The Clean Technology Innovation Challenge

1. The Clean Technology Innovation Challenge Reinhilde Veugelers Senior Fellow @ Bruegel, Brussels Full Professor @ University of Leuven Research Fellow @ CEPR

2. Outline • Simulation exercises confirm that to keep the costs of mitigation and adaptation to climate change “manageable”, we need a sufficiently wide portfolio of technologies in action soon. • This includes radical new technologies which are not yet available or still far from commercialization. • These technologies need to be developed and diffused sufficiently fast and at the appropriate scale This talk: • Are Climate Change Policies capable of mobilizing the private green innovation machine? • Policies needed for green innovations • Taking stock of the performance of private green innovations: • A multipolar green technology world? • Evaluating EU’s current Climate Change policies for innovation • Suggestions for the future

3. How should CC policy look like? Insights for green policy making from endogeneous directed technical change models • Public intervention is needed to kickstart private sector • Combination of environmental and knowledge externalities • Installed base advantage for fossil technologies.. • Public intervention should leverage the private sector • The importance of demand for green innovations • The importance of clear and consistent public policy signals • The importance of timing of the intervention • Cost of delay • Temporary nature of interventions (exit strategy), especially for R&D support of specific (transition) technologies • The efficiency of a mix of public policy instruments • R&D subsidies are more efficient if in combination with carbon pricing • R&D subsidies and carbon pricing will be more efficient if transition is smoother: Role of regulations, standards… Source: Aghion, Hemous & Veugelers, 2009, No green growth without innovation, Bruegel Policy Brief

4. On the importance of combining policy instruments Results from calibration exercise: how high the optimal carbon price or subsidies would have to be when used in isolation relative to its optimal level when used in combination: • the carbon price would have to be about 15 times bigger during the first 5 years, • subsidies would have to be on average 115% higher in the first 10 years. • Source: Aghion, Hemous & Veugelers, 2009, No green growth without innovation, Bruegel Policy Brief

5. Are the right policies being deployed? • The two main instruments of policy intervention, carbon pricing and R&D subsidies have been shapelessto turn on the private green innovation machine • On carbon prices: relatively low level, cross country fragmentation and volatility • On green public R&D investments: relatively low level, uncoordinated and volatile Especially the lack of long-term commitment is detrimental for inciting the private green innovation machine. Source: Aghion, Veugelers, Serre, 2009, Bruegel Policy Contribution

6. Performance on Clean Technology Innovations: evidence from patents CET=Clean Energy Technologies Kyoto protocol Source: UNEP/EPO/ICTSD, 2010 Note: Patents are counted on the basis of claimed priorities (patent applications filed in other countries based on the first filed patent for a particular invention)

7. Who’s who in green patenting Source: UNEP/EPO/ICTSD, 2010 Note: Patents are counted on the basis of claimed priorities (patent applications filed in other countries based on the first filed patent for a particular invention)

8. Who’s who in green patenting Source: Own calculations on the basis of UNEP/EPO/ICTSD, 2010,

9. A multipolar green technology space? Source: Own calculations on basis of UNEP/EPO/ICTSD, 2010 Notes: (1) Only countries with at least 1% of world patents in technology; (2) although relative positions vary across technologies, the top 3 countries are always JP, US, GE; (3) If taken as one aggregate, the EU would hold a RTA in all CETs excl Solar PV

10. Some characteristics of the private green innovation machine (as measured by CET patents) • CET have a very small share in total patents(<1% (88-07)) • Growth in CET patents only after 1997 • Especially in solar PV and wind, also more recently in Biofuels and CCS • Fossil fuels & nuclear started trending down after 1997 • Main patent actors • Japan largest but not specializing in CET: strong dominance in solar PV; • US & GER in second position, US not specialized in CET; • Treating EU as one block, it would be slightly bigger than Japan, twice as big as US and slightly specialized in CET • Korea shows a strong recent growth, concentrated on solar PV • China, still small, but growing esp recently and specializing in CET • India, Brazil remain much smaller and concentrated in few CET technologies

