Compare the fate of the U.S. wind power industry with that of the photovoltaic solar industry in Japan and Europe. In the U.S., investment in wind power has been dependent on a government- provided “production tax credit,” which has been offered and withdrawn in a series of stops and starts over the past several years. But the mechanism for subsidizing the photovoltaic solar industry in Japan, Germany, and elsewhere was explicitly designed to be long-lived. The subsidies decreased in a slow and carefully planned fashion, thus creating incentives for producers to deliver reduced costs through increased scale, learning, and innovation. The resulting cost improvements and industry growth followed predictably. A similar comparison can be made with the nuclear industry. In the United States, shifting regulations contributed to spectacularly rising project costs, whereas in France, a more stable regulatory environment enabled rapid growth and lower project costs.
The most successful governments in a post-carbon world will be those that provide predictable long-term environments favoring investment and innovation. This will matter more than getting the market design or regulatory regime exactly right, or than picking winning technologies.
Making Better Bets
If public policies play out this way, then the path is clear for corporate decision makers in the energy and industrial sectors. Don’t bet on projects that pay out only with a very high CO2 price. For example, with current technologies, carbon sequestration is financially viable only if the price of CO2 remains above roughly $70 per ton. On the other hand, a status quo strategy that depends on carbon emissions remaining “free” — such as relying on traditionally coal-fired power generation — is also risky. The greatest opportunities for investment will be holistic urban or regional infrastructure makeovers, where the energy, transportation, water, and telecommunications systems are seen as interrelated and the financing, construction, technological development, and social design are all conceived in unison. (See “Lights! Water! Motion!” by Viren Doshi, Gary Schulman, and Daniel Gabaldon, s+b, Spring 2007.)
Many discussions of market-based solutions are either too optimistic or too pessimistic. They ignore and downplay the costs or they insist that the costs are too great for any action. The best corporate response involves a sober assessment of the strengths and limits of available options, in light of the complexity of the emerging regulatory, political, and social milieu. Envisioning a world in which society employs multiple tools to address climate change — including standards, research programs, subsidies, and interdiction, as well as carbon markets — opens up a much broader range of new opportunities than the narrow (though worthy) strategies currently being pursued. Clean coal, renewable generation, and the like are only the tip of the post-carbon iceberg. It is the actions under the surface — behavior change, efficiencies, incremental innovation, infrastructure design, and good management practice — that will ultimately have the greatest impact.
Reprint No. 09101
Daniel Gabaldon is a principal with Booz & Company based in McLean, Va. He focuses on providing strategic advice to leading participants in the global energy and infrastructure sectors.