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Allison Giffin ES-300 4/11/13 Solutions to the Renewable Energy Gap Abstract: The widespread adoption of renewable energy

is deterred for primarily economic reasons, and by inextricable association, political reasons. This paper reviews the literature on the economic barriers to a higher percentage of global renewable energy consumption. While some are more commonly cited in the policy literature, others are more unexpected and others still, are (relatively) easy to solve. The first section assesses the most common barriers to renewable energy proliferation. The second section will delve into more regionally specific barriers separated into specific political deterrents within the U.S. and issues specific to developing countries. The last section synthesizes common themes among both general and regionally specific barriers and provides policy prescriptions and possible areas of further study. Introduction In the haystack of apocalyptic literature concerning global warming and the impotence of any policies intended to mitigate it, one can find precious few needles that pierce the thick atmosphere of doubt. What does emerge in the discussion of solutions to climate change is the agreement that there is no one solution. (Socolow, 2004; Davis, 20013). Afforestation, changes in food production and consumption, land-use planning, and population control are mentioned as possible (and always partial) solutions to the climate change problem, but societies most starkly apparent obligation is to stop (or vastly reduce) the combustion of fossil fuels. There are two components to emissions reductions: using less fuel, and using different fuel. Carbon taxes, efficiency standards, and cap & trade programs are the most salient possibilities for carbon reduction while renewable portfolio standards (RPS) and feed-in tariffs (FIT) are the most widely discussed policy solutions to

facilitate the switch to different fuel. Feasible solutions would most likely be some combination of both, but switching to different fuel is an especially enticing possibility because it reduces the magnitude with which those enjoying detrimentally consumptive lifestyles have to change their behavior. The political implications of such an attractive prospect imply that the widespread use of renewable energy should be a cardinal policy consideration with a high level of public support. Indeed public opinion polls indicate that, at least in the US, there is a high level of support for renewable energy (Pew, 2010). More specifically, researchers at Harvard and Yale found that the average American citizen was willing to pay $162 per year to support a national policy requiring 80% clean energy by 2035 (Gillis, 2012). This willingness to pay actually dropped off when the definition of clean energy was expanded to include natural gas or nuclear power, indicating wide support for renewable energy specifically. The public opinion literature is rife with evidence of public support across a number of countries for serious integration of renewable energy (Gillis, 2012). The question remains then: why dont renewable energy sources make up a larger percentage of the energy resource composition both in the United States and in other countries across the globe? An oft-cited reason for why renewable energy isnt a viable solution to climate change is a technical one. It is difficult to store the energy generated from most conventional renewable sources: wind, water, and the sun. This is an important consideration, and there is scientific research involving various mixes of renewable energy sources being used to store other sources (Trafton, 2008). Further, the possibility of a viable backstop technology for baseline power cannot be ruled out. Even the controversial prospect of a great proliferation of nuclear energy is made more appealing with research into safety measures like thorium molten salt reactors. Using thorium instead of uranium with a molten salt cooling agent instead of water make the process safer by generating a smaller amount of waste with a shorter half-life and preventing melt down (Ludovic, et al. 2006). This investigation, however, will address a different set of reasons why the world does not meet a higher percentage of its energy needs with renewable

sources. Even with the continued use of fossil fuels for baseline power supply, it is possible right now to use renewable sources by an order of magnitude more than the degree to which we are currently using them (Socolow, 2010). The widespread adoption of renewable energy is deterred for primarily economic reasons, and by inextricable association, political reasons. This paper reviews the literature on the economic barriers to a higher percentage of global renewable energy consumption. While some are more commonly cited in the policy literature, others are more unexpected and others still, are (relatively) easy to solve. The first section assesses the most common barriers to renewable energy proliferation. The second section will delve into more regionally specific barriers separated into specific political deterrents within the U.S. and issues specific to developing countries. The last section synthesizes common themes among both general and regionally specific barriers and provides policy prescriptions and possible areas of further study. General Barriers to Renewable Energy Investment: It is important to define the distinction between market barriers and market failures when discussing economic deterrents to renewable energy investment. Market barriers are anything that prohibits the entrance of competing suppliers to a market, like high capital costs. It is not easy to enter the airplane manufacturing business whereas it is relatively easy to enter the t-shirt printing business. Other market barriers involve pricing structures, firm structure, the elasticity of supply and demand, and various uncertainties. Market failures are the inability of the market to reach an efficient Pareto optimal equilibrium in which no party is made better off without making another party worse off. This is most often due to externalities, which are essentially costs or benefits imposed on an uninvolved third party as a result of a market transaction, like loud noises from a factory, a good smell from a bakery, or, in this case, air pollution and climate change as a result of the production and consumption of fossil fuels.

