ch17: promoting clean technology (theory)

Question 1

Why might regulation not be sufficient to achieve environmental goals?

Answer 1

1. rapid economic growth
2. rising marginal costs of control
3. the leakage problem
4. can be weakened over time through political influence

Question 2

3 characteristics of clean tech

Answer 2

1. services of similar quality to existing technologies
2. cost-competitive with existing technologies, in the long run
3. environmental superior to existing technologies

Question 3

long-run private marginal costs of tech

Answer 3

the cost of producing an additional unit once the technology is mature, including all taxes and regulatory costs

Question 4

two types of CTs

Answer 4

1. late-stage CT
   - costs competitive with existing technologies at current volume production
2. early-stage CTs
   - require additional r&d or high-production volumes to achieve minimum long-run costs

Question 5

how have average costs fallen for CTs?

Answer 5

1. economies of scale
2. learning by doing: as production ramps up, firms discover lower-cost methods of organization and production
3. external economies: as complementary industries and markets develop, input costs fall

Question 6

what are 2 problems with determining whether CTs are environmentally superior? How can we solve them?

Answer 6

problem 1: need to track impacts “cradle to grave”
solution: life cycle analysis

problem 2: different tech have non-comparable impacts
solution: monetize and total the expected life-cycle environmental damages from each source. ie water used, landfill space etc

Question 7

why is the market so slow to adopt clean tech?

Answer 7

path dependence theory: once a path is chosen, other paths are closed off.

–> very difficult to change paths because
1. infrastructure and r&d investments made in support of chosen technology

2. economies of scale create cost advantage
3. complementary technologies develop that are tailored to the chosen path

Question 8

what determines development path choice in a given society?

Answer 8

1. relative production costs
2. consumer preferences
3. relative political strength of conflicting interests
4. chance historical circumstances

Question 9

What can the government do to help overcome path dependence?

Answer 9

influence the market-driven process of tech development toward a path consistent with a sustainable future

Question 10

what market obstacle is facing CTs?

Answer 10

lack of substantial profit advantage in the market

Because they compete in mature markets with low-profit margins, they are not likely to be highly profitable. Without a substantial profit advantage, firms will not be encouraged to push CTs.

this means that there is little private incentive to overcome barriers of CTS and the inclination to stick with “what works” (path dependence)

Question 11

What government obstacle is facing CTs?

Answer 11

direct or indirect subsidies to highly polluting competitors
- agriculture, energy, waste disposal, etc
- creates excess supply of highly polluting products.

these subsidies can get “locked in”
- inefficient tech (ie nuclear fission) can survive

Question 12

what can be done to minimize government errors and political influence?

Answer 12

1. level the playing field - eliminate subsidies for dirty technologies and internalize the resulting social costs, preferably through IB regulation
2. promote only environmentally superior options
3. engage in least-cost planning

Question 13

what is least-cost planning? what does it achieve?

Answer 13

under a least-cost approach, all subsidies are either time-limited or conditioned on cost reducing performance.

this acts to speed up market process of adoption of CTs instead of replacing market process because market forces only spread profitable technologies

this way bureaucrats can avoid making expensive commitments to inefficient technologies

Question 14

4 market barriers to cts that must be overcome

Answer 14

1. high sunk costs in r&d and marketing
2. thin supplier markets
3. poor access to capital
4. high discount rates
   consumers require high rates of return for investment in efficient, durable CTs

Question 15

how can early-stage cts be promoted?

Answer 15

1. r and d funding
   - r and d funding will be undersupplied in a free market because r and d has many characteristics of a public god (large spillover effects of tech break throughs so private parties cannot capture full benefits of privately funded research). Funding r and d will allow for these spillover effects to occur, speeding up shift to clean tech.
   - can be used for green energy sources, alternative agriculture, waste reduction in manufacturing
2. producer subsidies
   - can be used for solar, hybrid evs, alternative agriculture, waste reduction in manufacturing
3. technology-forcing standards:
   - set a deadline for firms to deliver technology that is not yet marketed.
   - can be used for energy efficiency, hybrid electric vehicles, fuel-cell vehicles, recycling
4. infrastructure investment
   - can be used for mass transit and recycling

Question 16

3 examples of producer subsidies

Answer 16

1. price preferences: gov pays premium for eco friendly products
2. procurement contracts: provides early stage ct with guaranteed markets.
3. loan guarantees: providedto promising start ups to help them access capital from private sources. gov pays the loan back to the bank if the project fails.

