Will freely operating markets, unencumbered by the heavy hand of government, ensure an economically efficient transition to technologies that protect Earth from climate change? Fat chance, says a study out of Germany.

Researchers at the Potsdam Institute for Climate Impact Research say their “complex computer simulation that spans the entire 21st century” shows that without financial support for new technologies to back an emissions trading scheme, “energy technologies with high cost-reduction potentials will hardly stand a chance.”

Potsdam Institute for Climate Impact Research study
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They call it a case of market failure, citing an inherent aspect of energy: It’s all just energy, equally usable, no matter where it comes from, so consumers generally just look to get it as cheaply as possible. This leaves players in the global energy sector scant incentive to spend money to innovate. So we end up using inferior energy technologies long after a more efficient competing technology has come on the scene.

But the Potsdam researchers say their modeling shows a way to fight the old-energy inertia. They recommend feed-in tariffs or quotas for energy produced by emerging technologies, such as offshore wind power, biomass and solar power (but not, they add, for further-along CO2-reducing technologies such as nuclear reactors, hydropower or highly efficient gas power plants).

Short-term modeling, they say, hides the benefits this support can bring; it only becomes apparent when the time-span is extended many decades.

“We found that although it is possible to reduce the greenhouse gas emissions through emissions trading only, this is at a higher cost,” says Ottmar Edenhofer, chief economist at the Potsdam institute and co-author of the study. Only targeted funding “can introduce new technologies to the market which then show a steep learning curve – in other words which improve and become cheaper quickly.”

The researchers’ paper, “Learning or Lock-in: Optimal Technology Policies to Support Mitigation,” is available online as a PDF.

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