Focusing first on market barriers, most of the literature cites infrastructure and more generally the cost of switching as the most prominent barriers to investment in renewable energy. Most forms of renewable energy sources have high up front fixed costs of capital and extremely low marginal, and variable costs thereafter, some of which eventually pay for themselves (Schmalensee, 2010). Hamilton (2009) finds that for communities considering widespread installation of in home geothermal heating and cooling pumps, the high up front costs of installing a community sized underground pipe network is prohibitive when developers bear the up front costs of installation and homeowners reap the benefits of lower heating and cooling costs. At the household level, this problem is further compounded by the principle agent problem in which the pay structures of engineers and architects that install solar panels, backyard windmills, and geothermal heat pumps, are a percentage of the capital costs of the projects. This kind of pay structure renders the already high up-front costs of installing renewable energy sources or efficiency improvements arbitrarily more expensive (Brown, 2009). Similarly, at the household level, the principle agent problem exists where landlords have no incentive to install either renewable energy or energy efficiency projects when they bear the costs and their tenants reap the benefits of lower heating and cooling costs (Brown, 2009). Even with variable costs close to zero, the high fixed costs of renewable infrastructure and capital installation make it seem prohibitively expensive when compared to the apparent cheapness of fossil fuels (Schmalensee, 2010). This discrepancy highlights the core of the problem when assessing the relative costs of fossil fuels versus renewable sources of energy. The reason why the aforementioned market barriers to renewable energy adoption exist is because of a larger market failure: the misrepresentation of the true cost of fossil fuels. This comes in two parts: the absence of a price on carbon emissions which creates a large gap between the private and social costs of fossil fuels (also characterized as a global tragedy of the commons), and the frequent omission of incredibly costly aspects of the fossil fuel market when calculating the relative costs of fossil fuels vs. renewable fuels. Due to high levels of uncertainty surrounding the effects of climate change,

and the difficulty in deciding on an appropriate discount rate, there are vastly different estimates of the ultimate social cost of continuing to burn fossil fuels (Stern, 2006. Nordhaus, 2009). Using meta-analysis across a wide variety of sources that include not only the effects of global warming, but local health effects of particulate and other gases as well, Heal (2010) finds that the external costs of renewables are less than those of fossil fuels by as much as 5 cents/kWh. Until the true cost of carbon is internalized, the private cost of fossil fuels will continue to be below that of renewable sources of fuel. Already, the expectation of a price on carbon emissions seems to have contributed to a sharp drop in investment in coalfired power plants in the United States in the last five years (Heal, 2010). Beyond pricing carbon, calculations of the costs of fossil fuel energy production rarely include: a.) The discounted cost of the slow build up of fossil fuel infrastructure over time b.) The vast array of subsidies to the fossil fuel industry both direct and in the form of tax exemptions, allowances, and deductions (Koplow, Dernbach, 2001) c.) The enormous military and transportation expenditures towards maintaining and protecting the shipment of oil in the Persian gulf. Without adequately pricing fossil fuels to include their external costs, it is much more difficult to garner support for policies meant to stimulate investment in renewable energy innovation and adoption, the absence of which creates a great deal of uncertainty on the return to renewables investment. Without firm policy signals, investment in renewable energy remains stagnant (Cosbey et al. 2008). Internalizing the hidden cost of carbon is the most important first step to encouraging the use of renewable energy, but there are other important policyoriented considerations. The next section describes concerns having to do with political and economic structures both in the U.S. (many of which can be extrapolated to other OECD countries) and in less developed countries. U.S. Policies that Hinder Renewable Energy Investment

Hamilton (2009) cites geographical issues like the distance between energy resource location and centers of demand as well as the stage and structure of grid development. This is, of course, a concern for all countries. China, for example, has a grid development structure in which priority is placed on the construction of basic, efficient grid systems rather than focusing on end-user services or cross-border connectivity and transmission capacity, whereas The EU, to some extent takes these issues into consideration when expanding the power grid (Hamilton, 2009). The U.S. also has a unique grid system that can be prohibitive to the expansion of renewable energy use. Since sources of renewable energy are geographically specific, it is important that if all geographic regions are to enjoy a high percentage of renewable energy generation, there must be a grid system that can efficiently transport electrons generated by renewable sources to areas where those sources are unavailable. The way the U.S. energy grid is structured cuts off areas of relatively little potential to generate power from renewable sources (the southeastern United States) from areas that have the potential to generate surplus energy that could theoretically be transported, like the Midwest for wind power, the southwest for solar, and coasts with heavy winds and powerful waves. A graphic of the grid structure is shown below:

