Trumping up the carbon lock-in
- Govt may lower tariffs for new hydro-electric power projects
- Excluding external talent seen as major deterrent to innovation
- India pushes for concluding balanced RCEP deal that includes services pact
- Investing in arresting ageing
- IIFL arm to raise $500 million for maiden offshore affordable housing fund
Let’s agree at the outset that human-industrial activity has accelerated the changing of the world’s climate—this is also the opinion of 99% of scientists who study this subject. Yet, and you may be surprised, the American president-elect thinks otherwise. Given the power of the office he is going to assume, a new round of global debates is going to begin on the very basics of the issue—reversing, or at the very least stalling, decades-worth of work in international climate policy and clean energy development.
Against the backdrop of these gloomy headwinds, I want to highlight an overlooked but extremely fundamental aspect of climate change, that of the “carbon lock-in.” The concept, developed by American academic Gregory Unruh of George Mason University, demonstrates why, despite viable alternatives, we continue to maintain decades-old, fossil fuel-based infrastructure. What leads to a lock-in is the complex interconnectedness of people, private companies, and public institutions stewed over a long period of time. One of the best examples to demonstrate this concept is that of the internal combustion engine in automobiles.
At the technology level, once the base technology of the internal combustion engine was innovated and built out, it set the wheels of large-scale adoption into motion. The incumbent at the time was the horse carriage industry. Roads were designed for horse carriages, networks of rest stops with hay—similar to modern-day petrol pumps—had been set up for horses, and entire drainage systems were built out to manage horse-dung on the streets. How could automobiles with internal combustion engines gain entry into a system that was designed entirely for horse carriages? The answer is continuous innovation, demonstration of the superiority of the technology, sustained public relations efforts, and large-scale up-front investments—some of them subsidized—to create the support infrastructure. Once the internal combustion engine technology broke in through the locks of the horse carriage industry, it snowballed into a lock-in in and of itself.
Lock-ins take shape due to the following reasons:
First, improved economies of scale of incumbent technologies. Over time, as production volumes increase, the unit costs of production decrease because fixed costs get spread out. This improves prices for consumers as well as bottom lines for producers; and makes it difficult for new entrants, like clean energy technologies, to compete against well-priced incumbents, like coal and oil.
Second, the accumulation of skill and experience. The more people focus on an incumbent area, work on it, study about it, innovate around it, the more they are able to drive improvement through cost reductions and performance. Similar to the energy example above, think about how hydraulic fracturing—a technology invented in 1947 to drill oil—improved gradually over a period of almost six decades to finally become commercially viable in 2005. Hydraulic fracturing, also known as fracking, is now one of the key technologies used to extract oil and gas trapped deep beneath the Earth’s surface in hard rock formations.
The unprecedented amount of oil and gas that is being extracted through this method is primarily responsible for the current $50/barrel oil-price regime in global oil markets. Such long-term improvements in incumbent technology, again, make it difficult for new entrants to compete.
Third, adoption reduces uncertainty. As more people adopt a technology over time, uncertainty about its quality, performance, and permanence reduces. This has benefits for both consumers, who want to use reasonably-priced reliable goods, and producers, who want to produce saleable products with steady long-term business prospects. Home owners are more likely, for instance, to continue buying power from state distribution companies—something they’ve always been doing—than take the risk and cost of installing rooftop panels on their premises.
The result of a carbon lock-in is that, for the reasons outlined above, we are now a society reliant on fossil fuel-based energy production—over two-thirds of global energy generation came from coal, oil and gas in 2013.
In fact, a pertinent example of the carbon lock-in is India’s grid design. Given that India developed its national grid keeping coal at the centre of its design, it will eventually struggle to evacuate large amounts of solar and wind power into the grid given that these technologies have a very different generation profile in comparison to coal.
If we were to design the grid from scratch, maybe we would do so differently to optimize solar and wind production; but now that the legacy system is in place, it will be challenging for these new technologies to find an optimal place in the system.
One way for newer clean energy technologies to get a seat at the table is to use government help in the early stages of the product cycle. This could be either in the form of subsidies for research and development, or in terms of fair regulations on the incumbents.
The outgoing US president did just that—and what the US does is important because it accounts for the lion’s share of world oil and electricity consumption.
President Barack Obama put long-term restrictions on coal power plant emissions that were expected to drive up costs of coal production and level the playing field for renewables. He put a moratorium on the drilling of oil and gas on land owned by the US federal government—which accounts for 25% of the US’s proven oil and gas reserves—to, among other reasons, put a check on the US’s carbon emissions.
And he budgeted outlays for research and development that led to the vast improvements in battery, turbine, panel manufacturing, electric vehicle, and other clean energy technologies. He was, in effect, loosening the lock-in of carbon-based technologies on global infrastructure.
However, the American president-elect, Donald Trump, has a different agenda and is motivated by job creation above all else. In his “contract” with the American voters, and on numerous instances on the recently concluded campaign trail, Trump has promised to scrap all of President Obama’s restrictions on fossil fuels to unlock more jobs for American people in the short term. While he does not seem to be fundamentally opposed to clean energy per se, clean energy technologies now have to break the carbon lock-in on economics alone. This will eventually happen, but for the time being Trump’s election will strengthen the carbon lock-in.
Sumant Sinha is chief executive of ReNew Power. Silent Spring will appear every fortnight and look at issues related to the environment, climate change and renewable energy.