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No. 34, July 2012 www.irpp.org

A Technology-Led Climate
Change Policy for Canada
Isabel Galiana, Jeremy Leonard and Christopher Green

If Canadian governments truly want to contribute to global climate change

mitigation, they should adopt policies to bring about the necessary technology
breakthroughs, rather than setting GHG emissions reduction targets they are
unlikely to meet.

Plutôt que de se fixer des cibles difficilement tenables en matière de réduction

des gaz à effet de serre, les gouvernements canadiens devraient adopter des
politiques pour engendrer les percées technologiques dont nous avons tant
besoin ; ils apporteraient ainsi une véritable contribution à l’atténuation des
changements climatiques.
Summary

As Canada has formally withdrawn from the Kyoto Accord, what can we do to contribute
meaningfully to reducing global greenhouse gas (GHG) emissions? Climate policy activists
and experts have long argued that adopting emissions-reduction targets and implementing
policies to try to meet these targets is the best approach. In this study, Isabel Galiana, Jeremy
Leonard and Christopher Green take a contrarian view. They argue that the policy focus on
meeting GHG emissions reduction targets over the past 15 years has been a failure, and that
adopting a technology-led policy would be a more effective way for Canada to contribute to
global climate change mitigation.

The authors begin by describing the primary drivers of GHG emissions to illustrate the degree
of “decarbonization” of the economy required to meet the emissions-reduction target of 50
percent by 2050 set by the G-8 countries, and they find that it would entail a virtual tripling
of the current global rate of decline in the carbon intensity of output. Even if aggressive car-
bon pricing did encourage wider use of existing low-carbon technologies, evidence casts con-
siderable doubt on whether these technologies can deliver the necessary improvements in
energy efficiency and reductions in carbon intensity — and certainly not without incurring
major costs in terms of economic growth.

Galiana, Leonard and Green’s conclusions about energy technology development differ con-
siderably from those in much of the literature, which are based on scenarios that assume
implausibly large declines in global energy and carbon intensities, even without government
intervention. As a result, these widely used scenarios greatly understate the magnitude of the
technology challenge in stabilizing climate change and the economic costs of mitigation.

Essentially, nothing short of a technological revolution will be required to sufficiently cut emis-
sions. There has been a remarkable lack of progress in technology development and emissions
reduction in the past 20 years, and the main reason, according to the authors, is that policy-
makers have put the emissions-reduction “chicken” before the technology-development “egg.”

While many economists assume that the use of carbon pricing will induce the development of
new energy technologies by the private sector, the authors disagree. They argue that what is
needed is basic scientific research, followed by testing and demonstration which, due to their
public good characteristics, will require governments to play a role.

The authors recommend that Canada take a lead in developing next-generation technologies
by establishing a low-carbon energy research council — funded by a modest carbon tax — to
provide secure, long-term funding for research and development. As a large producer and user
of energy, Canada could benefit directly from the development of low-carbon-emitting tech-
nologies. Given its minor 2-percent share of global emissions, this would also be the most
globally effective contribution it could make.

IRPP Study, No. 34, July2012 1

Résumé

Le Canada s’étant officiellement retiré du protocole de Kyoto, comment peut-il aujourd’hui

contribuer efficacement à la réduction des émissions mondiales de gaz à effet de serre (GES) ?
Selon les experts et intervenants en politiques climatiques, la meilleure approche consiste à
définir des cibles de réduction puis à prendre des mesures en conséquence. Or dans cette
étude, Isabel Galiana, Jeremy Leonard et Christopher Green soutiennent à contre-courant que
cette priorité donnée depuis 15 ans aux cibles de réduction des GES est un échec et que le
Canada serait mieux avisé d’adopter une stratégie axée sur le développement de nouvelles
technologies qui permettront réellement d’atténuer les changements climatiques.

Après avoir décrit les grands facteurs d’émission de GES pour illustrer quel niveau de « décar-
bonisation » de l’économie permettrait d’atteindre en 2050 la cible de réduction de 50 p. 100
fixée par les pays du G8, les auteurs montrent qu’il faudrait pour y arriver tripler le taux actuel
de diminution de l’intensité des émissions de carbone. Et même si de forts prix sur le carbone
stimulaient l’usage de technologies à faible teneur en carbone, tout indique que celles-ci ne
pourraient produire les améliorations requises en efficacité énergétique et atténuation de l’in-
tensité de carbone, et sûrement pas sans compromettre gravement la croissance économique.