Other aspects specific to the U.S. that hinder renewable energy investment

include the robust fossil fuel lobby born out of the existence of significant coal and oil reserves on U.S. soil. In comparison, many countries in Europe mainly import their fossil fuels. This is arguably a reason why these countries have higher percentages of their energy coming from nuclear and renewable sources. Even the fundamental structure of the pluralist political system in the U.S. acts as barrier to passing policies that might facilitate the use of renewables. The sheer number of political venues with which organized, concentrated, and wellfunded interests such as the oil, gas, and coal lobbies can subvert the interests of the much more diffuse and disorganized interests of the public in political arenas like congress and the judiciary are enough to significantly reduce the likelihood that policies that serve those diffuse interests get passed, despite high levels of public support (Lowi, 1972). The European parliamentary system, by contrast, while much slower in getting salient issues on the agenda due to the smaller number of political venues, is much more efficient at passing significant policies once important issues are considered, which is also a function of the small number of political venues (**). Climate change has evidently become a salient enough issue to fall under the radar of European policymakers. Furthermore, there is a higher prospect of securing energy security through renewables in Europe than there is in the U.S. where large coal, natural gas, and oil reserves still exist. Other authors cite a number of other attributes of the tax system, credit markets, and inter-state law in the United States that contribute to the lack of investment in renewables. Alderferder (2000) cites prohibitions against uses of distributed energy resources (other than emergency backup when disconnected from the grid) and state-to-state variations in environmental permitting requirements that result in significant burdens to project developers. Tariff barriers include buyback rates that do not provide credit for on-peak production and backup and standby charges that can be excessive. Lovins, (1992), describes how US tax rules require capital costs for commercial buildings and other investments to be depreciated over more than 30 years, whereas operating costs can be fully deducted from taxable income. Since efficient building technologies typically cost more than standard equipment on a first cost basis, this tax code penalizes efficiency. Koomey,

(1990) cites the fact that In 1990, twelve states charged sales taxes on residential energy-saving devices but not on residential fuels and electricity; only one state did the opposite. Victor and Yanosek (2011) summarize the federalism issue succinctly: Because the states and the federal government rarely work in tandem, the clean-energy market in the United States suffers from a patchwork of varied and volatile policies. This system has unwittingly given investors good reasons to spend largely on conventional renewable-energy technologies that can be developed quickly rather than on innovations that could, once developed at scale, compete with traditional energy sources. (Victor, Yanosek, 2011) Brown (2010) describes the ways in which U.S. credit markets inhibit investment in renewable energy due to what he calls the interest rate gap. This is the phenomenon in which energy suppliers can obtain capital at lower interest rates than can energy consumers. Differences in these borrowing rates may reflect differences in the knowledge base of lenders about the likely performance of investments as well as the financial risk of the potential borrower. At one extreme, electric and gas utilities are able to borrow money at low interest rates. At the other extreme, low-income households may have virtually no ability to borrow funds, resulting in an essentially infinite discount rate for valuing improvements in energy efficiency. This goes for not only energy efficiency, but also the installment of things like solar panels, which low-income families who cant afford the initial capital investment would be able to take advantage of in the form of net metering. While these examples are specific to the U.S, they highlight how unintended consequences of tax policy, inter-regional commerce, and credit markets can create path dependencies that inhibit the widespread adoption of renewable energy. It is easy to extrapolate the lessons from these examples to other areas of the world. Barriers Specific to the Global South The global South is a particularly interesting area for the purposes of renewable energy because it does not have the same deeply entrenched economic structures, political structures, and infrastructure that make the switch to

