Innovation for Climate chAnge mitigation: a study of energy R&d, its Uncertain effectiveness and Spillovers‘ is a three-year (2010-2012) European Research Council (ERC) Starting Grant funded by the European Commission under the umbrella of the 7th Framework Programme. The project is coordinated by Valentina Bosetti at the premises of Fondazione Eni Enrico Mattei.
ICARUS aims at producing an unprecedented analysis of energy-related innovation mechanisms with the objective to:
- understand the role of Research & Development (R&D) investments;
- provide detailed analysis of international and inter-sectoral R&D and innovation spillovers;
- disentangle the roles and synergies of public and private R&D investments;
- incorporate in the analysis the uncertainty that inevitably affects the success of R&D programs;
- simulate optimal policy responses using an integrated assessment model.
The ICARUS research team, supported by its prestigious Advisory Board, will therefore:
Much has been said on how to reduce current anthropogenic emissions with the aid of a portfolio of existing technologies. However, stabilization of atmospheric concentrations of greenhouse gases to a safe level can only be achieved if, over time, net emissions fall to zero.
There is only one way to achieve this goal in a manner acceptable to the majority of the world’s citizens: through some kind of technological revolution. Innovations that have marked the history of technical progress (e.g. the ENIAC machine, developed by the US military department) have typically appeared in sectors with high spending on research and development (R&D). In other words, a necessary condition for the development of innovation breakthroughs is adequate R&D investment.
The energy sector, together with transport and communication, has historically been characterized by innovations that led to a more efficient use of energy or to the commercialization of carbon-free technologies. Indeed, innovation in the energy sector is considered essential for the development and the deployment of more efficient generation technologies whose demand is bound to increase alongside the growing concern for environmental issues and global warming. The role of innovation in the energy sector will be particularly relevant for Europe, in light of its leading position in climate negotiations and the Lisbon Agenda.
Technological breakthroughs will therefore play a major role in determining competitiveness, as pointed out by their increasing relevance in the recent policy debate. On top of this, technological transfers to developing countries could be the key to solve the logjam affecting international negotiations. Furthermore, the economic and population growth of countries such as India and China will push energy demand. New technological options to meet this increasing demand with less pressure on the environment are needed, but their development and deployment are first of all conditional on R&D.
From a broad perspective, understanding the dynamics of innovation in the energy sector has relevance to four main issues:
- environmental concerns, because new and more efficient energy technologies can reduce the impact of human activities on the climate;
- energy security, because renewable resources and paths towards reduced dependence on fossil fuels are today a crucial governmental concern;
- complexity of energy systems, since long-term investments in energy technologies have inter-temporal and often inter-generational effects;
- economic efficiency, given that climate change is a challenge that needs to be tackled at a reasonable cost.
In order to investigate how R&D stimulates innovation in the energy sector, the ICARUS project will therefore:
- learn from the past. By building a comprehensive database on public and private energy R&D and compliance expenditures, the research team of the ICARUS project will be able to carry out novel empirical analysis on core issues such as technological innovation, diffusion and transfer, crowding out between energy and non energy (as well as public and private) research efforts, the effect of (innovation and environmental) policy on technological change as well as a number of interesting case studies on selected relevant sectors, such as renewable and fossil energy. These analyses will greatly contribute to the understanding of the linkages between R&D investments, policy, patenting and innovation;
- learn from the experts. By using expert elicitation techniques, ICARUS will carry out a systematic process of collection and elaboration of qualitative and quantitative estimates from the experts, in order to better characterise the uncertainty concerning the innovation process in selected technologies,
- project into the future. This phase of the project will use the empirical analyses and the expert elicitations’ results as building blocks to improve the WITCH model and thus shed light on a number of areas relevant for the modelling community. On the one hand, we will provide a better description of the mechanisms that lead to the construction of an energy knowledge stock (accounting for inter-country and inter-sector spillovers). On the other, we will integrate the results of the expert elicitation process in the WITCH model to represent uncertainty;
This commitment arises from the acknowledgment that one of the major barriers to research in innovation with respect to energy efficient and climate friendly technologies is the poor understanding of the dynamics between investments and innovation in the energy sector. Such poor understanding is often attributable to scarce or inexistent data on R&D investments, value of innovation and technology diffusion and transfer.
There is indeed a lack of detailed data on investment in R&D for the private sector, and the necessity to compact all the available information and data already available from a number of different institutions.
Within ICARUS, the research team aims at:
- Expanding available energy R&D databases: in particular, collecting data on public and private energy R&D investments for top players in the field of energy and climate friendly innovations
- Assembling a database of patents that can help researchers analyze the development and diffusion of the technologies of interest
- Collecting data on selected less-carbon-intensive technologies currently in the demonstration phase which have a high potential of becoming breakthrough technologies in the next 30 years.
