invention and cap-and trade programs - berkeley lawinvention and cap-and trade programs symposium on...

Invention and Cap-and Trade Programs

Symposium on Intellectual Property and Entrepreneurship12th Annual BCLT/BTLJ Symposium

Margaret Taylor Goldman School of Public PolicyUniv. California BerkeleyMarch 7, 2008

Today’s Road Map

1. Climate change and the need for clean tech innovation

2. What we know about clean tech innovation3. Climate cap-and-trade programs (CTPs)4. Evidence re: existing CTPs and invention5. Climate policy implications

Climate change and the need for clean tech innovation

2050 Goals are our Best Guess for Safety

Even these goals may not be ambitious enough:Accelerating growth rate of atmospheric CO2

Faster-than-predicted ice melts …

Sou

rce:

Man

agin

g G

reen

hous

e G

as E

mis

sion

s in

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iforn

ia, f

ig. 3

-1

Legislated in AB 32Non-binding Target)thatStabilizes

Concentrations

The Technologies aren’t There YetThis will require innovation, probably in multiple technology strategiesDesigning policies that support innovation is at least a smart hedge…

What we know about clean tech innovation

Innovation and “Clean Tech”

Overlapping activities lead to a successful innovationInventionCommercial adoption and diffusionPost-adoption learning from experience

Innovative success is difficult to achieveR&D is a long-term, uncertain processFrom birth to maturity of a technology, lots of obstaclesLikelihood of success greatest with the largest number of searchers and the broadest field of search

The private sector is especially importantOf all U.S. R&D expenditures tabulated by NSF b/t 1953-2004, 57% by industry with no federal support

But the private sectorUnder-invests in R&D compared to “socially optimal” returnsNotoriously under-invests in “clean technologies” that help maintain the public good of a clean environment

Who invents clean technologies?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SO2 NOx CCS Wind STE PV SWH

Other Firms& Individuals

ResearchInstitutions

Transport &Affiliated

Utility

Oil Company

Pollution Control Alt. Generation Energy Cons.

Patent breakdown in carbon relevant technologies by assignee type

Emissions Sources

Tech Suppliers

Government

Climate cap-and-trade programs (CTPs)

Climate Cap-and-Trade Programs (CTPs)

Rapidly becoming the world’s dominant climate policy instrument. Operating or developing in:

European UnionAustraliaOver half of both the U.S. States and Canadian provincesOne Mexican state …

How they work:Policy-makers set a cap on emissions and then allocate emissions “allowances” to polluting sources that are equivalent, in sum, to the capIf sources can reduce emissions cheaply, they can then try to sell (or bank) excess allowances

Price is whatever the market will bear

Current legislated caps aren’t set at “safe” GHG emissions levels

If politics goes well, plan is to gradually tighten the capsIn the meantime, a lot of hopes are being pinned on CTPs stimulating technological innovation

What do CTPs mean for clean tech innovation?

Some theory says better than other policiesAnalysis assumes innovators = emissions sources

Not much empirical evidenceMost work on adoption of existing technologies, not invention that can improve/substitute for existing technologies

Evidence re: existing CTPs and invention

ApproachLook at existing CTPs and invention, with an

eye to the climate policy implications1. Understand the CTPs we have evidence for2. Understand the relevant technologies and the

adoption pattern3. Measure inventive activity

Scope Pollutant Major Emissions Source

Title IV SO2

OTC/NBPNOx

RECLAIM(NOx)

What CTPs do we have Evidence For?


Title IV SO2 National

OTC/NBPNOx

Regional

RECLAIM(NOx)

Sub-State



Title IV SO2 National Sulfur dioxide (SO2)

OTC/NBPNOx

Regional Nitrogen oxide (NOx)

RECLAIM(NOx)

Sub-State NOx and SO2.