L’avis des auteurs sur le développement de technologies énergétiques diffère sensiblement des
conclusions de bon nombre de recherches sur la question, qui reposent sur d’improbables scé-
narios de forte réduction de l’intensité énergétique mondiale, même sans intervention des
gouvernements. Pourtant largement utilisés, ces scénarios sous-estiment grandement l’am-
pleur des défis technologiques à relever pour stabiliser les changements climatiques ainsi que
les coûts à engager pour les atténuer.

En vérité, il faudra ni plus ni moins qu’une révolution technologique pour réduire suffisam-
ment les émissions de GES. Or depuis 20 ans, très peu de progrès ont été accomplis en matière
de développement technologique et de réduction des émissions, en grande partie parce que les
décideurs ont choisi de placer la « poule » avant l’« œuf », c’est-à-dire la réduction des émis-
sions avant l’innovation technologique.

Les auteurs divergent aussi d’avis avec les nombreux économistes qui croient qu’une tarifica-
tion du carbone inciterait le secteur privé à créer de nouvelles technologies. Ils soutiennent
qu’il faut plutôt privilégier la recherche scientifique fondamentale, qui est par essence un bien
public et doit donc être soutenue par les gouvernements.

Aussi recommandent-ils au Canada de prendre l’initiative en vue de développer la prochaine

génération de technologies à faible teneur en carbone en établissant un conseil de recherche
sur ces énergies, qui serait financé par une modeste taxe sur le carbone et se consacrerait au
financement à long terme de la R-D, des essais et des démonstrations. Important producteur et
consommateur d’énergie, le Canada profiterait directement des nouvelles technologies mises
au point dans ce secteur. Et vu sa part déjà faible de 2 p. 100 des émissions mondiales, c’est
ainsi qu’il pourrait le mieux contribuer à leur réduction.

2 IRPP Study, No. 34, July 2012

A Technology-Led Climate Change Policy for Canada
Isabel Galiana, Jeremy Leonard and Christopher Green

W hat can Canada do to contribute meaningfully to reducing global greenhouse gas

(GHG) emissions — in particular, those associated with energy use? The answer cli-
mate policy activists and “experts” usually give is to adopt emissions-reduction targets, imple-
ment policies that try to meet the targets and perhaps set an example for other countries to
follow.

There are, however, problems with such an approach, aside from the fact that Canada’s
share of global emissions is just 2 percent and declining. First, what Canada might do to
reduce emissions would not necessarily be replicated in the rest of the world. On the
contrary, sticking to strict, date-specific national GHG emissions-reduction targets could
accentuate the ongoing shift of emissions and emission-intensive activity to other parts
of the world, especially the rapidly growing emerging economies (Davis and Caldeira
2010; Peters et al. 2011). Second, meeting strict reduction targets assumes — erroneously,
we argue — that the requisite low-carbon energy alternatives are available on a large
scale or that they would be if enough pressure were applied to reduce global emissions
substantially and rapidly. And, third, even if Canada were to adopt tough emissions-
reduction targets, existing low-carbon energy technologies would not be adequate to
meet such targets without incurring unacceptably high economic costs. Such an out-
come would be a counterproductive example for the rest of the world.

In this study, we offer an alternative way forward. We begin by describing the macro drivers of
GHG emissions, to illustrate the degree of “decarbonization” of the economy that would be
required to meet emissions-reduction targets, and we compare that process to recent trends.
We then discuss the global energy technology challenge, explain why we believe the challenge
is larger than much of the existing research literature assumes, and examine the economic
costs of meeting existing GHG targets. We make the case for a Canadian technology-led poli-
cy, which would be a more effective way for Canada to contribute to climate change mitiga-
tion than setting targets we believe cannot be achieved.

