Gernot Wagner
NEW YORK – The jockeying for position in the global clean-energy race is underway. The United States joined the field just two months ago with the passage of the Inflation Reduction Act. Since then, Austria, for example, has announced a €5.7 billion ($5.6 billion) subsidy package, which alone mobilizes per capita investments on par with the US effort. But with more governments embracing industrial policies to transform their economies, deciding which green technologies to support will be a key challenge. Picking winners is hard.
Carbon pricing
Policymakers can start with the relatively simple task of identifying the losers. Carbon dioxide, methane, and other greenhouse gases must be cut to zero or near-zero to stabilise the global climate. That is one reason why economists have long preferred carbon pricing as the primary climate-policy tool. By making polluters pay the full cost of their emissions, the thinking goes, governments can leave it to the market to decide which technologies will win out.
But this is easier said than done. Pervasive market distortions, large vested interests (on both the business and the labor side), and massive infrastructure lock-ins make the economist’s tidy solution nearly impossible. Consider, for example, that over 90% of global coal power capacity is insulated from market competition by contracts that often extend 20 or more years into the future. Such entrenched support for dirty, outdated technologies like coal, even when there are otherwise cheaper, cleaner, and better alternatives available, shows that more must be done.
Complicating matters further is the urgency and the sheer scale of the challenge. Energy plays an all-important role in our lives, and achieving carbon neutrality will require an all-encompassing transformation of the economy and society. Given the circumstances, leveraging the power of the public purse is more than appropriate, especially considering how far behind we are in the clean-energy transition. But policymakers with limited public funds must still make hard choices about the right technologies. Margrethe Vestager, the EU Commissioner for Competition, has already voiced concerns about a subsidy race. Beggar-thy-neighbor energy policies could ultimately hinder the global green transition, but “we’re nowhere near the global saturation point of needed investments,” as Brian Deese, Director of the National Economic Council, said in far-reaching remarks on the US industrial strategy.
Difficult questions
An important early race to watch is the one between greener liquid fuels and all-electric options. Each has its advantages, but there are difficult questions concerning what constitutes an advantage, and for whom.
Liquid fuels might be easier to swap in using the existing infrastructure of pipelines, furnaces, and internal combustion engines. But physics favors electrification in the vast majority of cases, especially in buildings and transportation, which together constitute around 40% of total emissions. Going all-electric with heat pumps and electric-vehicle (EV) engines is clearly the better long-term solution. It is around five times more efficient to heat and cool one’s home with electricity directly than it is to use that electricity to produce a liquid fuel; and EVs can go five times farther than vehicles running on green liquid fuels – often called “e-fuels” or “electrofuels” – using the same energy.
Still, e-fuels might remain a promising option for industry, which accounts for around one-quarter of total emissions. Current manufacturing processes often require combustion to create high temperatures. Hydrogen burns at over 2,000° Celsius (3,600°F), making it potentially well-suited for cement, glass, or steel production. Those designing the leading low-carbon steel technologies are looking to hydrogen as the fuel of choice to replace coal.
Other solutions
But there also may be other solutions on the horizon, owing to competition among entrepreneurs to reinvent long-established industrial processes. The startup Chement has found a way to produce cement at room temperature, and Electra is making use of a process that produces steel at 60°C. True, it remains to be seen whether either company will revolutionize its industry. And their early successes do not necessarily mean that green liquid fuels will not or should not be part of the solution. But the potential for a shakeup in these sectors shows why governments should be wary of supporting incumbent energy or industrial companies that lobby hard for subsidies for their favored technology.
Things gets trickier when a startup claims that it can decarbonize the energy system simply by swapping green liquid fuels for dirty ones. The promise of a seamless technofix can be all too tantalizing. As the founder of the “green gas” producer Tree Energy Solutions said recently, “We can go in the same ships, the same pipes, the same factories.” This kind of one-for-one swap might have significant early advantages, especially for industries that will still need to burn liquid fuels.
Green moral hazard
But there is also a danger of green moral hazard, whereby the mere promise of a simple technofix weakens the incentive to pursue a more comprehensive and ultimately superior transformation. It is one thing to rely on expensive e-fuels for rare, hard-to-abate industrial processes (or to show off that century-old antique car). But it is quite another thing to use them to heat homes and power daily commutes when technologically and economically preferable alternatives are available.
As so often, the Germans have the perfect neologism to capture the challenge at hand: Technologieoffenheit, which connotes both an openness to new technologies and a wariness of prematurely locking in inferior solutions. But openness must not mean wishing away basic physical realities. Amid this year’s energy crisis, vested interests with technologies that might otherwise lose out are pushing the point about openness while waving away the need for longer-term thinking.
The last thing we need is for new policy, regulatory, and investment decisions to lock in another highly inefficient technology for the long term. The most successful entrepreneurs are good at focusing on the main task at hand, rather than being distracted by each shiny new thing. Policymakers will need to do the same in determining which technologies to push, and which to drop.
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Gernot Wagner is a climate economist at Columbia Business School.
Copyright: Project Syndicate, 2022.