Title IV SO2 National Sulfur dioxide (SO2)

Coal-fired electric power plants

OTC/NBPNOx

Regional Nitrogen oxide (NOx)

Transportation; Coal-fired power plants largest stationary source

RECLAIM(NOx)

Sub-State NOx and SO2. Transportation; Manufacturing/Industrial is the largest centralized stationary source, with gas-fired power plants a significant, although not dominant, source


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

SO2 Prices ($/Ton)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Phase I (Trading Begins) Phase II

Ex Ante Expected PricesAllowance Prices

CTP

- Lower than Expected

Government

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

NOX OTC-SIP Prices ($/Ton)

OTC Phase II (Trading Starts)

NBP

Ex Ante Expected Prices

Allowance PricesAllowance PricesAllowance Prices


Allowance Prices

Ex Ante Expected PricesEx Ante Expected Prices

Allowance Prices

Ex Ante Expected PricesEx Ante Expected Prices

CTP


Government

NOX RECLAIM Prices ($/Ton)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999


Allowance PricesAllowance PricesAllowance PricesAllowance PricesAllowance Prices


CTP

Government

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003


NOX RECLAIM Prices ($/Ton)

Allowance PricesAllowance PricesAllowance PricesAllowance PricesAllowance Prices

- California Electricity Crisis Unexpected

CTP

Government

Options in a Traditional Pollutant CTP

SO2 – Coal Cleaning

Combustion ModificationNOx – LNB, OFA

Scrubbers:SO2 – FGDNOx - SCR

Buy Allowances$Change Tech

Electricity System, from Coal to Homes

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

How the Options did in the SO2 Market

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007



CTP

- Prices stayed lower than expected

Buy Tech

$ $

Buy Credits

Unused Credits

Clean Tech Market Expectations and Realities, across CTPs

Less technology employed than expected in each CTP

Despite variations among techs re: cost, performance, market share

In at least 2 of 3 CTPs, significant cancellations of tech. orders in progress

What about Clean Tech Invention?Used patents to gauge

The most widely used measure of invention with an eye to commercialization

Considered a range of SO2 and NOx techs.Used published, replicable patent searches

Corrected for continuation, pendency issuesChecked against potential reclassifications, USPTO trends, market data

SO2 Patenting Activity: Scrubber

0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

Traditional Regulation


0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1990

Cle

an A

ir Ac

t

Traditional Regulation Trading Preparation


0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Phas

e II

1990

Cle

an A

ir Ac

t

Phas

e I

TradingTraditional Regulation Trading Preparation

SO2 Patenting Activity: Coal Cleaning

0

5

10

15

20

25

1975

1977

1979

1981

1983

1985

1987

1989



0

5

10

15

20

25

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1990

Cle

an A

ir Ac

t



0

5

10

15

20

25

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

1990

Cle

an A

ir Ac

t

Phas

e II

Phas

e I


NOX Patenting Activity:Scrubber

0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995



0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

OTC

Pha

se I

(RAC

T)

NO

x SI

P C

all



0102030405060708090

100

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

OTC

Pha

se I

(RAC

T)

OTC

Pha

se II

NBP

NO

x SI

P C

all


NOX Patenting Activity:Combustion Modification

0

10

20

30

40

50

60

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995



0

10

20

30

40

50

60

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

OTC

Pha

se I

(RAC

T)

NO

x SI

P C

all



0

10

20

30

40

50

60

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

OTC

Pha

se I

(RAC

T)

OTC

Pha

se II

NBPNO

x SI

P C

all


Climate policy implications

Will it Happen in Climate CTPs?

€ 0

€ 5

€ 10

€ 15

€ 20

€ 25

€ 30

€ 35

4/20

03

6/20

03

8/20

03

10/2

003

12/2

003

2/20

04

4/20

04

6/20

04

8/20

04

10/2

004

12/2

004

2/20

05

4/20

05

6/20

05

8/20

05

10/2

005

12/2

005

2/20

06

4/20

06

6/20

06

8/20

06

10/2

006

12/2

006

2/20

07

Only one operating so far: EU Emissions Trading SchemePrices (€/Ton) lower than Expected

Options in a Climate CTP

Scrubber:CO2 – CCS

Distributed Generation

Energy Efficiency

Efficiency Improvements

Generation Switching

Buy Allowances$Change Tech

Electricity System, from Coal to Homes

Why worry?Probably not bad for cheap, existing optionsBut what about relatively expensive, potentially highly effective technologies that still need long lead times?