Our conclusions about energy technology development differ considerably from those
reported in much of the research literature. The differences stem from more recent work
by a number of researchers demonstrating, first, that many emissions-reduction scenarios
— including those of the Intergovernmental Panel on Climate Change (IPCC 2000) —
assume implausibly large global energy intensity declines that would require substantial
and sustained improvements in energy efficiency; and, second, that emissions-reduction
scenarios could be a poor basis for technology analysis because they understate the magni-
tude of the low-carbon-energy challenge entailed in stabilizing climate change.
Furthermore, a simple thought experiment suggests that widely published estimates of
mitigation costs might be too low by an order of magnitude under reasonable assumptions

IRPP Study, No. 34, July 2012 3

A Technology-Led Climate Change Policy for Canada

about the evolution of current low-carbon energy technologies. Our conclusions are
echoed by more recent studies that cast doubt on the readiness and capabilities of current
energy technologies to achieve deep emissions reductions without significant reductions
in output (Fischer and Newell 2008; Davis, Caldeira, and Matthews 2010; Hoffert 2010;
Myhrvold and Caldeira 2012).

Many economists contend that, if the requisite low-carbon technologies are not yet
available, the application of a carbon price would induce their development. We explain,
however, why this induced-technological-change hypothesis is flawed if the energy tech-
nology challenge is as large as we argue it is. Although imposing a tax or fee on carbon
emissions probably would encourage the deployment of low-carbon technologies that
are close to the commercialization phase, it is highly unlikely that such a policy would
spur the large and risky up-front investments in basic research and development (R&D),
testing and demonstration required to develop next-generation technologies. Instead, we
propose a made-in-Canada blueprint for financing and developing the technological
means to cut future GHG emissions, especially those of energy-related carbon dioxide
(CO 2 ). Our proposal would use carbon pricing in a uniquely pragmatic and arguably
politically acceptable manner — namely, by imposing a very low carbon tax or fee that
would provide the needed long-term funding for energy technology R&D, testing and
demonstration with minimal economic disruption.

It is important to emphasize that a technology-led climate change policy would be a first

step, rather than a stand-alone response to the challenge of reducing GHG emissions.
Over time, as reliable and scalable new technologies are developed, the carbon price
could be allowed to slowly rise in order to send a forward price signal to energy
providers and consumers to adopt and deploy these technologies. Other policies to
reduce emissions might be necessary as well, and these undoubtedly would result in eco-
nomic costs. But our key point is that putting the technology-development “egg” before
the emissions-reduction “chicken” would make these costs economically manageable
and politically acceptable.

This is not to say that all existing policies to encourage the use and diffusion of existing
low-carbon technologies should be abandoned. Even though we do not believe that
available technologies are sufficient to solve the climate change problem, every contribu-
tion helps. But if deep reductions in energy-related GHG emissions are desired, then at
least some countries must invest in a long-term technology revolution to enable them.
Indeed, remarkably little progress in energy technology or emissions reduction has been
made in the 20 years since climate change became a major global concern, in our view
largely because policy-makers have focused excessively on emissions-reduction targets
and commitments. A technology-led policy would aim to encourage movement on deep
GHG emissions reductions that cannot be achieved using the low-carbon energy options
available today. We believe, moreover, that Canada should take the lead on this front, if
for no other reason than that it is the most globally effective contribution this country
could make.

4 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

A Framework for Understanding Drivers of Greenhouse Gas

Emissions

T o understand the sources of GHG emissions from a macro perspective, it is useful to call
on the “Kaya identity,” formulated by Japanese economist Yoichi Kaya (1990), which
decomposes carbon emissions into the constituent factors that drive them:

C ≡ P ⨯ (GDP/P) ⨯ (E/GDP) ⨯ (C/E),

where C = carbon emissions, P = population, GDP/P = gross domestic output per capita,
E/GDP = energy intensity, and C/E = carbon content of energy. Table 1 shows the Kaya decom-
position of CO2 emissions for Canada, the United States, China, India and the entire world.
Several noteworthy trends stand out. First, demographic and economic forces are putting
upward pressure on emissions in all four countries. Population growth is largely a function of
fertility rates and changes in life expectancy, and cannot be affected easily by public policy
short of government diktat — China’s one-child policy has succeeded in reducing average pop-
ulation growth below that of the United States and Canada in the 2000s — while GDP per
capita is a broad measure of a country’s material well-being, and few, if any, countries would
want to enact policies that significantly reduce its growth.

