Value Networks and the Renewable Energy Industry: Part 4 in a Series

By Patrick DeCourcy

(Ed. Note: This post is an excerpt from a recent paper entitled 'Value Networks and the Renewable Energy Industry: Mapping a Pathway Towards Enhanced Technology Diffusion' which explores some of the challenges facing the renewable energy industry as it moves to become a greater part of the US energy infrastructure. This is Part 4, the final in a series. Parts 1 through 3 can be found at the following links; Part 1, Part 2, and Part 3.)

Emissions Tracking and Trading Schemes

Another element of the value network of renewable energy firms relies on the trading, tracking, and penalties associated with emitting carbon into the atmosphere.  The thought is that due to the heavy pollution associated with the generation of coal and oil based energies, an emissions trading scheme would inhibit the use of fossil fuels and make it financially more viable to invest in renewable energies.

For example, there is legislation filed in the United States Senate called the Clean Energy Jobs and American Power Act – much more commonly known as “cap and trade” - that caps carbon emissions and sets up a pricing scheme for carbon and carbon credits which can be actively traded between corporations on an exchange, similar to a stock exchange. [1]  The credits themselves and the trading would be taxed, which provides a source of revenue to the government and it is expected that these regulations will drastically reduce carbon emissions.

When assessing the usefulness of this sort of public policy plan for the renewable energy sector, conventional wisdom would tell us that this is a useful incentive to drive the adoption  of renewable energy over fossil fuels.  Unfortunately, it is also expected to drive up costs for consumers of fossil fuel based energies or the goods and services of corporations who take advantage of goods and services made from anywhere between $175 - $1,870 per year by 2020. [2] This again would reinforce some of the weaknesses of incentives mentioned in the previous section.

But to fully analyze the value of this system, it is best to take a look at other countries which have enacted similar plans and see what the results were for energy consumers and for the diffusion of renewable energy.  The European Union enacted a cap and trade system in 2005 similar to that being proposed in the USA, some highlights of the results were as follows as reported in Canada Free Press: [3]

·         “Most Western European nations participating in the cap-and-trade program found the program to be expensive, as well as inefficacious in reducing carbon dioxide emissions, actually resulting in increased rather than decreased emissions until the global recession hit.  According to European Commission figures, emissions from the 27 member states rose by 1.9 percent in the first three years after cap-and-trade was put into effect.  Several countries were seeing a faster growth in carbon-dioxide emissions than the United States, which did not adopt the policy.”

·         “Further, the Europeans found misuses and abuses in the system, because all parties have an incentive to manipulate it.  Many companies got free permits, and because those permits were based on future estimates of emissions levels, there were too many free permits.  As a result, companies made large profits by selling unneeded permits and not passing their savings on to their customers.”

·         “Europe found the costs of the program to be large. In 2006, individual businesses and sectors had to pay €24.9 billion ($31.6 billion) for permits totaling over one billion tons.”

·         “Recently, tax evasion has been added to the list of ills stemming from carbon trading. German prosecutors searched 230 offices and homes of employees of Deutsche Bank, Germany’s largest bank, and of RWE, Germany’s second-biggest utility, to investigate tax evasion of 180 million Euros ($238 million U.S.) linked to emissions trading. Last year, the U.K., France, and the Netherlands started investigating carbon traders who committed fraud by collecting the tax and then disappearing without turning the tax funds in. According to estimates from Bloomberg New Energy Finance, about 400 million metric tons of emission trades may have been fraudulent last year, or about 7 percent of the total market.”

This analysis indicates that carbon trading and emission schemes have not lowered overall emission levels and resulted in widespread gaming and fraud, allowing fossil fuel use to continue unabated if not less inhibited than before.  If carbon emissions are increasing, then that leads me to believe that there is no usefulness of cap and trade plans for the diffusion of renewable energy.  Why should something like this be part of a modern renewable energy value network?  Where is the value created through this policy?  Innovators should spend no time nor invest any energy in this sort of public policy.

