The Race to Remake the World’s Energy

There’s nothing like a round of international climate talks to get a person thinking about buying a boat and a cockroach recipe book. After all, setting targets for reducing carbon emissions amounts to writing a number on a whiteboard and smiling hopefully. Apparently, world leaders at this year’s summit in Paris are finding that hard. What will we do once the task turns to actually meeting those targets?

In the past few decades, thankfully, a number of ideas have been raised at national and local levels for how to make big changes in energy markets, quickly. Which are the most promising? What interesting experiments are taking place? I posed those questions to several experts. Unsurprisingly, the answer was complicated. But it also wasn’t devoid of optimism.

“The first thing to consider,” said Tim Boersma, the acting director of the Energy Security and Climate Initiative at the Brookings Institution, “is that it’s important to differentiate between policies for [promoting] renewable-energy development and those that reduce carbon.” You’d think that, say, doubling the percentage of a country’s energy supply coming from wind would have an immediate impact on emissions, but that’s not necessarily the case. Boersma pointed to the example of Germany, which began to transform its energy market in 2011 but nevertheless saw overall emissions levels rise over the next few years (total emissions fell in 2014 due, environmentalists argued, to an exceptionally mild winter).

On paper, Germany is an exemplar for rapid energy-market transition: Five years ago, renewables made up only 17 percent of the market. Today, they provide a full third of the energy used in the country. This was the result of a government-led shift known as the Energiewende, which relied on a tool called feed-in tariffs: long-term (think decades) promises to investors in renewable energy, guaranteeing them an above-market price for the renewable energy they add into the grid. “Feed-in tariffs by all measures have been successful,” said Boersma. New investment in Germany actually exceeded government targets, and made electricity so cheap that traditional power companies suffered huge losses. (Whether the policy is fiscally sustainable, he pointed out, is another matter; countries opting for feed-in tariffs have yet to figure out what measures government should pursue after jump-starting investment.)

“But the carbon part of [Germany’s climate] policy was based on the Emissions Trading Scheme in Europe, which has a number of flaws,” Boersma continued. “The bottom line is that the emissions price [the cost of purchasing further emissions allowances after a company has exceeded its quota] is not nearly as high as the Germans and others were hoping when the policy was installed,” starting in 2005. In addition, he said, “European institutions have given out too many free allowances to help out member states and specific industries. By doing so, the right to emit carbon does not have an appropriate value and so there’s not a lot of incentive to reduce emissions.” And in the absence of a stricter emissions policy, Germany’s renewables push has had a counterintuitive effect. As explained by The Economist in 2014, cheap renewable energy has cut into the natural-gas market and forced utility companies to turn instead to coal, which produces much higher emissions rates than gas.

For promising emissions-reduction policies, Boersma said, look to British Columbia, Canada, and Norway: “The Norwegians, one thing they did very well is they started [a carbon tax] in the early 1990s and started off very low, and indicated to industry and all investors that over the course of the coming decades they would gradually increase the taxation levels,” giving the various stakeholders time to prepare.

“Australian policy,” by contrast, “is actually a good example of how not to do this,” Boersma added, as are the policies of his home country, the Netherlands: Both nations first adopted one energy policy, then switched to another. “There are unfortunately numerous examples throughout the developed world where policies have changed over and over again,” he explained. “If you do that it makes it very hard to invest—investors generally shy away. Long-term stability and predictability are key.”

The success of Nordic countries in revamping their energy markets is well-established. Finland, Sweden, Denmark, and Norway all made the top 15 countries in last year’s Global Cleantech Innovation Index, published by the Cleantech Group and the World Wildlife Fund. But one intriguing possibility is that the region as a whole could serve as a testing ground for climate policies, given its head start in the field and the similarities among the countries on other variables. Tracking which Nordic country is ahead of its neighbors is the closest to a controlled experiment we might get.