Table 1: Factors driving carbon emissions based on the Kaya identity, Canada, the United States, China, India and the world, 1990-2008

Canada United States China India World

1990-2000 2000-08 1990-2000 2000-08 1990-2000 2000-08 1990-2000 2000-08 1990-2000 2000-08

(average annual percentage growth rates)

CO2 emissions 2.0 0.5 1.5 -0.1 2.3 10.9 5.0 4.7 1.0 3.1

Population 1.1 0.8 1.2 0.9 1.0 0.5 1.8 1.6 1.4 1.2

Real GDP
per capita 1.8 1.3 2.1 1.0 8.9 9.5 3.5 5.4 1.7 2.7

Energy
intensity
of output -1.1 -1.4 -1.7 -2.0 -6.9 0.5 0.0 -2.2 -1.7 -1.1

CO2 content
of energy 0.1 -0.2 -0.1 -0.1 -0.6 0.3 -0.3 -0.1 -0.5 0.3

Sources: United States, Energy Information Administration; International Monetary Fund.

Note: Because the Kaya equation is an identity, the CO2 content of energy can be calculated as the difference between the growth rate of CO2 emissions and the sum
of its other three components. CO2 emissions include only emissions from the consumption of energy.

The second trend is that all four countries have succeeded in reducing the energy intensity of pro-
duction (measured as the average kilograms of oil equivalent to produce one dollar of output).
Canada has reduced its energy intensity by almost 20 percent since 1990 (an average of 1.2 percent
per year); this is less than the United States has achieved, but the pace of Canada’s improvement
accelerated somewhat in the 2000s. The emerging economies have been more successful on this
front, but this is a function more of their stage of economic development than of their explicit

IRPP Study, No. 34, July 2012 5

A Technology-Led Climate Change Policy for Canada

energy efficiency policies. In both China and (to a lesser extent) India, structural changes in both the
economy and the organization of production — in particular, manufacturing — have led to jumps in
productivity as domestic firms have begun to adopt best-practice production techniques. As this
process becomes more advanced, however, further incremental improvements will be increasingly dif-
ficult to achieve. This dynamic is borne out in table 1: China’s energy intensity declined by an average
of 6.9 percent per year in the 1990s, but actually increased slightly over the 2000s; India, which is
somewhat behind China in terms of industrial development, saw an acceleration of the decline in
energy intensity in the 2000s for essentially the same reasons. At the same time, in both countries
rapid industrialization has led to a large increase in their consumption of carbon-emitting fossil fuels,
with the result that the decline in energy intensity has been insufficient to offset the growth in their
carbon emissions — indeed, in China, the carbon content of energy used has actually increased.

From these trends, it is clear that deep reductions in global emissions in the context of contin-
uing economic and population growth will require a significant acceleration in the decline of
energy intensity and/or the CO2 content of energy. For Canada to reach its near-term target of
a 17 percent reduction in emissions from 2005 levels by 2020, it would have to reduce average
annual emissions by 1.2 percent per year. If this is to be achieved with minimal impact on
Canadians’ economic well-being, the combination of energy intensity and the carbon content
of energy would have to decline at a rate of 3.3 percent per year — more than double the com-
bined average annual rate of decline over the past two decades.

In contrast, in China, the world’s largest CO2 emitter, emissions have grown by an average of 6.6
percent annually since 1990 (although table 1 reveals that China’s emissions growth accelerated
dramatically in the 2000s with the onset of rapid industrialization). Thus, simply stabilizing emis-
sions, much less meeting proposed reduction targets, would require economic growth to stop in
its tracks if recent trends in energy intensity and carbon intensity were to continue. It is no won-
der that China and other large emerging economies are loath to commit to binding targets.

On a broader scale, the notional goal of reducing global CO2 emissions by 50 percent by 2050
(which would require emissions to decline by an average of 1.7 percent per year) appears to be
mathematically out of reach without either significant economic disruption or dramatic decreas-
es in carbon intensity. At the past two decades’ rates of GDP per capita and population growth,
this would mean a 4.8 percent annual reduction in the average CO2 intensity of GDP — the sum
of the rates of decline in energy intensity of output and CO2 intensity of energy. This is more
than triple the rate of reduction experienced over the past two decades and, as we argue
below, likely to be exceedingly difficult to achieve and sustain over a long period.