Question 17

2 examples of technology-forcing standards

Answer 17

1. Corporate Average Fuel Economy (CAFE):
   standards require firms to meet increased average vehicle mileage in future years
2. renewable portfolio standards (RPS):
   requires a utility to include a certain % of renewable energy generation in their mix

Question 18

1 example of infrastructure investment

Answer 18

smart grid: relies on information tech to reduce waste, avoiding the need for additional supply.

Question 19

What are the tools for promoting late-stage CTs?

Answer 19

1. product labeling
   - people are willing to pay price premium for environmentally friendly products if they are labelled as such
   - can be used for energy and water efficiency, recycling, alternative agriculture
2. flexible design standards
   - mandated minimum level of environmental performance across all products ex home efficiency standards
   - can be used for energy and water efficiency
3. utility marketing of energy efficiency
   - have the tech marketed by large firms and provide lower cost access to financial and human capital
   - can be used for energy efficiency
4. technological assistance programs
   - gov technicians provide advice to firms interested in undertaking ct investment (=direct support)
   - can be used for waste reduction in manufacturing, alternative agriculture, passive solar, wind power
5. consumer subsidies
   - gives consumers an incentive to educate themselves about the product and overcome obstacles of rapid diffusion associated with higher capital costs.
   - can be used for energy and water efficiency, recycling, passive solar

these tools act to overcome informational barriers, reducing consumer’s perceptions of risk of adoption

Question 20

How can you design consumer subsidies to avoid free riders?

Answer 20

free rider problem: people willing to adopt the technology regardless of subsidy take advantage of it.

solution: loans and grants can be targetted to working and middle-class individuals. these ppl are resource constrained and therefore least likely to adopt the cts in the first place.

Question 21

What is alternative agriculture? what is the primary obstacle to this? What is a potential policy solution to this obstacle?

Answer 21

what: agriculture that reduces chemical pesticide use through a switch to biological and mechanical methods. Generates comparable quality at reduced costs.

primary obstacle:
often reduced yields –> insignificant profit advantage that is unable to overcome adjustment costs.

policy solution:
- focus on r and d and technical assistance
- eliminate penalities for crop rotation and natural fertilization methods and reduce water subsidies
- change focus from pesticide regulation to promotion of alternative agriculture

Question 22

what is solid waste recycling? what is the environmental benefit? why was it successful?

Answer 22

environmental benefit: lower environmental impact than landfilling and incineration
- direct benefit: cleaner and lower volume of waste disposal
- indirect benefits: lowered upstream impacts and reduced energy use in processing

why sucesss:
- gov regulation increased landfill and incineration costs (internalizing externalities)
- local communities put in place recycling infrastructure and mandatory recycling requirements.
- secondary industries grew up to take advantage of the recycled products
- result: recycling has become a major, cost-competitive waste management option in many places

Question 23

3 forms of consumer subsidies

Answer 23

1. tax credits
2. low interest loans
3. grants

Question 24

Why are loans and grants preferable to encourage small-scale CTs?

Answer 24

1. require groups to justify investment
2. discourage non-serious applicants
3. provide means to allocate funds on a least-cost basis

Question 25

adjustment costs of ct

Answer 25

1. new managerial techniques
2. successful techniques highly region-specific
3. time to transition

= barriers to ct adoption

Question 26

How can the indirect benefits of recycling be maximized?

Answer 26

1. recycled goods replace products made from non-renewable sources
2. goods can be recycled repeatedly
3. the collection of recycled materials displaces garbage collection
4. recycled materials are available closer to manufacturing centers