Friday, 29 June 2012

Financing renewable energy: Who should pick up the bill?

By Stephen Spratt

The Rio+20 Summit ended as expected: long on aspiration, short on hard commitments. Everyone accepts the need to move to a more sustainable model of economic development and growth. The question posed at the original summit – and still outstanding twenty years later – is how on earth this is to be achieved?

While there are real disagreements on what many aspects of the ‘green economy’ should look like, there are areas of consensus. Perhaps most important is the general acceptance of the need to move away from a reliance on fossil fuels towards clean forms of energy. So how are we doing on this front?

Gaining energy from renewable resources?
Despite repeated failures to secure global deals to reduce carbon emission to sustainable levels, annual investment in renewable increased six-fold from 2004 to 2010. This was also the year that developing countries overtook developed countries for the first time, accounting for more than half of the $268billion of investment. While this is very much to be welcomed, it is nowhere near enough. Energy from non-renewable sources (coal, oil and gas) still represents the overwhelming bulk of energy production globally, and there seems little chance of this changing – countries aspire to sourcing 10-20% of their energy from renewable sources, not 100%. Although China has become a global leader in renewable energy – and is largely responsible for investment growth in recent years – it is still building a new coal-fired power station every week. Why is this? and what can be done about it?

I recently co-authored (with Stephany Griffith-Jones and Jose Antonio Ocampo) a paper for the 2012 European Report on Development, which examined this issue. We looked at three questions:
  1. What are the obstacles to increasing investment in renewable energy in developing countries? The primary obstacles are economic: renewable energy remains more expensive than non-renewable in most instances. Despite the fact that costs have fallen significantly – particularly in wind and solar – the fact remains that renewables are rarely competitive in terms of cost, and often significantly more expensive.
  2. What mechanisms could be developed to overcome these? The potential mechanisms to address these could take one of two forms. Firstly, the cost of producing renewable energy can be reduced, and/or secondly, returns to renewable energy producer can be increased. A variety of mechanisms already exist, or have been proposed, to alter the economics of renewable energy in this way. Many countries have implemented feed-in-tariffs, some have directly subsidised the cost base, others have provided guarantees, yet others have explored how to build in a price for carbon.
  3. Who should bear the cost of funding these mechanisms? Despite their differences, public mechanisms to alter the economics of the renewable energy industry have a common feature: they represent a cost to the public purse, and often a significant one. Which brings us to the question of responsibility, particularly who should bear this cost? 
‘Polluter pays’ principle
If ever there was a case for employing the ‘polluter pays’ principle, this would seem to be it. So who is the polluter? Well, the overwhelming responsibility for climate change rests with today’s developed economies. As their share of annual emissions rises, the larger emerging economies also have some responsibility – though it is important to recognise that it is cumulative rather than current emissions that matters.

What no-one suggests is that low income countries bear any meaningful responsibility for climate change. So, while the UK governments should financially support renewable energy in the UK, this does not hold for poorer developing countries. If these countries are to switch to renewable energy in a major way, therefore, someone else needs to bear the costs of financing the mechanisms to make this happen.

As long as renewable energy remains more expensive than fossil-fuels – and this could be a long time yet – countries will bear a real economic cost for moving away from fossil fuels. If we want developing countries to make this shift – which is only necessary because of problems we have largely caused – then it is today’s developed countries that need to provide the financial support needed to incentivise private investment.

*Image reproduced from The Open University Learning Space - Introducing environmental decision making

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