If we’re certain that allowance prices reflect true balancing of societal benefits and costs, then invention results not a worryBut what if we’re not certain about the caps?

1. Start with a strict cap and initial allowance auction (use revenues for R&D)

2. Set regular intervals (5 years?) to modify the cap, but don’t set exact levels when law is initially passed

1. Allows you to adjust to climate science, technologies2. (Could revalue some of the banked allowances for

similar effect)3. Charge an independent board with the

modifications

Could Play with Quantities

Preserves the advantages of a CTP while sustaining the market expectations of technology suppliers

Could Play with Prices

CTPCTPCTPCTPCTPCTP

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007



Safety Valve

Symmetric Safety Valve

Isn’t this a carbon tax w/brokerage fees?

Public R&D funding?Risky to count on sustaining high levels over time (politics, budget exigencies)Involves government picking winners

Public subsidy programs?Similar risks

Standards?Not as risky re: lapsingNot as much of a “pick winners” problem. Arguably better for inventor market expectations:

Standards usually get stricter

Could Play with Other Policies

Thanks!

Public R&D not correlated w/Patents for Pollution Control

0

5

10

15

20

25

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Con

stan

t $20

03, m

illio

n

0

5

10

15

20

25

30

Num

ber o

f Pat

ents

Public R&D FundingPatentsSCR

(NOx)

010203040

5060708090

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Con

stan

t $20

03, m

illio

n

010203040

5060708090

Num

ber o

f Pat

ents

Public R&D FundingPatents

FGD(SO2)

Public R&D better with Policy Creating Commercial Market

No Federal R&D

Some Federal R&D


CAA Regs + R&D


Public R&D Looks better with Alternative Generation, Except There’s a Chicken-and-Egg Issue

0

20

40

60

80

100

120

140

160

180

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

0

10

20

30

40

50

60

Num

ber o

f Pat

ents

Publ

ic R

& D

Fund

ing

(200

2 MUS

)

Number of U.S. PatentsPublic R & D Funding

Patents come first

Subsidies run out at the same time that public R&D drops!

0

20

40

60

80

100

120

140

160

180

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

0

10

20

30

40

50

60

Num

ber o

f Pat

ents

Publ

ic R

& D

Fund

ing

(200

2 MUS

)

Number of U.S. PatentsPublic R & D Funding

Both respond to politics (inc. run out)Both pick winners, to some extent

1978 NEA - ETA

1981 ISO4

1992 PTC

1978 ITC

Advantages of standards…

Expected to stay around or get stricterMore certain than other policiesCan be technologically neutral

$0.01

$0.10

$1.00

$10.00

$100.00

1 10 100 1,000 10,000 100,000 1,000,000Cumulative Capacity Installed (MW)

PV

WindSWH

STE

SCR*(gas)

FGD

SCR(coal)

Cap

ital C

ost 2

004$

/W

Usually experience has positive innovative outcomes… but good to have courage

PV

Wind

SCR SCR

FGDSWH

STE

The searchers: Do not have the same roles or incentives

SuppliersInvent and sell technologiesCompete w/alt. techs (& price of CTP credits)

Emissions sourcesAdopt technologies (or buy credits)

GovernmentPasses laws, implements/enforces policies, conducts/doles out R&D $, etc.

Priv

ate

Sec

tor

Pub

lic S

ecto

r

About the TechnologiesScrubbersCoal

Cleaning

Combustion Modification

Buy Allowances$

Options in a Traditional Pollutant CTP

SO2 – Coal Cleaning

Combustion ModificationNOx – LNB, OFA

Scrubbers:SO2 – FGDNOx - SCR

Buy Allowances$

Options in a Climate CTP

Scrubber:CO2 – CCS

Distributed Generation

Energy Efficiency

Efficiency Improvements

Generation Switching

Buy Allowances$

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