are much more popular than policies that impose a cost on “bads” (such as carbon taxes). Even in the European Union, which has an emissions trading system (ETS) for greenhouse gas emissions, renewable energy targets and support programs form a major part of EU climate policy—and not without controversy. For one, studies indicate that the implied CO2 abatement costs from these renewable technology policies are significantly higher than corresponding ETS allowance prices. Second, the generators that benefit from these policies already operate in a market subject to the ETS cap, meaning that additional abatement via renewable energy can be offset by reduced effort among other covered units. As a result, renewable energy targets increase the cost of meeting the cap without improving the environment.

Still, overlapping policy instruments can be justified by overlapping policy goals. In addition to domestic emissions abatement, stated rationales for renewable energy support include promoting technological innovation, exports, employment and energy security. Indeed, Europe is a leading manufacturer of renewable energy technologies, and if innovations can make those technologies more competitive abroad, they have even greater potential to displace fossil fuel emissions than at home. However, World Trade Organization (WTO) agreements place important limits on subsidies—including green ones—to avoid protectionism.

In STRATECHPOL, Fischer explored the value of clean technology programs above and beyond their emissions abatement potential, with a focus on innovation and emissions leakage. Her approach used a blend of economic theory and calibrated numerical modeling, as well as interdisciplinary research in trade law and the environment. To what extent do clean energy technologies exhibit strong external benefits, and to what extent do popular clean technology policies bring forth those benefits? What strategies do countries want to pursue in their own interest, and does the economics indicate that WTO law should make more room for green industrial policy?

Trade law is important for green industrial policy, since the main governing Agreement on Subsidies and Countervailing Measures (SCM) makes no exceptions for environmental purposes. In “Canada—Renewable Energy: Implications for WTO Law on Green and Not-So-Green Subsidies” (https://doi.org/10.1017/S1474745615000063), Fischer and Professor Steve Charnovitz of George Washington University Law School summarize the legal arguments of the recent dispute over Ontario’s feed-in-tariff. They compare and contrast them with the economics of renewable energy policies, and examine the Appellate Body’s findings, highlighting a number of important implications of the Appellate Body’s reasoning.

In “Strategic Subsidies for Green Goods” (http://dx.doi.org/10.2139/ssrn.2789809), Fischer examines the national incentives and global rationales for offering production and consumption subsidies for environmentally friendly goods. In turn, she evaluates the role of multiple market failures, including the market power enjoyed by firms in a new clean-tech industry, scale economies related to a growing and innovating industry, and the underpricing of environmental damages, particularly in foreign markets. In “Environmental Protection for Sale: Strategic Green Industrial Policy and Climate Finance” (http://link.springer.com/article/10.1007/s10640-016-0092-5), Fischer considers the problem when green industrial policy is partly driven by special-interest lobbying, rather than just addressing market failures. Whereas WTO restrictions can be helpful for global trade in brown goods, looser subsidy rules can be beneficial for green goods, as proponents of domestic clean-tech manufacturers then facilitate emissions reductions abroad.

With Mads Greaker and Knut-Einar Rosendahl, Fischer explored related questions of subsidies for abatement equipment in “Robust Policies Against Emission Leakage: The Case for Upstream Subsidies” (http://dx.doi.org/10.1016/j.jeem.2017.02.001). In “Strategic technology policy as a supplement to renewable energy standards” they reveal the importance of the governing policy context; when renewable energy targets are in force, subsidizing the adoption of those technologies makes the target easier to achieve, allowing fossil energy and emissions to expand. The collective lessons of the above research are summarized in the chapter “Are Renewable Energy Subsidies in Need of Reform?” in The Economics and Political Economy of Energy Subsidies (MIT Press; ISBN: 9780262337472).

Three related papers explore the value of renewable energy policies in a context with innovation spillovers. “Environmental and Technology Policy Options in the Electricity Sector: Are We Deploying Too Many?” (https://www.feem.it/getpage.aspx?id=6518&sez=Publications&padre=73, with Louis Preonas and Richard Newell) finds that deployment subsidies create modest external values from learning by doing; these subsidies are likely overprovided relative to R&D support, and emissions pricing is still the single most cost-effective policy for reducing carbon emissions.  “Second-Best Analysis of European Energy Policy: Is One Bird in the Hand Worth Two in the Bush?” (with Michael Huebler and Oliver Schenker) asks how supplemental policies should be rebalanced when policymakers are constrained. “Overlapping Strategies for Reducing Carbon Emissions from the Personal Transportation Sector” (with Soren Anderson and Alex Egorenkov) analyses the combination of policies addressing renewable fuels, emissions, and fuel economy in the U.S. light-duty vehicle market. They find that the current suite is three times as costly as a carbon price alone; advanced biofuels play a small role, and since fuel-economy standards exacerbate other externalities like congestion and accidents, they have higher abatement costs even when consumers undervalue fuel economy.

Alternative energy support policies have faced criticism in the “Green Paradox” literature, which argues that oil resource owners will respond to reductions in future demand for their products by lowering prices and accelerating extraction today. In “Balancing the Carbon Budget for Oil: the Distributive Effects of Alternative Policies,” Fischer and Stephen Salant consider how different policy strategies—raising carbon prices, expanding the coalition of countries pricing carbon, and accelerating technological change in a clean alternative—impact different stakeholders, given an agreement to stay below a carbon budget. While a global CO2 tax is both cost-effective and the best policy for regulated consumers, extractors and unregulated consumers prefer a technology-only policy. When the regulating coalition is subglobal, support for the clean substitute is desired and often required. A strategic coalition will pursue a tighter cap and less technology policy than is globally optimal, leaving room for bargaining over who pays for clean innovation.

Competition between innovating renewable energy and expanding nuclear energy or exploiting abundant shale gas in China was a topic for papers with Ujjayant Chakravorty and Marie-Helene Hubert. “Post-Paris Clean Energy Options for China” is a chapter in The energy transition, NDCs, and the Post COP21 agenda, and “How Can China Meet its Paris Commitment? The Role of Shale Gas” will be featured in a book on shale gas. Both nuclear energy and natural gas, while cleaner than coal, are relatively expensive, and promoting either will crowd out renewable energy and innovation, further raising the costs of such policies relative to carbon pricing.

The project also supported work in finalizing two papers related to strategic behavior outside the energy sphere. “Disease Risk and Market Structure in Salmon Aquaculture” (http://dx.doi.org/10.1142/S2382624X16500156) with Atle Guttormsen and Martin Smith considered the role of multinational firm strategies in setting the stage for a disease outbreak in Chile. It won the 2016 AquaFish Prize for Best Aquaculture Economics Paper from the International Institute of Fisheries Economics & Trade. “A Theory of Multi-Tier Ecolabels,” with Tom Lyon, addresses strategic behavior and competition among different organizations setting ecolabel standards. Both of these papers highlight the limitations of voluntary mechanisms for meeting environmental goals.

In addition to supporting a broad range of policy-relevant research, STRATECHPOL facilitated dissemination to stakeholders in academia, industry, government, and policy circles. Research was featured in roughly thirty conferences and workshops, including a keynote address at the International Energy Workshop, and 15 seminars. Working papers were disseminated in the FEEM Note di Lavoro series, as well as the RFF Discussion Paper series and CESifo Working Paper series.