Human emissions of greenhouse gases (GHGs) are contributing to a rise in global average temperatures, with potentially significant effects on the climate. In response, governments around the world have introduced policies intended to reduce emissions of GHGs. Most of these policies are “top-down” and include mandatory restrictions on emissions, mandatory use of certain “low carbon” technologies, and subsidies to specific technologies.
This study finds that such top-down policies’ approaches to controlling GHG emissions may not be as effective as bottom-up approaches that harness the natural tendency of entrepreneurs and innovators to identify more efficient and cost-effective ways to produce goods and services.
The study identifies several key trends that suggest bottom-up approaches are already delivering results:
- Energy use per dollar of gross domestic product (GDP) has been declining at a fairly constant rate in the U.S. for about a century.
- Emissions of carbon dioxide (CO2) per dollar of GDP have been falling faster than the rate of decline in energy use for the past half century, both in the U.S. and globally.
- Over the past 30 years, emissions of other GHG per dollar of GDP have been falling faster than emissions of CO2 globally.
These trends are largely driven by improvements in efficiency and changes in the sources of energy, including a centuries-long shift toward more energy-dense, lower-carbon fuels. These improvements were mainly driven by market forces, not government intervention.
While continued improvements in energy efficiency may slow or even stop the growth in energy use, they are unlikely to lead to a reduction in energy use, let alone a reduction in CO2 emissions. As such, if reductions in carbon dioxide emissions are to occur, they will need to come primarily from a continued shift toward lower-carbon fuels.
Currently, about 90% of the world’s energy and 80% of U.S. energy are supplied by carbon-based fuels. Numerous lower-carbon energy sources are currently available and are able cost-effectively to supply some portion of current energy demand. Unfortunately, however, attempts to shift largely or exclusively to zero-carbon fuels in the short term are likely to be prohibitively costly.
- Hydropower can only be cost-effectively produced in locations that are geologically suitable.
- Geothermal energy can be cost-effective in certain locations and applications.
- Solar and wind power can be cost-effective in a relatively wide range of locations and applications but cannot be relied upon by themselves to supply power because the sun only shines for an average of 12 hours per day and the wind does not blow continuously. For these intermittent power sources to form a significant proportion of energy supply, storage (such as batteries) or back-up generation will be needed.
- Battery storage is currently not cost-competitive with natural gas as a source of back-up power for renewable energy systems.
- Nuclear power remains an important source of energy in the U.S., but the cost of a new nuclear power plant is more than twice the cost of a new natural gas-fired power plant per kW of energy generated.
For low- and especially zero-carbon energy to become the dominant source of power in the U.S. and globally, continued innovation is key. The question is, which policies are most appropriate to drive such innovation?
In other cases, innovations may derive laterally from innovations in other technologies. For example, large-scale battery storage technology has already benefited from dramatic improvements in lithium-ion batteries initially developed for laptops and other small consumer electronics. Likewise, geothermal energy generation is already benefiting from innovations developed to enable the extraction of oil and natural gas from shale formations.
Because many factors are geographically specific, the optimal combination of lower-carbon technologies will vary significantly from place to place. It will also change over time as innovation drives down costs. So, policymakers should avoid one-size-fits-all, top-down approaches and instead look at ways to encourage innovation and implementation from the bottom up—both in general and specifically in energy markets.
Some of the most important factors affecting innovation in general are:
- Competition, both in general and specifically in capital markets;
- Flexible labor markets;
- Low personal and corporate taxes; and
- Streamlined, cost-effective regulation.
Meanwhile, governments could improve the prospects for low-carbon energy generation specifically by taking actions to:
- De-monopolize electricity markets;
- Remove trade barriers in the energy sector (both exports and imports);
- Reduce subsidies and tax expenditures for energy and energy-related technologies;
- Streamline permitting for all forms of energy generation, including nuclear; and
- Eliminate arbitrary, technology-specific energy mandates.
Innovation has the potential dramatically to reduce carbon emissions over the course of the next half-century. Indeed, if the United States were to adopt the pro-innovation approach outlined here, U.S. GHG emissions could fall to zero, or close to zero, by about 2060. Globally, it could take a little longer, but with a concerted effort to remove barriers to innovation, greenhouse gas emissions could approach zero in the last two decades of the century without any need for explicit restrictions on CO2 or other greenhouse gases.
Human emissions of greenhouse gases (GHGs) are contributing to a rise in global average temperatures. Concerns about the effects of increased temperature stemming from further increases in atmospheric GHG concentration have led governments around the world to implement policies that aim to reduce GHG emissions.
Unfortunately, many of the policies so far implemented have done little to reduce GHG emissions or reduce the risk of future temperature increases, at enormous cost. Unfortunately, many of the policies so far implemented have done little to reduce GHG emissions or reduce the risk of future temperature increases, at enormous cost. The Renewable Fuels Standard, discussed in Part 7 of this study, is an extreme example, but there are many others. Going forward, it is important to identify cost-effective policies to reduce GHG emissions and thereby slow the rate of climate change.
This study examines and explains the mechanisms underpinning reductions in GHG emissions and describes a set of policy changes that would achieve such reductions cost-effectively. It begins in Part 2 with a simple description of the relationship between economic activity, GHG emissions, and global warming.
Part 3 delves more deeply into the changing relationship between economic activity and emissions and offers a hypothetical projection of future emissions based on this changing relationship.
Parts 4 and 5 consider the role of energy density and dematerialization as explanations for the changing relationship between output and emissions.
Then, Part 6 assesses various factors that underpin both increasing energy density and dematerialization.
Part 7 evaluates the prospects for increasing energy efficiency both in general and through targeted policies.
Part 8 identifies technologies and policies that might lead to lower-carbon energy generation.
Finally, Part 9 draws together the several strands of policies discussed throughout the paper and offers conclusions.