Thank you, Chair.
Thank you for the opportunity to speak to you today. I'm a professor of public administration and international affairs at the Maxwell School of Syracuse University. I'm an environmental economist who has studied the interactions between policy and clean technology development for the past 20 years.
Over the last summer, I wrote a report for the C.D. Howe Institute on the development of low-emissions technology in Canada. As part of that work, over the last 18 months I've had the opportunity to give presentations in Toronto and Ottawa and to speak with government officials in Ontario and Alberta. While I wouldn't consider myself an expert specifically on Canadian energy policy, I have had the opportunity to learn a lot about it over the past two years.
Given the questions that were sent out before the meeting today, I will focus my comments on the adoption of clean technology. The most important thing to keep in mind here is that policy is the main driver of clean technology adoption. Many if not all the benefits of clean technology go to the general public, in the form of a cleaner environment, rather than the user of the technology. This translates into what economists call a “market failure”, in this case an externality. Without clear policy signals, investors have little reason to adopt clean technology.
This is important, because this also adds risks to the process, particularly for capital investment. Within the natural resources sector, we're often looking at equipment that may be used for 20 or 30 years. This means that investors want to know not just what will be in place today but what policies will remain in place for the future. It's important to think about what signals the government can provide that the policy in place today will exist through the lifetime of the investment. As a simple example that we all may be familiar with, even when gasoline prices increase, consumers may be reluctant to switch to more fuel-efficient vehicles if they expect that prices will fall again in the near future, as they so often have.
Given this, what should these policy signals be? That depends on what the policy goals are. I want to lay out a couple of different options. The simplest thing to use is a broad-based, technology-neutral policy that simply addresses the environmental externality. Examples could be large-scale policies such as the carbon tax in place in British Columbia, or the cap and trade that has been used in Ontario. It could also include sector-specific policies that do not explicitly favour one technology over another, such as a renewable portfolio standard.
In cases such as this, firms will comply with these policies by choosing the most cost-effective technologies available to them. This means that technology-neutral policies favour the technologies that are closest to being market-ready. Essentially, it narrows the gap between the cost of fossil fuels and the cheapest available renewable energy source. Such a policy has been efficient in that it keeps the compliance cost as low as possible. If that's the policy goal, then a broad-based policy is best, and we need to only ask what other market failures might exist to discourage the adoption of otherwise clean technologies. I'll return to that point later.
I would argue, however, that clean technology policy should focus not only on adoption but also on innovation. Since technology-neutral policies favour the clean technologies that are closest to market, they're not enough to support the development of technologies that are not yet market-ready and are considered important to meet future environmental needs. Thus, if the goal is also to encourage the development and the deployment of new breakthrough clean energy technologies, you'll want to complement these broad-based policies with additional policies targeting those technologies that are not yet market-ready. As an example of this, as I mentioned before, renewable portfolio standards encourage the development and diffusion of wind energy. Countries, states, and provinces that have used that policy have seen the development of wind and not as much the development of solar energy.
The development of solar has occurred in countries with more targeted policies. Germany, for example, uses feed-in tariffs, which were set initially seven times higher for solar energy than for onshore wind. As a result, it's led to a big expansion of solar energy in Germany, and Germany has become one of the leaders in solar energy usage. It's important to keep in mind, though, that there's a trade-off here. Such a policy comes at a cost, as these higher feed-in tariffs are passed on to the consumer in terms of higher electricity prices. Really, there are two competing needs to balance off here—the goal of keeping current costs as low as possible versus the goal of trying to encourage continuing improvement with a technology.
Once the environmental externality has been addressed, we can then consider what other barriers remain. Within the natural resources sector, a couple that are particularly important include the high cost of capital. Because the natural resource sector is capital-intensive, clean technology requires large up-front investments, which leads to a couple of issues. One issue is that it raises the cost of switching to a new technology. There's the concern that policies may lead to the lock-in of currently affordable technologies that make it difficult for a new technology to come online. When we think about the challenges that electric vehicles have, not having charging infrastructure online I think would be an example of that.
Financing is also a challenge, particularly for small firms. The United States has used a couple of policies that have helped to address some of these financing barriers. I'll talk about a couple of them and how they've been successful.
One is the small business innovation research grant program. This is not specific to energy. It's required of 11 different U.S. government agencies to set aside a little less than 3% of their extramural R and D budget to give out to small firms.
A recent study of the Department of Energy's small business innovation research program by Sabrina Howell, an economist at New York University, shows that the recipients of these grants, compared to applicants who applied but did not receive the grants, were much more successful. They received more subsequent patents, they were more likely to receive future venture capital, and they were twice as likely to earn positive revenue. When they did earn positive revenue, they made more money than the non-recipients of the grants did. Her research went on to show that the reason for this success was that these funds were important for developing demonstration and proof of concept. It's very challenging for these smaller firms to come up with the initial financing to get their products under way.
Another program that has been successful is the Department of Energy's loan guarantee program. This has received negative press because of the funding that was given to Solyndra, which eventually failed; but overall, it's important to note that the program received more back in interest payments than it lost on failed loans.
A key point here is that targeted funds that can help commercialization can be useful, but should focus on things that the market won't do on its own. This could include breakthrough technologies further from the market; complementary technologies such as improvements to the transmission grid, which are important for the development of renewable energy; and, focusing on smaller firms that may have more difficulty raising capital in the financial markets.
I'll conclude with some recommendations.
Any policy effort should start with broad-based policies. Here, it's important as well to provide long-term signals. For example, using the revenues from a carbon tax to lower other taxes signals a long-term commitment, right? If the revenues are used to lower the taxes, the government is less likely to take away the carbon tax because doing so would necessitate raising other taxes to replace that revenue.
Any targeted policies that are used should focus on breakthrough technologies that are further from the market. It should encourage some adoption of these, enough to encourage further development of the technologies, but they shouldn't be so large or widespread as to make the use of expensive technologies over cheaper substitutes the dominant technology in the market. The goal isn't, for example, to have solar energy overtake wind, but to encourage enough investment in these costlier technologies so that further learning and technology development can continue.
Finally, I would note that higher energy prices are not a substitute for environmental policy. It's important to distinguish between prices that increase due to energy market forces and price increases that result from policy.
A clear example of this comes from the oil market. Oil prices reached record highs during the early 21st century. Because of Canada's rich natural resources, these high energy prices spurred innovation within Canada, both on low-emission technologies such as wind and solar, but also on methods designed to increase the extraction of fossil fuels, such as the expanded efforts in the oil sands of Alberta.
Thus, simply relying on uniformly higher energy prices provides incentives for the development of both renewable energy and enhanced energy extraction.
In contrast, by reducing the price gap between low-emission energy sources and fossil fuels, policies such as a carbon tax encourage additional development and adoption of low-emission energy technologies, but do not promote additional investments in new oil recovery technology.
Thank you for your time.