3.4.2 RD&D and investment patterns

As mentioned in Chapter 2, the private sector is leading global research and development of technologies that are close to market deployment, while public funding is essential for the longer term and basic research. R&D efforts in the energy area are especially important for GHG emissions reduction.

Accelerating the availability of advanced and new technologies will be central to greatly reducing CO₂ emissions from energy and other sources. Innovation in energy technology will be integral to meeting the objective of emission reduction. Investment and incentives will be needed for all components of the innovation system – research and development (R&D), demonstration, market introduction and its feedback to development, flows of information and knowledge, and the scientific research that could lead to new technological advances.

Thus, sufficient investment will be required to ensure that the best technologies are brought to market in a timely manner. These investments, and the resulting deployment of new technologies, provide an economic value. Model calculations enable economists to quantify the value of improved technologies as illustrated for two technologies in Figure 3.36.

Figure 3.36: The value of improved technology.

Note: Modelling studies enable experts to calculate the economic value of technology improvements that increase particularly drastically with increasing stringency of stabilization targets (750, 650, 500, and 450 ppmv, respectively) imposed on a reference scenario (modelling after the IS92a scenario in this particular modelling study). Detailed model representation of technological interdependencies and competition and substitution is needed for a comprehensive assessment of the economic value of technology improvements. Left panel: cost savings (billions of 1996 US$) compared to the reference scenario when lowering the costs of solar photovoltaics (PV) from a reference value of 9 US cents per kWh (top) by 1, 3, 4, and 6 cents/kWh, respectively. For instance, the value of reducing PV costs from 9 to 3 cents per kWh could amount to up to 1.5 trillion US$ in an illustrative 550 ppmv stabilization scenario compared to the reference scenario in which costs remain at 9 cents/kWh). Right panel: cost savings resulting from availability of an ever larger and diversified portfolio of carbon capture and sequestration technologies. For instance, adding soil carbon sequestration to the portfolio of carbon capture and sequestration technology options (forest-sector measures were not included in the study) reduces costs by 1.1 trillion US$ in an illustrative 450 ppmv stabilization scenario. Removing all carbon capture sequestration technologies would triple the costs of stabilization for all concentration levels analyzed.

Source: GTSP, 2001.

Generally, economic benefits from improved technology increase non-linearly with:

1. The distance to current economic characteristics (or the ones assumed to be characteristic of the scenario baseline).

2. The stringency of environmental targets.

3. The comprehensiveness and diversity of a particular technology portfolio considered in the analysis.

Thus, the larger the improvement of future technology characteristics compared to current ones, the lower the stabilization target, and the more comprehensive the suite of available technologies, the greater will be the economic value of improvements in technology.

These results lend further credence to technology R&D and deployment incentives policies (for example prices^[24]) as ‘hedging’ strategies addressing climate change. However, given the current insufficient understanding of the complexity of driving forces underlying technological innovation and cost improvements, cost-benefit or economic ‘return on investment’, calculations have (to date) not been attempted in the literature, due at least in part to a paucity of empirical technology-specific data on R&D and niche-market deployment expenditures and the considerable uncertainties involved in linking ‘inputs’ (R&D and market stimulation costs) to ‘outputs’ (technology improvements and cost reductions).