Post n°322. How can technology help achieve the Paris Agreement goals of net zero emissions and limiting global warming? The Alestra et al. (2022) Advanced Climate Change Long-term Model (ACCL) is used to assess different scenarios of technological innovations and carbon taxation. Only a multi-lever strategy could reach the climate objectives.
Note: LCT Increase in the relative price of fossil fuels by 1%/year; Decrease in the relative price of non-carbon-emitting electricity by 3%/year; CO2 sequestration of 7.6 Gt/year; Efficiency gains of 1.6%/year.
According to the Intergovernmental Panel on Climate Change (IPCC), technological progress must be an important part of the mix of actions to reach net zero greenhouse gas (GHG) emissions and limit climate change. But what kind of technology can help us achieve the Paris Agreement goals of net zero emissions and limiting global warming? And what are the economic implications of such a technological transition? The Alestra et al. (2022) climate model (ACCL model) assesses different scenarios of technological innovations and carbon taxation in a recent working paper.
No single technology alone is sufficient to reach the climate goals
The ACCL model is a tool that quantifies the consequences of energy price and technology shocks. It has a comprehensive modelisation of TFP (Total Factor Productivity) dynamics and differentiation of energy sources, with five types of energy, four “dirty” in terms of CO2 emissions (coal, petrol, gas, “dirty” electricity) and one “clean” electricity.
The ACCL model is used to assess the contribution of three types of technology improvements that are directly oriented toward the objective of a decline in the stock of GHG (Greenhouse Gas): energy efficiency gains, diffusion of CCUS (Carbon Capture, Utilisation and Storage) technologies and a decrease in the relative price of “clean” energy.
Energy efficiency gains mean a decrease in the ratio of energy use to GDP in volume. Since the first oil shock, advanced economies recorded energy efficiency gains, which reached 1.6% per year in the 2010s (IEA, 2021). These gains stem from innovation targeted at reducing the use of energy inputs but also on the diffusion of existing technologies and basic quality improvement. For example, the renovation of existing buildings is a critical source of energy efficiency gains in the IEA assessment (ahead of gains in transport and industry). Energy efficiency gains can accelerate with the implementation of a carbon tax or carbon emission regulations.
CCUS are technologies that capture CO2 at emission, use it in industrial processes or store it in natural facilities. It excludes biological carbon sequestration such as forests. Mature CCUS technologies are used for CO2 capture at emission from sizeable industrial facilities (e.g. electricity generation, steel or cement production). CCUS are energy-intensive and costly technologies, explaining why they did not develop although they have been available for decades and could have already been implemented a long time ago. CCUS scenarios crucially hinge on the implementation of CO2 tax, which is needed to set the proper incentive to implement these technologies.
Beyond nuclear energy, non-CO2 emitting energies are renewable sources such as solar, wind, hydro or biomass. While the cost of nuclear energy has remained stable over the past decades, renewable technologies have become increasingly competitive as new capacities were deployed at a growing scale (IRENA, 2022). Depending on renewable sources, the electricity cost dropped from 48% (offshore wind) to 85% (utility-scale solar photovoltaics) between 2010 and 2020. The costs of producing electricity with renewable energy are now on par with those of new generation capacity from fossil fuels. Potential innovations such as renewable hydrogen, modern biomass or improved energy storage capacities and the redirection of public subsidies towards cleaner power generation may foster further improvements in renewable feasibility and affordability in the future.
The ACCL model allows to explore different scenarios. The baseline scenario is a worldwide low carbon tax (LCT), which assumes an increase in the relative price (relative to GDP price) of each of the four “dirty” energy types by 1% per year (alternatively, we consider 1.5% a year) and a stability of the relative price of the “clean” energy over the whole period and in all countries. This “low” carbon tax scenario, which would nonetheless lead to more than a doubling of the relative price of “dirty” energies by 2100, appears more realistic than higher carbon tax scenarios, as we assume a worldwide implementation of the tax. The model compares this scenario with other scenarios adding different technological innovations to the LCT scenario.
These simulations show that none of the single-lever scenarios is sufficient to reach the climate objectives by 2100 (see Graph 1). The scenarios without ‘green’ technologies require very challenging assumptions, like perfect coordination among countries in the immediate implementation of very ambitious climate policies (high carbon taxation – HCT - scenario), to limit climate damages with a temperature increase below 2°C. The scenarios with each ‘green’ technologies alone all fail to achieve net-zero emissions by 2100, implying that global warming continues well above 2°C.
Combining all different technologies with a carbon tax can achieve the climate goals
We then consider four composite scenarios that combine the LCT scenario with either or both the ‘usual’ technological progress (TP) and a ‘green’ technology package. The ‘usual’ TP hypothesis represents a technological shock that is not specifically oriented toward climate goals, while the ‘green’ technology mix (TM) is a combination of the different technological technologies presented above. The model shows that only a composite scenario adding technological action to a realistic increase in the relative prices of “dirty” energy makes it possible to achieve the climate goals (cf. graph 2).
This result is consistent with findings summarised in the latest IPPC assessment and such a scenario needs to start immediately and be coordinated across all countries (a challenging assumption considering the current geopolitics). A delayed or incomplete implementation means that efforts will have to be stronger in a second phase to compensate for higher greenhouse gas emissions during the delay.