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Investing in markets Vs. investing in technology

May 20, 2021 in Markets

Why robust carbon pricing is the key to technological change

The fight against climate change requires technological innovation; this is incontestable. The world must wean itself off fossil fuels and deploy zero-carbon technologies rapidly to meet the Paris Agreement goal of restricting global temperatures increases to less than 1.5 degrees Celsius.

Already, innovation has achieved incredible change. Renewable electricity – solar and wind – has proliferated around the world to the point where it can compete, without subsidy, against entrenched legacy technologies that use coal, oil and natural gas.1 Electric vehicle sales are ballooning, and developments such as battery systems, heat pumps and rooftop solar are starting to revolutionise domestic energy use.2

What’s striking about this “green technology imperative” is how it cuts across the entire global economy: from cutting out emissions-intensive processes in heavy industry to replacing internal combustion engines in transport, to developing agricultural techniques that enable more carbon to be stored in the soil.

Investing in markets Vs. investing in technology

Governments are aware of the challenge we face, and many are devoting considerable resources to research and develop the new technologies we need. Production tax credits, feed-in-tariffs, contracts for difference, all of these target individual technologies in specific jurisdictions.

But is this really the wisest course of action? SparkChange believes we can do more and do it more effectively.

Instead of selecting individual technologies to support, governments can offer support to all potential solutions at the same time and better yet, leverage immense amounts of private capital to help develop them, by introducing strong carbon pricing policies.

Properly implemented, a carbon price acts across the entire economy. It internalises the cost of carbon emissions for every entity and sector that participates, and produces a true, real cost of climate action.

Markets address higher costs by seeking out efficiencies, improvements, and replacement technologies. While a government support programme can devote finite resources to upscaling one new technology, markets deploy millions of potential resources, or investors, to focus on a wide range of potential solutions.

Even the unprecedented gains in Europe’s benchmark carbon price aren’t enough to trigger the scale of decarbonisation that the Paris goal requires.3 Scientists believe that carbon prices need to be much, much higher if we are to avoid the worst impacts of climate change.

The scientific view is backed up by numerous studies and reports that include the High-Level Commission on Carbon Prices, chaired by Nobel laureate Joseph Stiglitz and Lord Nicholas Stern. This report concluded that “the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment is in place.”4

Although some breakthrough technologies such as “green” hydrogen – produced without any emissions – may be feasible with a relatively low carbon price, other important technologies like carbon removal – either capturing and storing greenhouse gases underground – and direct air capture, currently cost $250-$600/tonne.5

Some politicians also agree that prices need to be higher. European Commission vice president Frans Timmermans said in May that “the price should be much higher than it is, even at €50.”

Not only do carbon prices need to be higher, but there need to be more of them.

So far, just 22% of the world’s emissions are covered by a carbon price, according to the World Bank.6 We need more. The EU ETS represents around 6% of the total. China’s nationwide carbon market only covers power generation in its first phase, representing some 4 billion tonnes a year in emissions, less than 10% of the total.7 8

“A rising tide lifts all ships,” the saying goes. A broad and deep worldwide carbon market would expose the full range and the cost of the changes that we need to prevent catastrophic climate change. It would bring the full weight of capital to bear upon the problem, ensuring that as many different solutions are found.

As nations’ ambition to cut greenhouse gases increases, so the cost of reducing emissions will also rise. Capital will still seek out the reductions that we need to get us to the Paris Agreement goal.

Trying to pick winners with subsidies and grants is an imperfect solution. Choose markets, and they will pick the winners.

1 https://about.bnef.com/blog/scale-up-of-solar-and-wind-puts-existing-coal-gas-at-risk/

2 https://www.iea.org/reports/global-ev-outlook-2020

3 https://www.theice.com/products/197/EUA-Futures/data?marketId=5474735&span=3

4 CPLC High Level Commission on Carbon Prices

5 WRI Direct Air Capture: Resource Considerations and Costs for Carbon Removal

6 World Bank State and Trends of Carbon Pricing 2020

7 ICAP Emissions Trading Worldwide Status Report 2021

8 UN Emissions Gap Report 2020

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