We know how to make the electricity supply renewable. We know how to make land transport electric. Both are on track. But there are four problem industries where things are not so clear.
These estimates are not all for the same year and not strictly comparable, but they are good enough to make the point that to reach net zero emissions, the four sectors (together 20% of global fossil emissions) cannot be ignored.
The challenges are distinct but they have common features.
- Very plausible technological pathways exist to decarbonise. But these are not mature, and for the moment they are far more expensive than BAU.
- There is no guarantee or strong expectation that technical progress will ever eliminate the cost barrier, in contrast to electricity and land vehicles.
- The industries are typical of modern capitalism: they are international and oligopolistic, with a lot of trade, a handful of large companies, and a myriad of small ones.
- Their products and services rarely have plausible substitutes. (We shall see later on why this matters).
Points 1 and 2 mean that the issue for public policy is not R&D (pace all the Democratic presidential hopefuls) but early deployment.
Recall how we got to cheap wind, solar and batteries. It wasn’t a carbon tax, since that does not exist anywhere in the pure form. Partial cap-and-trade exists in the EU, but it has only just started to bite, after giveaway initial allocations. It was done by subsidies for early deployment to create economies of learning and scale:
- In the USA, tax breaks for wind, solar, and electric cars; renewable obligations at state level.
- In Europe and China, tax breaks, subsidies, and regulatory privileges for electric cars.
- FITs and ringfenced auctions for wind and solar generation in Germany, other European countries, China and India.
The costs of FITs have been large in the past, though the cumulative liability (in Germany for instance) has now almost stopped growing as the few surviving FITs are near market rates. Well worth it of course, especially if you aren’t a German consumer.
The same principle holds for our four problem industries. Carbon taxes are politically toxic, and a coordination nightmare in globalised industries. So what’s the workable second-best kludge?
I’d like to float a possible solution. I’ll take steel as the example. The principle extends to the others ceteris paribus.!