This unpleasant arithmetic underscores the importance of technology in addressing the

climate change challenge. Short of arbitrary population controls and unpalatable
attempts to stunt global economic growth, reductions in global emissions will depend
heavily not only on major advances in energy efficiency, but especially on the develop-
ment of scalable, reliable and reasonably cost-effective low-carbon energy supplies and
the technologies to produce them — that is, nothing short of an energy technology revo-
lution (Galiana and Green 2009).

6 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

The Magnitude of the Energy Technology Challenge: A Global

Perspective

T he energy technology challenge of stabilizing the atmospheric concentration of GHGs is

huge, getting bigger as the bar for the acceptable concentration (or average global temper-
ature rise) is lowered and, most important, is generally understated. The challenge is huge in
two respects. First, properly measured, the technological gap between what we are doing and
what we must do is much larger than that implied by comparing most emissions scenarios
with stabilization paths. Second, the gap between the current capabilities of low-carbon ener-
gy technologies and what is required for stabilization remains stubbornly large. Consider this:
in a world of growing economies, in which more than 80 percent of energy consumption is
carbon emitting, it is fairly straightforward to estimate that the current 2.5 terawatts of car-
bon-emissions-free power (generated almost entirely by nuclear plants and hydroelectric
installations) would have to be raised to 15 to 20 terawatts by 2050 and to 25 to 40 terawatts
by 2100 to stabilize atmospheric carbon concentration at approximately 550 parts per million,
which is double the pre-industrial concentration (Hoffert et al. 1998).

Indeed, GHG emissions scenarios, especially those developed for the IPCC (2000, 2001, 2007a)
are seriously misleading indicators of the energy technology challenge, with regard to both
establishing the effective size of the challenge and estimating the economic costs of reducing
emissions. The crux of the matter is that the IPCC’s “business as usual” scenarios (meaning
the estimated future path of GHG emissions without policy actions to reduce them) in fact
assume an acceleration of the decarbonization of the global economy without specifying how
that should occur. Instead, the technical summary of the 2007 report (IPCC 2007b, 41) merely
states that “[b]aseline scenarios usually assume significant technological change and diffusion
of new and advanced technologies,” although the report’s more detailed discussion on tech-
nology appears to acknowledge considerable uncertainty about how low-carbon technologies
will evolve in the absence of explicit policies to encourage their development and diffusion.
The IPCC’s assumptions draw heavily from Nakicenovic et al. (2006), who conclude that rates
of decarbonization of the global economy will double or even triple relative to trends over the
past two centuries even without any policy action — an acceleration that is predicated on,
among other factors, market forces raising the price of fossil fuels and inducing the adoption
of low-carbon alternatives. It is important to note, however, that forecast decarbonization
rates vary considerably across the scenarios surveyed by the authors, with some showing
steady or even decelerating rates.

To determine how much the IPCC emissions scenarios understate the global energy technology
challenge, Pielke, Wigley, and Green (2008) analyze several of these scenarios under the
assumption that current energy technologies do not change (meaning that there is no further
decline is the carbon intensity of the global economy) and compare them with the forecast
emissions based on IPCC assumptions about decarbonization. Figure 1, which summarizes the
results of that work, shows the level of global GHG emissions reductions that are assumed to
take place as a result of technology improvements under the IPCC scenarios. The sum of the
three stacked bars shows the total estimated GHG emissions for each scenario under the so-

IRPP Study, No. 34, July 2012 7

 A Technology-Led Climate Change Policy for Canada

called frozen-technology baseline.1 Because each scenario employs different assumptions about
economic growth, population trends and other factors that affect emissions, total emissions
under the frozen-technology assumption differ depending on the scenario.