That’s the suggestion offered by Ben Armstrong, a Ph.D. candidate at MIT, and Varun Sivaram, a fellow at the Council on Foreign Relations and an energy advisor to New York Governor Andrew Cuomo, in a recent post at CFR. They cited the examples of Denmark and Sweden, states that have much in common except for Denmark’s “cleantech sector [being] considerably more successful than Sweden’s.” Danes and Swedes, they noted, poll very similarly on their concern about climate change (and thus would probably generate roughly the same amount of demand for renewable energy), while their governments have pursued roughly similar agendas on emissions cuts. Determining where the two countries’ paths diverged, Armstrong and Sivaram argued, could provide lessons in how to stimulate green innovation.

The two are planning to air their theories for this divergence in a follow-up post, but Sivaram told me by email that they think it might have to do not with new market disruptors, but rather with how established Danish companies responded to the economic stagnation and energy crises of the 1970s, by “re-orienting” toward new energy-efficient technology. It’s possible that the Danish government’s environmental regulation at the time played a role in that shift.

But models for innovative energy policies aren’t restricted to Germany and Scandinavia. “Israel in particular is interesting,” said Sivaram, pointing to its place at the top of the Cleantech Index. “Israel has a highly successful high-tech ecosystem and it innovates in cleantech out of necessity given its resource constraints.” Or, as the Cleantech report itself put it, the country is “able to compensate for its small domestic market, sensitive geopolitical setting, and water constraint by drawing the attention of both local and foreign investors to bet on its pool of high-tech entrepreneurs.”

Furthermore, according to Sarah Ladislaw, the director of the Energy and National Security Program at the Center for Strategic and International Studies, some of the most important and aggressive policy experiments right now are playing out in countries typically portrayed as the big bad guys on carbon-dioxide emissions: China and the United States.

China is a particularly compelling case study, argued Ladislaw: “On the one hand, they obviously have a great deal of coal and oil. On the other hand, they’ve added more renewable-energy capacity than any other country over the last several years. They’ve been able to almost singlehandedly drive down the cost of a lot of solar energy because they’ve just been able to produce so much and subsidize it so greatly.”

The Chinese have managed this in part by simultaneously applying the preferred European and American policies for stimulating the renewable-energy market. U.S. policymakers tend to reject German-style feed-in tariffs as an expensive, never-ending subsidy, according to Boersma. Instead, U.S. proposals often focus on renewable portfolio standards (a few European countries have this as well), where the percentage of renewables that utility companies must commit to is determined by government regulation, but the market determines price-setting as well as, frequently, which sorts of renewables make up the mandated percentage. The Chinese government is taking both of these approaches, according to a CSIS report Ladislaw co-authored in 2011. And it’s also about to institute a national cap-and-trade program, she said. Once in place, it will be the largest such system in the world.

America’s high level of emissions and failure to ratify the 1990s-era greenhouse gas-reduction commitment known as the Kyoto Protocol have earned the country notoriety in the campaign against climate change. But individual states are nevertheless functioning as pioneers; this fall, California lawmakers passed a bill committing to 50-percent renewable portfolio standards by 2030, while Governor Cuomo recently announced his intention to back a similar 50-percent renewables goal in New York.

One compelling aspect of American models, said Ladislaw, is the array of innovative “micropolicies”—for example, “demand response” programs that allow consumers, via smart meters, to adjust their energy usage throughout the day according to the price at that time, eliminating the need for power companies to build separate plants for “peak” energy-use periods. California has also introduced compensation for building electric-vehicle infrastructure, in an effort to address the chicken-and-egg problem in the transition to electric cars: Why build recharging stations and hook them up to the grid before a critical mass of cars need them? Why buy an electric car if there are no recharging stations on your daily commute?

Ladislaw mentioned India as well: “The thing they get the most attention for is for their really ambitious solar target,” which aims to install 100 gigawatts of solar-energy capacity by 2022 (the country is now at four). But, she added, “there’s going to be a lot of finance and attention from the international community in trying to help them not only reach that solar target but other clean-energy targets. It’s [going to be] proof of concept: that you can go through a period of strong economic growth and still be able to decarbonize.”

The international diplomacy underway in Paris may not inspire a lot of confidence. But the policy ideas are out there—and they’re about to be tested on a massive scale.