11. Some characteristics of the private green innovation machine (as measured by CET patents) • Countries specialize in different technologies: • Solar PV for Japan, Korea; Germany: Wind, Solar & Geo Thermal; ,France in Biofuels & CCS, Denmark in Wind…US more diversified • High concentration of patents in top countries (Japan, Germany, US), but concentration differs across technologies • High concentration in the more mature Solar PV; also CCS • Lower concentration in Hydro, Biofuels, Geo Thermal Although Europe specializes on average on CET, member states positions differ across technologies; Asian countries hold strong positions in CET, esp in more mature, more concentrated solar PV;

12. The importance of government policy for green innovations • Theory arguments: knowledge and environmental externalities; installed base advantage for fossil technologies.. • Empirical evidence on trends in patents and who is patenting in which technologies responsive to government intervention • Econometric evidence confirming the impact of government intervention, next to fuel prices, innovation capacity.. • E.g. Johnstone et al (2010) • But details matter… • E.g. Johnstone et al (2010) confirm the importance of both subsidies and carbon pricing (like feed-in tariffs, tax credits..) the relative importance varies by technology field, with subsidies being more important for early stage technologies.

13. A new momentum? • Carbon pricing • US Cap & Trade, EU 20/20/20 targets to 30, Improved ETS, coordinated carbon tax discussions… • Green R&D subsidies • Green stimulus packages • EU: European Economy Recovery Package; SET plan, FP7 total budget proposal increase … • US Climate Change Science Program, … Is it enough? Is it effective?

14. A long-term consistent carbon price signal for green innovations? Source: Veugelers (2011), Europe’s clean technology investment challenge, Bruegel Policy Contribution 2011/06

15. A new momentum in the EU?Public funding in the EU for CET  SET • EU’s SET (Strategic Energy Technology) plan • Launced in 2009 • SET Plan is the EU’s technology pillar where CEP meets Europe2020 towards “creating a low-carbon and renewable energy-based European economy” • The goal is to coordinate fragmented policies and programmes and organise energy research efforts across Europe in a coherent and efficient manner behind a clear set of technology targets in partnership with the private sector to mobilize innovation for CC and hopefully put European companies in competitive positions in SET technologies. • From Research to Development & Demonstration: • SET focuses on six sectors: • carbon capture and storage. • wind, • solar (both concentrated solar and photovoltaic), • smart grids, • bio-energy, • nuclear fission Source: Veugelers (2011), Europe’s clean technology investment challenge, Bruegel Policy Contribution 2011/06

16. Public funding in the EU for CET  SET technologies Source: EC-JRC (2009) Note: * Nuclear Fusion, although a technology closely related is not a SET priority technology

17. How much funding for SET is needed? The SET Plan envisions raising the total public and private investment in low-carbon energy technologies from the current €3bn per year to around €8bn per year over the next 10 years. Source: EC-JRC (2009)

18. Where will the money come from? • EU funds: • Currently: EU crisis funds; funds from ETS allowances, FP funds.. • Major battle will be over the 2014-2020 budget • Leveraging of individual Member States public funding • Individual Member States are sollicited to take the lead in other (non-CCS) Initiatives • Leveraging of private funds will be critical • Will depend on credibility of overall CC policy

19. Main messages • Reaching CC targets at affordable costs will require smooth functioning of green innovation machine • If governments want to leverage the needed private innovation machine, they will have to provide a well designed time consistent policy, combining carbon pricing, regulations and public funding. • A sufficiently high and predictable carbon price is pivotal. This will reduce the amounts needed for public funding of technologies, especially for Development, Demonstration and Deployment of later stage technologies • Perhaps most needed for the SET plan: sufficiently high and predictable carbon price;

20. Main messages • As CC is a global issue and the world of green technologies is multipolar • Global coordination (US, EU, Asia..) • To establish: • A single global carbon price: Globally integrated/linked carbon markets • Coordinating public R&D programs • Pooling resources & know-how; avoiding duplication; supporting more competition among a larger set of potential technology trajectors; diffusing results • Have global green technology markets where private actors have incentives to diffuse green technologies (clear and affordable IPR)

21. Thank You For Your Attention Reinhilde.veugelers@bruegel.org www.bruegel.org 21