Figure 1: Assumptions of the effects of technological change on The top bars in figure 1 show the Pielke et
future emissions reductions under various Intergovernmental Panel
al. estimates of GHG emissions reductions
on Climate Change (IPCC) emissions scenarios,1 2000-2100
7000
that the IPCC assumes would occur “spon-
taneously” in the absence of explicit emis-
6000
sions-reduction policies. These reductions
come from the technological change
Cumulative gigatonnes of carbon

5000
assumptions built into each IPCC scenario
4000
and, as the figure shows, they typically are
3000
very large. In the A1B scenario, which is
widely used for climate policy modeling,
2000 assumed technology improvements would
reduce cumulative GHG emissions from
1000
6,183 to 1,431 gigatonnes of carbon
0
A1B A1FI A1T A2 B1 B2 n = 6 n = 35 AR4
between 2000 and 2100. This represents
IPCC scenarios more than 80 percent of the reduction
Amount of technology-induced reductions in emissions built into
IPCC scenarios — that is, assumed to take place in the absence required to reach the level consistent with
of policy.
Amount of emissions reductions necessary by 2100 to reach stabilizing atmospheric concentration of
stabilization levels based on IPCC forecasts of baseline emissions.
2100 emissions levels consistent with stabilizing atmospheric
emissions at 500 ppm or 775 gigatonnes of
CO levels at 500 parts per million (ppm).
2
carbon. Indeed, such assumed technology
Source: Pielke, Wigley, and Green (2008). improvements are responsible for more
1
Note that the unit of measure for this figure is gigatonnes of carbon (GtC), which
should not be confused with gigatonnes of carbon dioxide (GtCO ). One GtC is
2 than half of the emissions reductions in all
equal to 3.7 GtCO . The dash line represents the cumulative GtC consistent with
2
an atmospheric concentration of carbon of 450 ppm. of the IPCC scenarios. The middle bars in
figure 1 show the emissions reductions that
under the IPCC scenarios would have to be achieved through climate-change mitigation poli-
cies to stabilize atmospheric concentrations of GHGs over and above the technology advances
already assumed in each scenario. If we accept these IPCC technology assumptions at face
value, it appears that the policy challenge of climate stabilization is not as daunting as it may
be. Taking the A1B scenario again as an example, total emissions over the next century would
have to be cut approximately in half, from about 1,431 to 775 gigatonnes. The required reduc-
tion would be even smaller in several other scenarios.

The assumed technology advancements embedded in IPCC scenarios imply, however, an

unprecedented rate of carbon intensity reduction, through a combination of declines in ener-
gy intensity (E/GDP) and in the carbon content of energy (C/E). In the A1B scenario in figure
1, the implied annual decline in the global carbon intensity of output is 2.4 percent per year
(consisting of a 1.4 percent decline in E/GDP and a 1 percent decline in C/E); this is three
times the rate from 2000 to 2008 and nearly double the long-term historical trend. While we
do not take issue with the fact that some improvements in energy efficiency and low-carbon
technologies have occurred under current policies, it stretches the imagination to believe that
such a dramatic acceleration would happen in the absence of aggressive policies to encourage

8 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

the development of next-generation low-carbon technologies. The IPCC itself notes that “[a]ll
of the technological options assumed to contribute towards further decarbonization and
reduction of future GHG emissions require further…R&D to improve their technical perform-
ance, reduce costs and achieve social acceptability” (IPCC 2007b, 221).

With regard to energy efficiency, a decline in energy intensity (E/GDP) in excess of 1 percent
per year (as implied in the A1B and many other scenarios) is possible over a period of one to
two decades. Indeed, as table 1 shows, the average annual decline in the energy intensity of
output was 1.7 percent in the 1990s but decelerated to 1.1 percent annually over the 2000-08
period. However, average annual rates of decline that exceed 1.0 to 1.2 percent would be diffi-
cult to sustain over a 50-to-100-year period. As Baksi and Green (2007) show, a global century-
long energy intensity decline of 1.5 percent annually would require a three- to sixfold
improvement in energy intensity in most sectors, while an annual rate of decline of 2 percent
or more would require energy intensity to improve tenfold in most sectors. In short, the IPCC
understates the energy technology challenge by generally overstating achievable rates of ener-
gy intensity decline.

The analyses by Baksi and Green (2007) and by Green, Baksi, and Dilmaghani (2007) suggest,
moreover, that doubling or tripling the rate of decline in the carbon intensity of output would
put most of the onus on the decarbonization of energy supply. This is no small feat! As table 1
shows, average rates of decline in the CO2 content of energy (C/E) experienced since 1990
have been on the order of a few tenths of a percentage point; globally, C/E has actually
increased slightly over the 2000-08 period. Such a dramatic change in the rate of decarboniza-
tion of energy supply would require not only matching the superior energy performance of
fossil fuels, but also overcoming many technological barriers that currently stand in the way
of scalable and reliable low- or non-carbon-emitting energy sources and technologies. Such
improvements certainly cannot be simply assumed into existence, as in the IPCC scenarios.

