220.127.116.11 Research and Development
The role of R&D in changing the trajectory of energy economy is unquestionable – new technologies have played a large role in the evolution of the energy sector over the last century. Moreover, the rate at which low emission technologies will improve during the next 20–30 years will be an important determinant of whether low emission paths can be achieved in the long term.
Policy uncertainties, however, often hinder investment in R&D and the dissemination of new technology, although different types of polices may be needed to address different types of investment. Hamilton (2005) notes that investors prefer a policy environment which is ‘loud, long and legal’. A number of authors note that long-term policy targets or clear foresight on carbon taxes can overcome social inertia and reduce uncertainty for investors in R&D (Blyth and Yang, 2006; Edenhofer et al., 2006; Reedman, Graham and Coombes, 2006).
Nearly 600 billion US$ was expended worldwide on R&D in all sectors in 2000, with approximately 85% of that amount being spent in only seven countries. Over the last 20 years, the percentage of government-funded R&D has generally declined, while industry-funded R&D has increased in these countries. In a historic context, R&D expenditures as a percentage of GDP have gone up and down in cycles as government priorities have changed over the last 50 years, although in some instances comparisons over time are difficult (US-NSF, 2003; OECD, 2005a; US-GAO, 2005).
Total public funding for energy technologies in IEA countries during the period 1987–2002 was 291 billion US$, with 50% of this allocated to nuclear fission and fusion, 12.3% to fossil fuels and 7.7% to renewable energy technologies (IEA, 2004; see Figure 13.1). Funding has dropped after the initial interest created through the oil shock in the 1970s and has stayed constant, even after the UNFCCC was ratified. Nemet and Kammen (2006) suggest that for the USA a change in direction is warranted and that a five- to tenfold increase in public funding is feasible.
Figure 13.1: Public funded Research and Development (R&D) expenditures for energy (A) and renewable energy technologies (B) by International Energy Agency (IEA) member countries.
Source: IEA, 2004, 2005.
The USA and Japan, the two largest investors in energy R&D, spent on average of 3.38 and 2.45 billion US$, respectively, between 1975 and 1999. However, such figures mask important underlying trends. For example, a large percentage of the funding designated for energy R&D has gone into nuclear power – nearly 75% in the case of Japan (Sagar and van der Zwaan 2006). The support of the US government for R&D declined by 1 billion US$ from 1994 to 2003, with reductions implemented in nearly all energy technologies, while R&D investments in other areas grew by 6% per year. Between the 1980s and 2003, private sector energy R&D declined from nearly 50% of that of government funding to about 25% (Nemet and Kammen, 2006).
Many countries pursue technological (R&D) advancements as a national policy for a variety of different reasons: for example, to foster the development of innovative technologies or to assist domestic industries in being competitive. Countries also chose to co-operate with each other in order to share costs, spread risks, avoid duplication, access facilities, enhance domestic capabilities, support specific economic and political objectives, harmonize standards, accelerate market learning and create goodwill. Cooperation, however, may increase transaction costs, require extensive coordination, raise concerns over intellectual property rights and foreclose other technology pathways (Fritsche and Lukas, 2001; Sakakibara, 2001; Ekboir, 2003; Justice and Philibert, 2005). Governments use a number of tools to support R&D, such as grants, contracts, tax credits and allowances and public/private partnerships. The effect of these tools on public budgets and their effectiveness in stimulating innovation will vary as a function of how they are structured and targeted. For example, in the USA, R&D tax credits to industry totalled an estimated 6.4 billion US$ in 2001; however, industries associated with high GHG emissions did not take advantage of this opportunity in that the utility industry received only 23 million US$.
There are different views on the role of R&D, its links to the overall energy innovation system and processes underlying effective learning. Sagar and van der Zwaan (2006) examined the trends in major industrialized countries and report that public R&D spending does not correlate with changes in national energy intensity or carbon emissions per unit of energy consumption. For a more extensive discussion of technological learning, energy supply models and the link to R&D, see Chapter 3, Section 3.4.2 and Chapter 11, Section 11.3.3. Watanabe (1999) argues that government R&D can play a role in achieving breakthroughs in some areas, induce investments by industry in R&D and generate trans-sectoral spill over effects. Others have noted, however, that the benefits of R&D may not be realized for two to three decades, which is beyond the planning horizons of even the most forward-looking companies (Anderson and Bird, 1992) and that, for a variety of reasons, industry can only appropriate a fraction of the benefits of R&D investments (Margolis and Kammen ,1999). In the energy sector in particular, technology ‘spill over’ to competitors is large; as a result, firms under-invest in R&D (Azar and Dowlatabadi 1999) and face difficulties in evaluating intangible R&D outputs (Alic et al. 2003). In addition, regulatory interventions can cap profits in the case of path-breaking research success (Foxon and Kemp, 2004; Grubb, 2004). Goulder and Schneider (1999) argue that increasing R&D expenditures in carbon-free technologies could crowd out R&D in the rest of the economy and therefore reduce overall growth rates. However, Azar and Dowlatabadi (1999) counter that radical technological change will trigger more research overall and therefore increase economy-wide productivity rates.
The OECD (2005b) finds that obligations/quotas, price guarantees and tax preferences have had the most influence on innovation and patent activities in the renewable energy sector and that while public subsidies for R&D have not played a role, the overall level of investment in R&D within the economy of a country has been important. Sathaye et al. (2005) observe that government-funded research at government-owned facilities, private companies and universities may help identify patentable technologies and processes. They reviewed the process of allocating patent rights in four OECD countries and found that intellectual property rights (IPR) regimes have changed since the ratification of the UNFCCC, with diffusion typically taking place along a pathway of licensing or royalty payments rather than unrestricted use in the public domain. Popp (2002) also examined patent citations and found that the level of energy-saving R&D depends not only on energy prices, but also on the quality of the accumulated knowledge available to inventors. He finds evidence for diminishing returns to research inputs – both across time and within a given year – and notes that government patents filed in or after 1981 are more likely to be cited. Popp (2004) notes that when in terms of the potential for technology to help solve the climate problem, two market failures lead to underinvestment in climate-friendly R&D: environmental externalities and the public goods nature of the new knowledge. As a result, government subsidies to climate-friendly R&D projects are often proposed as part of a policy solution.
Policies that directly affect the environmental externality have a much larger impact on both atmospheric temperature and economic welfare. Fischer and Newell (2004) examine several policy options to promote renewables and indicate that research subsidies are the most expensive approach to achieve emission reductions – in the absence of higher prices. They note that the process of technological change is less important than the implementation of direct incentives to reduce emission intensity or overall energy use. A more specific example arises from the Danish experience with wind technologies. Meyer (2004) notes that despite significant support for wind energy R&D during the 1980s, wind power only boomed in Denmark when favourable feed-in tariffs were introduced, procedures for construction allowances were simplified and priority was given for green electricity. This is supported by Nemet (2005), who found that the ability to raise capital and take risks has played a much larger role in the recent expansion of the photovoltaic industry than other factors, such as learning by experience.
In summary, national programmes and international cooperation relating to R&D are essential long-term measures to stimulate technological advances. Substantial additional investments in and policies for R&D are needed, depending on the specific goals: for example, if high stabilization levels are desired (e.g. 750 ppmv CO2-eq, which is scenario category D of Chapter 3 of this report), a technology-focused approach that defers emissions reduction to the future would be sufficient; for low stabilization goals (e.g. 450 ppmv CO2-eq, which is category A1, or 550 ppmv CO2-eq, which is category B), strong incentives for short-term emission reductions would be necessary in addition to technological development and deployment programmes. See Section 13.3 for a discussion of goals.