Apr

7

Garnaut Review Submission on Innovation

April 7, 2008 | 6 Comments | Joshua Gans

Today I submitted a paper to the Garnaut Climate Change Review responding to their issues paper on research and development. My paper says several things including:

  • ‘Getting the prices right’ is not sufficient to generate the required innovation to optimally deal with climate change (indeed, it may make private incentives worse)
  • Emissions trading will promote carbon sequestration but will not likely promote more efficient use of fossil fuels or of alternative fuels
  • There is an unprecedented opportunity to use emission permit pricing to determine the social return on projects for government funding in this area.

And some other stuff. It will be interesting to see what proposals they end up recommending in this space.


Comments

6 Responses to “Garnaut Review Submission on Innovation”

  1. Robert Merkel on April 7th, 2008 4:55 pm

    Hmmm. I’m not sure I find your argument entirely persuasive, at least on the qualitative level (I’m not competent to critique your quantitative modelling).

    Isn’t the whole point of the exercise that you divert investment – including R&D – away from other areas, and into ones that result in less emissions?

    So even if there are fewer (for example) cars produced when emissions trading becomes widespread, all Toyota’s R&D budget (even if slightly smaller) goes into improving the Prius rather than improving the tactile experience of door closure or the other stuff they previously spent money on.

    And, yes, at one point car manufacturers spent not insubstantial amounts of money making car doors give a nice, solid “thunk” when you close them, because they found that customers regarded this as a way to judge quality and safety.

  2. Joshua Gans on April 7th, 2008 5:16 pm

    Robert, I wish that were so but the problem is that emissions restrictions reduces resources that used to be available for R&D; clean air doesn’t produce science, I’m afraid. So even if you take into account diversion of resources, it is not enough. The government is going to have to do more than the free-marketiers would presume.

  3. Robert Merkel on April 7th, 2008 5:47 pm

    I’d love to look at the assumptions you’re making here.

    There’s been a whole bunch of new technology invented to reduce nitrogen oxides, sulphur compounds, particulates, and whatnot from cars, in the wake of emissions laws.

    Presumably, all this gear makes cars more expensive, which reduces the number of cars sold.

    But there’s been very substantial innovation in pollution reduction gear in cars.

    Maybe some of that is based on government-funded research, but I think most has been done by the car companies.

    I find it very counterintuitive that the comparatively small restriction on economic growth would impose drastic cuts in R&D sufficient to overcome fairly massive resource diversion towards research in emissions reduction.

    If and when do you intend to publish your detailed modelling? Is it in a form that mere mortals can get some insight into the assumptions and numbers behind it?

  4. Joshua Gans on April 7th, 2008 5:52 pm

    Alas I am years from an academic publication. I was struggling to get stuff done to my satisfaction just to make a submission to the review.

    I would have thought it unlikely too but I didn’t set out to find that. When it comes down to it, R&D is determined by what we have in terms of resources right now. And we have only so many scientists in the world. That is a big limiting factor. Add to that a shrinking market and there is less private incentive for R&D.

  5. Richard Ferrers on April 10th, 2008 9:51 am

    Congratulations on a thoughtful analysis Joshua. Have skimmed over it and wanted to share my perspective. Your prizes comment ties in with my notes below.

    My analysis forms the implications chapter to my PhD on ‘how innovation happens’, focussing on the individual and social perspective, and particularly on Value.

    I have identified four problems with the emissions trading scheme (ETS), encouraging low carbon innovation, mostly arising from Christensen’s (1997) disruptive technology theory:

    Excerpt from Garnaut submission (final yet to submit):

    Some problems exist with the ETS encouraging low C (carbon) technology. Firstly, the ETS will encourage incremental innovation in power stations, and transfer from coal to gas, however it will not encourage radical or disruptive innovation, which is likely to come from small firms operating outside of the power and car/oil industries. Disruptors who do not hold C certificates have less incentive from the ETS to innovate.



    Secondly, disruptive innovation can decrease the value of C certificates, giving certificate holders an incentive to resist such technology to protect the value of their investment in C certificates.



    Thirdly, oil companies who purchase certificates, rather than petrol consumers, to keep the ETS simple, are more likely to pass C prices onto consumers, than to create or buy low C technology, which is outside their competencies, and would reduce their profits.



    Fourthly, to protect their C lock in, the coal and oil industries have incentive to undermine the processes, and distract funding away from other low C technologies eg QLD $900M clean coal investments vs $26M Centre for Low Emission Technology, VIC $187M Energy technology innovation strategy (including $103.5M clean coal) vs $12M for renewable energy support fund,



    Therefore, to avoid these ETS problems, I suggest a Low C Incentive scheme, which collects funds and pays low C users and producers to encourage such use and production.

    Full details on my blog – valman.blogspot.com, with the recommendation, being a 2% GST increase to raise $1 billion per month to create a GOLD RUSH – race to low carbon innovation.

    Richard Ferrers
    Research Fellow
    Centre for Global Innovation and Entrepreneurship
    Dept of Management and Marketing
    University of Melbourne

  6. Richard Ferrers on April 10th, 2008 9:52 am

    Oops – GST temporary for five years (with option to renew for five more).