Furthermore, innovators at entrant firms need to tread very carefully when collaborating or engaging in a relationship with the political forces which are pushing cap and trade plans.  Although many of the advocates are well meaning and have performed breakthrough and award winning research, some elements of the movement are not interested in the diffusion of renewable energy technologies and see the movement as a venue to promote their own radical political agenda.  There have some examples of this agenda which have surfaced recently:

·         “But one must say clearly that we redistribute de facto the world’s wealth by climate policy.” [4]

Ottmar Edenhofer, Joint Session Chair of the United Nations Intergovernmental Panel on Climate Change (IPCC) in Geneva, Switzerland

·        "It's important that we have a global agreement on how we are going to limit the emissions of carbon dioxide and other greenhouse gases going forward, and an agreement that will include the tropical forests, that will include ways to transfer some of the revenues from carbon taxes or carbon emission permits in the North to pay for reduced deforestation in the South." [5]

John Holdren, Obama White House director of Science and Technology Policy

·         “A rising carbon price is essential to “decarbonize” the economy, i.e., to move the nation toward the era beyond fossil fuels. The most effective way to achieve this is a carbon tax (on oil, gas, and coal) at the well-head or port of entry. The tax will then appropriately affect all products and activities that use fossil fuels. The public’s near-term, mid-term, and long-term lifestyle choices will be affected by knowledge that the carbon tax rate will be rising.  The public will support the tax if it is returned to them, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts.” [6]

James Hansen, NASA Scientist and head of the NASA Goddard Institute for Space Studies in New York City

The goal of this analysis is not to poke holes in climate change or global warming science, as stated earlier, there seems to be solid consensus that manmade global warming is a real problem that will have to be dealt with.  However, some of these solutions from leaders in the field seem to center around Marxist ideology and other political solutions to achieve a global redistribution of wealth, rather than a global diffusion of renewable technologies.  There is absolutely no benefit for entrant renewable energy firms to have any linkages or relationship with this sort of movement.  Renewable energy firms need a profit motive, not a redistribution scheme, to continue to develop their technologies and to unseat fossil fuel companies from their dominance.  There is no single political answer to helping renewable energy diffuse and many of the purported solutions have actually led to fossil fuel companies being strengthened.

Conclusions and Lessons Learned

The value network which is being set up is poised to aid in the technological development and diffusion of renewable energy, but it has a few weaknesses.  Subsidies, incentives, and political solutions to energy policy are squarely embedded in the value network of fossil fuel companies.  Christiansen’s thesis regarding innovators failing due to becoming co-opted by trying to enter into their competitor’s value network has been shown to be accurate when renewable energy industry firms try to obtain similar subsidies that fossil fuel companies have enjoyed. 

If emerging and entrant renewable energy companies continue to waste their time focusing on the theoretical benefits and value of these, then they will remain stuck in the chasm prior to diffusion into the early majority of users.  Innovators in renewable energy have a great opportunity to fine tune the engineering of the various technologies (wind, solar, biomass, etc.) to outpace the efficiency and cost benefits present in the fossil fuel industry.  This will yield far greater benefits than any public policy incentive or complex trading schemes could ever produce.  When they can do that, they need to communicate this to consumers and they should be able to diffuse the technology throughout the early majority.  However, this will not happen by forcing an inefficient and non-optimal technology on consumers and businesses and it will actually be counter productive and may benefit their competitors as this analysis illustrated. 

[1] "S.1733: Clean Energy Jobs and American Power Act - U.S. Congress - OpenCongress." OpenCongress - Track Bills, Votes, Senators, and Representatives in the U.S. Congress. Web. 12 Dec. 2010. .
[2] "The Cap and Tax Fiction - WSJ.com." Business News & Financial News - The Wall Street Journal - WSJ.com. 26 June 2009. Web. 12 Dec. 2010. .
[3] "Myths of Cap and Trade and Clean Energy Policies." Canada Free Press. Institute for Energy Research, 11 May 2010. Web. 07 Dec. 2010. .
[4] Zeitung, Neue Zircher. "IPCC Official: “Climate Policy Is Redistributing The World's Wealth”." Welcome to The Global Warming Policy Foundation. 18 Nov. 2010. Web. 12 Dec. 2010. .
[5] ""Global Disruption" More Accurately Describes Climate Change, Not "Global Warming" - Leading Scientist John Holdren." A Daily TV/radio News Program, Hosted by Amy Goodman and Juan Gonzalez, Airing on over 900 Stations, Pioneering the Largest Community Media Collaboration in the U.S. 03 July 2008. Web. 12 Dec. 2010. .
[6] Hansen, James, and Anniek Hansen. Letter to MIchelle and Barack Obama. 29 Dec. 2008. Columbia University. Dr. James Hansen, 29 Dec. 2008. Web. 02 Dec. 2010. .

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