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Cicerone 5-2005

Ineffective climate policy

Today’s climate policy does not stimulate the use of new technology, such as carbon capture, says Knut Einar Rosendahl from Statistics Norway (SSB).

Rosendahl and his colleagues are instigating a research project that will look at the relationships between the energy market, climate policy, and technological innovation.
“Technological innovation is very important for both development of the energy market and mitigation of global warming,” he says. “We are interested in how different types of policies can affect technological innovation and how this can further affect energy markets with various climate goals. We will also look at how international climate policy can affect energy markets and greenhouse gas emissions in Norway.
“When we study climate policy, we look at not only carbon taxes and emissions trading, but also policy aimed at, for example, research and development of new technologies. Climate policy is a combination of pure climate policy and technology or innovation policy.”

Technological innovation

The project aims to develop a new economic model that looks at what governmental support of technological innovation would mean for the Norwegian economy (see textbox). Traditional models have taken technological innovation as a given.
“Now we want to model technological innovation as a separate activity in the model, where investing in this type of activity will increase technological innovation. Then we will focus particularly on carbon capture and storage as a highly relevant activity in Norway. Eventually we will also look at other types of energy technologies,” says Rosendahl.

Active innovation policy

The economists wish to study innovation policy more closely because often the market alone does not invest enough in new technology in relation to what is socially optimal.
“A typical example of this is that new knowledge and technology benefits not only the company that invested in its development, but also other companies. Companies will thus invest less in technology than what is best for society. Another example is that innovations often occur in markets with few actors and limited competition. In such markets, the prices are often higher and the development of new technology less than what would be economically optimal,” explains the economist.
But it is not enough to invest in technological innovation to meet Norway’s emissions reduction targets.
“Climate policy must also provide an incentive to make use of clean technologies. In my opinion such incentives are lacking today.”

The value of Norwegian natural gas

In the project, the researchers will also look at how technological innovation and climate policy can affect demand and thus the price of Norwegian natural gas.
“In the gas market there are several new technologies that can affect the development and prices of Norwegian natural gas. For example, technology for capturing and storing CO2 from gas-fired power plants can affect gas demand. This is especially important if climate policy is to become more ambitious in the time to come,” says Rosendahl.
In addition, various technologies transporting gas will affect demand. This is particularly true for the so-called LNG technology, where gas is liquefied and transported by ship.
“In recent years there has been a drop in costs of shipping gas. This affects the gas market and makes it more global. It is becoming easier to transport gas between continents, which then affects the profitability of Norwegian gas,” he explains.

Hydrogen society

Further in the future, technological innovation within the production of hydrogen will also affect the price of Norwegian gas. The production of hydrogen will probably in the first phase come from natural gas. And this will affect energy markets, particularly the gas market.
“As of today, this technology still has a long way to go before it is useable, but it can nevertheless be interesting for us to look at how increased use of hydrogen can affect the Norwegian economy and energy consumption.”
The researchers from Statistics Norway will also analyze a transportation system based on hydrogen.

Hydrogen cars and stations

“Today we have a transportation system based on gasoline and diesel with a wide distribution net of gas stations where you can fill up your tank whenever you want. If you were to buy a hydrogen car today, you would have a problem because there are almost no filling stations. Even if there were a hydrogen car that ran well and was reasonably priced, it would be of little use as long as fuel is not easily available. Potential suppliers of hydrogen think the same way: there are no hydrogen cars and therefore it is not profitable to build hydrogen stations.
“It is a problem that the costs of using hydrogen technology in the transport sector will be very high for the first cars and the first stations. But if there are enough people who buy hydrogen cars and enough stations are built, then it may be profitable for society to have a transportation system built on hydrogen.
“The project will look at what needs to happen for a hydrogen-based transport system to be realizable. We will first look at whether a new equilibrium of this sort is even possible. How low do the costs have to be for people to want to buy hydrogen cars and for gas stations to want to offer hydrogen? At this point, the technology is not sufficiently developed for a hydrogen-based transportation system to be better than the one we have today. But this could change in the long term.
“We will then look at what has to happen to achieve the new equilibrium. How many new cars must there be, and which measures have to be implemented by the authorities to make a hydrogen society a reality? It is difficult to achieve a new equilibrium without help from the government,” says the economist.

Support for the use of new technology

Even though government investment in technology development can be profitable for society in many areas, there are some exceptions.
“For other types of technology such as wind power, it is perhaps not a good idea for the government to invest in technological innovation. There is tough competition internationally, and Norway’s contribution would, in any case, be very small. But Norway probably has the best conditions for using wind power in Europe. This could be an argument for at least conducting research on implementation of wind power in Norway,” he says.
“A related example is wind power technology in Denmark. It is often presented as a success story. But there are also a number of studies that indicate that the costs of supporting this industry incurred by the Danish government may have been greater than the benefits yielded. It is not a given that it has been a profitable strategy even if there is currently a major export of wind power generators. Denmark is in many ways very similar to Norway in the sense that both are small and open economies. Norway nevertheless has a different energy production and consumption pattern than Denmark, and thus faces different challenges. While Denmark has focused on wind power, Norway has a strong focus on carbon capture and storage.
“When it comes to carbon capture and storage, Norway can occupy a niche even though there is major investment in this area also in the United States. Norway can make a major contribution internationally and establish a framework for the further development and prices of this technology. In addition, capturing and storing carbon from gas-fired power plants can affect the price of Norwegian gas and thus provide an additional benefit,” says Rosendahl.

Last updated: 29.11.2005

TECHNOLOGY SUPPORT. Economist Knut Einar Rosendahl and his colleagues will, over the next three years, find out how Norwegian investment in such innovations as carbon capture and storage can affect the Norwegian economy and Norwegian emissions of greenhouse gases. (Photo: Petter Haugneland)TECHNOLOGY SUPPORT. Economist Knut Einar Rosendahl and his colleagues will, over the next three years, find out how Norwegian investment in such innovations as carbon capture and storage can affect the Norwegian economy and Norwegian emissions of greenhouse gases. (Photo: Petter Haugneland)

“Capturing and storing carbon from gas-fired power plants can affect the price of Norwegian gas and thus give an additional benefit.”

Economic models

Economists use computer models that describe a country’s economy or the economy of the entire world. Certain aspects are simplified so as to emphasize the most salient aspects of the economy for the particular study. This project takes a detailed look at the power industry and will focus first on research and development (R&D) of carbon capture and storage. It will then be possible to see whether additional investment in carbon capture and storage R&D, for example, will take place at the expense of other R&D in the economy, and how this may have other consequences for the Norwegian economy.

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