renewable energy so difficult in more developed nations. This makes renewable

development in other countries particularly fascinating because investment in renewable infrastructure from other countries can improve the livelihood of citizens by creating jobs, connecting citizens to power grids, ensuring long-term
environmental sustainability, all while providing a potentially lucrative return to international investors in developed countries who arguably have the moral imperative to do so anyway, considering the vast majority of the historical greenhouse gas emissions are the product of industrialized nations. The Clean Energy Synthesis Report identifies a common theme among many studies examining renewable energy in the Global South. To summarize, many countries, particularly the least developed among them, are not getting their full share of potential clean energy investment because their existing policies make them unattractive for any but the highest return projects. This basic finding is repeated in study after study. More specifically, political instability, corruption, and weak regulatory structures vastly increases risk for investors due to the possibility of property expropriation, breach of contract, political upheaval, and currency devaluation (Cosbey et al. 2008). Other concerns include: non-transparent legal systems with weak legal protection of foreign investors, long arbitration processes, high legal fees, state monopolies and power purchasing agreements, trade barriers, poor transportation and existing infrastructure, lack of human capital (education, health, etc), restrictions on foreign ownership, and lack of solid legal intellectual property protection, an attribute I would argue is also true of the United States in many respects. Solutions, Policy Prescriptions, and Conclusions Two common themes emerge from the general barriers to renewable energy adoption: the social costs of carbon are rarely considered and the high initial costs of switching to renewable energy infrastructure makes the initial switch prohibitively expensive, even if it is cheaper in the long run (the long run being another vague notion that must be defined using elusive discount rates).

The most oft-cited ways of tackling the issue of internalizing the social cost of carbon are carbon taxes and a cap and trade regime. The former was first established by Pigou in 1920 to tackle the issue of internalizing externalities in a more general sense, while the latter is a more recent development that essentially creates a market for carbon that did not previously exist (Betsill, Hoffmann. 2011). The revenue generated from either taxes or the auction of carbon credits could be used towards domestic or foreign investment in renewable energy. Factoring in things like the discounted costs over time of developing fossil fuel infrastructure and the military costs of protecting oil interests in the middle east must be included in any calculation of the relative costs of expanding infrastructure and policies that facilitate the adoption of renewable energy compared to fossil fuels. Once these costs are internalized, it may be easier to establish clear-cut policies that send the signal to investors that investment in renewable energy will yield a high return. Until the price gaps are addressed, and the social cost of carbon is captured with policies like cap and trade, taxes, or some alternative,1 these remain the largest and most general barriers to the widespread adoption of renewable energy. Given the outrageously long laundry list of more specific problems with investment in renewable energy both in developed and developing nations, the solutions will be addressed in the order in which the problems were introduced. First, there has to be changes in the pricing structure of engineers and architects that install the initial capital necessary to generate renewable energy. This could be done by structuring payments to involve long-term payment installments that could be, for example, a percentage of savings gained from the close to zero marginal costs of producing renewable energy. Other problems having to do with the principle agent problem, like the lack of incentive for landlords to install heat pumps or solar panels, could be fixed relatively easily by instead charging tenants a long-term incremental payment (at least partially offset by savings in energy costs). The geographical and structural concerns with the energy grid are much
1I have other ideas for solutions to these problems, but Im short on length and could probably

squeeze a thesis out of it

more difficult and costly to implement, but establishing a realistic price for carbon that includes the external costs could help policymakers and private interests put in perspective the relative costs of expanding infrastructure for renewables. It is important that any further modifications to energy grids should involve considerations regarding cross-boarder connectivity and transmission capacity. Finally, it is imperative that baseline national standards for interstate renewable trading without high tariff barriers be established to smooth and refine the differences in state-to-state renewable power policies. Differences in environmental standards, prohibitions against the use of distributed or private energy resources, stipulations in the tax code that penalize efficiency, and closing the interest rate gap previously mentioned are all relatively arbitrary (and likely accidental) policies that inhibit renewable energy investment, and that can be fixed relatively easily with a standard set of policies across states that give investors reliable and predictable signals. As far as the Global South, it is clear that grid expansion and cross-border connectivity considerations are important too. It is tougher to address these issues completely however, because they are rooted in problems so deeply entrenched and complex that political science and economics scholars have spent decades, arguably centuries, trying to address why these nations lack stable political and economic institutions that foster reliable returns to foreign investment in general. Nonetheless, it is important for those in industrialized nations to recognize that they have the moral imperative to foster such foreign investment because the lack of fossil fuel infrastructure is an incredible opportunity to start from scratch, and developing nations wont wait around forever for renewable investment before building up a fossil fuel infrastructure capacity of their own. Once stable political, economic, and legal institutions are in place, foreign investment in renewables here can yield an extremely lucrative return while simultaneously kick-starting a sustainable economy in the global South. Deeply entrenched path dependencies and the slow movement of the policy process of course render all possible solutions an arduous task, but inaction comes

with grim consequences both uncertain in magnitude and timescale. The solution to climate change is not easy and will involve more than one venue of change, but dramatically reducing the consumption of carbon emitting fossil fuels is imperative, and switching to renewable energy is a vital component of such a reduction. Sources
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