Working Group III: Mitigation

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3.2 Drivers of Technological Change and Innovation

Reduction of greenhouse gas emissions is highly dependent upon both technological innovation and practices. The rate of introduction of new technologies, and the drivers for adoption are, however, different in industrial market economies, economies in transition and developing countries.

In industrial countries, technologies are developed as a result of corporate innovation or government-supported R&D, and in response to environmental regulations, energy tax policies, or other incentives. The shift of electric and gas utilities from regulated monopolies to competing enterprises has also played a major role in the strong shift to combined cycle gas turbines, often with utilization of the waste heat in the electric power sector.

Figure 3.3: Total net resource flows to aid recipient countries.

The most rapid growth in the electric power sector and many energy intensive industries is now occurring in developing countries, which have come to rely heavily upon technology transfer for investments in energy infrastructure. Capital for investment flows from industrial countries to developing countries through several pathways such as multilateral and bilateral official development assistance (ODA), foreign direct investments (FDI), commercial sales, and commercial and development bank lending. During the period 1993 to 1997, ODA experienced a downward trend with an increase in 1998, while FDI has increased substantially by a factor of five (see Figure 3.3) (OECD, 1999; Metz et al., 2000). This shift is a consequence of the many opportunities that have opened for private capital in developing countries, and a reluctance by some industrial countries to increase ODA. The energy supply sector of developing countries is also undergoing deregulation from state to private ownership, increasing the role of the private sector in technology innovation.

A large percentage of capital is invested in a relatively small number of technologies that are responsible for a significant share of the energy supply and consumption market (automobiles, electric power generators, and building heating and cooling systems). There is a tendency to optimize these few technologies and their related infrastructure development, gaining them advantages that will make it more difficult for subsequent competing technologies to catch up. For example, a particular technological configuration such as road-based automobiles can become “locked-in” as the dominant transportation mode. This occurs because evolution of technological systems is as important as the evolution of individual new technologies. As their use expands their development becomes intertwined with the evolution of many other technologies and institutional and social developments. The evolution of technologies for oil exploration and extraction and for automobile production both affect and are affected by the expansion of infrastructures such as efficient refineries and road networks. They also affect and are affected by social and institutional developments, such as political and military power and settlement patterns, and business adaptation to changed transportation options, respectively.

Lock-in effects have two implications. First, early investments and early applications are extremely important in determining which technologies will be most important in the future. Second, learning and lock-in make technology transfer more difficult. Learning is much more dependent on successful building and using technology than on instruction manuals. Furthermore, technological productivity is strongly dependent upon complementary networks of suppliers, repair persons and training which is difficult to replicate in another country or region (IIASA/WEC, 1998; Unruh, 1999, 2000).

There are multiple government-driven pathways for technological innovation and change. Through regulation of energy markets, environmental regulations, energy efficiency standards, and market-based initiatives such as energy and emission taxes, governments can induce technology changes and influence the level of innovations. Important examples of government policies on energy supply include the Clean Air Act in the USA, the Non Fossil Fuel Obligation in the UK, the Feed-in-Law in Germany, the Alcohol Transport Fuel Program in Brazil, and utility deregulation that began in the UK and has now moved to the USA, Norway, Argentina, and many other countries. Voluntary agreements or initiatives implemented by the manufacturing industry, including energy supply sections, can also be drivers of technological change and innovation.

In the energy-consuming sector, major government actions can promote energy efficient use and the replacement of high (like coal) to lower carbon fuels (like natural gas and renewables). Energy efficiency standards for vehicles, appliances, heating and cooling systems, and buildings can also substantially encourage the adoption of new technologies. On the other hand, continued subsidies for coal and electricity, and a failure to properly meter electricity and gas are substantial disincentives to energy efficiency gains and the uptake of renewable and low carbon technologies. Government-supported R&D has also played a significant role in developing nuclear power, low carbon technologies such as gas turbines, and carbon-free energy sources including wind, solar, and other renewables. Such government actions in the energy-consuming sector can ensure increasing access to energy required for sustainable development.

While regulation in national energy markets is well established, it is unclear how international efforts at GHG emission regulation may be applied at the global level. The Kyoto Protocol and its mechanisms represent opportunities to bring much needed energy-efficient practices and alternative energy to the continuously growing market of developing countries and in reshaping the energy markets of the economies in transition.

Important dimensions and drivers for the successful transfer of lower GHG technologies to developing countries and economies in transition are capacity building, an enabling environment, and adequate mechanisms for technology transfer (Metz et al., 2000). Markets for the use of new forms of energy are often non-existent or very small, and require collaboration among the local government and commercial or multilateral lending banks to promote procurement. It may also be necessary to utilize temporary subsidies and market-based incentives as well. Because energy is such a critical driver of development, it is essential that strategies to reduce GHG emissions be consistent with development goals. This is true for all economies, but is especially true for developing countries and economies in transition where leap-frogging to modern, low emitting, highly efficient technologies is critical (Moomaw et al., 1999a; Goldemberg, 1998).

Non-energy benefits are an important driver of technological change and innovation (Mills and Rosenfeld, 1996; Pye and McKane, 2000). Certain energy-efficient, renewable, and distributed energy options offer non-energy benefits. One class of such benefits accrues at the national level, e.g. via improved competitiveness, energy security, job creation, environmental protection, while another relates to consumers and their decision-making processes. From a consumer perspective, it is often the non-energy benefits that motivate decisions to adopt such technologies. Consumer benefits from energy-efficient technologies can be grouped into the following categories: (1) improved indoor environment, comfort, health, safety, and productivity; (2) reduced noise; (3) labour and time savings; (4) improved process control; (5) increased reliability, amenity or convenience; (6) water savings and waste minimization; and (7) direct and indirect economic benefits from downsizing or elimination of equipment. Such benefits have been observed in all end-use sectors. For renewable and distributed energy technologies, the non-energy benefits stem primarily from reduced risk of business interruption during and after natural disasters, grid system failures or other adverse events in the electric power grid (Deering and Thornton, 1998).

Product manufacturers often emphasize non-energy benefits as a driver in their markets, e.g. the noise- and UV-reduction benefits of multi-glazed window systems or the disaster-recovery benefits of stand-alone photovoltaic technologies. Of particular interest are attributes of energy-efficient and renewable energy technologies and practices that reduce insurance risks (Mills and Rosenfeld, 1996). Approximately 80 specific examples have been identified with applications in the buildings and industrial sectors (Vine et al., 1998), and insurers have begun to promote these in the buildings sector (Mills, 1999). The insurance sector has also supported transportation energy efficiency improvements that increase highway safety (reduced speed limits) and urban air quality (mass transportation) (American Insurance Association, 1999). Insurance industry concern about increased natural disasters caused by global climate change also serves as a motivation for innovative market transformation initiatives on behalf of the industry to support climate change adaptation and mitigation (Mills 1998, 1999; Vellinga et al., 2000; Nutter, 1996). Market benefits for industries that adopt low carbon- emitting processes and products have also been increasingly recognized and documented (Hawken et al., 1999; Romm, 1999).

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