The effort to compact and collect new data relevant for energy and climate innovation studies will lead to a number of significant empirical contributions to the current literature. These will be relevant both with respect to innovation in general, as well as climate change and energy innovation in particular. The research activities will focus on:
- Energy R&D dynamics, particularly on the substitutability or complementarity dynamics of private versus public R&D and on general purpose versus energy R&D
- The differential impact of environmental policy instruments on technology innovation, diffusion and transfer
- The extremely relevant issue of how International Property Rights protection and more in general the institutional setting affects the innovation, adoption, diffusion and transfer of technologies to combat climate change. This issue is particularly relevant since a successful promotion of environmental innovation requires both an optimal environmental policy as well as an optimal technology policy.
- How international and inter-sectoral R&D and innovation spillovers contribute to global learning with respect to environmentally-friendly innovation
- The role of technological specialization and absorptive capacity in favouring the environmentally-friendly sustainable adoption and adaptation of new energy technologies, which is a necessary condition to solve global warming issues while improving the well-being of citizens in developing countries.
- The role of uncertainty on innovation and technology diffusion
- Application of empirical results to climate economy models: towards a new specification of knowledge production and spillovers
Particular attention will be devoted not only to macro-analysis, informative of the overall dynamics of the R&D and innovation process, but also to specific case studies. In addition, an effort will be made to apply innovative econometric techniques to innovation issues with a specific attention to energy and climate change.
While data collection and analysis can provide extremely valuable information on past dynamics and development, ICARUS recognizes the determining role of uncertainty on the outcome of current and future innovation processes. In order to gauge the distorting effect of uncertainty on innovating firms’ behavior, ICARUS is carrying out a comprehensive experts’ elicitation process. This will result in new quantitative data and qualitative information on the technical characteristics of different carbon-free technologies and on the main barriers to their success and diffusion into the market.
The collected data will contribute to producing probabilistic estimates on the role of RD&D investments to overcome technological limits, abate costs and ensure market penetration. The technologies targeted in the interviews are in the lab or demonstration phase: they have high potential for emission reduction but costs are not yet competitive with respect to the traditional (fossil-based) incumbent technology.
We identified and selected a heterogeneous group of European top experts for each of the technology categories. During face-to-face interviews, carried out through web conferences, we submitted specific questionnaires on the different technologies.
Currently, most of the data has been collected and is being elaborated and analyzed. We are also carrying out follow-up interviews to check for inconsistencies or errors in the experts’ responses. Probabilistic judgments will be used to populate a stochastic version of an Integrated Assessment model, the WITCH model, aimed at assessing the role of technology innovation in mitigating the effects of climate change. Data collected will be also made available to the modeling community so that other models can include them and perform analogous analyses.
Who are the experts in ICARUS?
The collection and analysis of data from the experts’ elicitations on photovoltaic and concentrated solar power technologies, nuclear, electric drive vehicles, biofuels and bioenergy technologies are closed. For most of these technologies, reports are already available.
Carbon Capture and Storage
The final aim of the ICARUS project is to develop a framework that can guide policy makers when deciding on climate-related innovation, while accounting for the crucial fact that innovation is an uncertain process. This decision-support tool will be developed by integrating the experts’ judgments and results from the empirical analysis of patent, deployment and RD&D data into a stochastic formulation of the WITCH model.
WITCH (World Induced Technical Change Hybrid model) is one of the main modelling tools developed within FEEM’s Sustainable Development research programme. This Integrated Assessment model is designed to assist in the study of the socio-economic dimensions of climate change and to help policy makers understand the economic consequences of climate policies.
This macroeconomic model has a technologically-detailed energy sector and integrates advanced modelling of technological evolution via diffusion and innovation processes related to both energy- and carbon-efficiency improvements. In order to provide policy insights that properly consider the uncertainty pervading the innovation process, a stochastic formulation of the WITCH model will be used in ICARUS.
Stochastic programming makes it possible to devise optimal hedging strategies against policy, technology, and innovation uncertainties, describing the optimal path of R&D and technology investments before uncertainty is revealed. Optimising agents maximise an objective function over time and over different possible future states of the world. Because agents have perfect foresight, current decisions are taken knowing what they will be facing in each branch the future will open up, as well as the probability of the materialisation of each branch. However, agents cannot anticipate what future state of nature will occur and have to live in a unique state until uncertainty is revealed. The analysis is typically framed by defining a single- or multi-stage scenario tree describing future states of nature each characterised by a well-defined probability measure. The scenario tree is common knowledge and all agents in the model are equally informed.
The empirical data collected during the first part of the project (e.g data) will be used to strengthen the empirical foundations of technical change dynamics in the model, while expert judgments will be used to populate the scenario tree.