The more fundamental issue in our view is that much of the climate policy community, includ-
ing official sources such as the IPCC in its third and fourth assessment reports (IPCC 2001,
2007), have overstated the current capabilities of low-carbon sources of energy. On the con-
trary, whether viewed individually or in combination, current low-carbon technologies are far
from capable of displacing carbon fuels for several reasons: the potential for new hydroelectric
sites is limited; the fallout of the disaster at the Fukushima nuclear plant in Japan shows the
difficulty of scaling up nuclear power; and demonstrating the technical feasibility and practi-
cality of large-scale application of carbon capture and storage at anything like the levels
required to sequester a substantial portion of CO2 emissions from electricity-generating plants
is proving to be a slow, painstaking process (see, for example, Hoffert et al. 2002; Caldeira, Jain,
and Hoffert 2003; Green, Baksi, and Dilmaghani 2007; Lewis 2007; Barrett 2009; Galiana and
Green 2010).

Then there are the renewable energy sources on which so much hope is pinned. “First-genera-
tion” biomass (ethanol from corn; diesel from soybeans) has proven costly, on a life-cycle
basis uses almost as much energy to produce as is provided by the output and, depending on

IRPP Study, No. 34, July 2012 9

A Technology-Led Climate Change Policy for Canada

whether or not the energy input source is carbon based, might not even reduce emissions (see
Pimentel and Patzek 2005; Farrell et al. 2006; Fargione et al. 2008; Searchinger et al. 2008). At
the same time, the diversion of cropland from food production to energy might be contribut-
ing to food price increases (Pimentel et al. 2009; Wise et al. 2009). Unless there are technologi-
cal breakthroughs in “second-generation” biomass, this renewable source is not likely to make
much of a net contribution to low-carbon energy supply or to mitigating climate change;
indeed, it appears to be generating other problems.

Solar and wind power, while plentiful enough in theory, are available in very small amounts
in practice. Their diffuse nature means they require extensive areas to be covered with wind
turbines and solar arrays, raising various social, ecological and land-use problems. More
important, these energy sources are variable, and because they cannot be stored, they are not
available on demand. They thus require reliable backup and, consequently, are more costly
ways to generate electricity than estimated total average costs suggest (Joskow 2012). Without
major, and quite uncertain, technological breakthroughs in energy storage, then, it would be
difficult to scale up solar and wind power to levels sufficient to displace large amounts of car-
bon-based energy sources.

Underestimating Climate Change Mitigation Costs

T he mathematics of the Kaya identity mean that underestimating the technology chal-
lenge leads inevitably to underestimating the costs of meeting a given GHG reduction
target. Most estimates of the cost of stabilizing atmospheric concentrations of GHGs by mid-
century have been in the range of 1 to 5 percent of cumulative gross world product (IPCC
2007b). But without revolutionary changes in energy technologies, we believe these estimates
are much too low (particularly if IPCC emissions scenarios are used as baselines against which
to assess the cost of mitigation), since a great deal of energy technology change is already built
into the baselines.

But even if emissions scenarios are not at issue, low cost estimates are often suspect, because
they typically assume that there are carbon-free backstop technologies on the shelf that can be
scaled up to create large supplies of carbon-free energy, albeit at a price that is higher than the
cost of the fossil fuel energy they are to displace; and/or that placing a price on carbon would
spur the technological innovation needed to assure sufficient and scalable low-carbon technolo-
gies are made available (see IPCC 2007a, chap. 11). Neither assumption is justified.

The first essentially assumes away the energy technology problem by implicitly accepting
claims that needed technologies are available, scalable and sufficient, leaving the impression
that the only problem is their cost. But our reading of the evidence indicates that, at least in
their current form, low-carbon technologies cannot support a supply of low-carbon energy on
a scale capable of displacing carbon energy, although with major improvements and scientific
breakthroughs they could begin to do so. As for the second assumption, placing a price on car-
bon is unlikely to induce sufficient private investment in the type of R&D needed to meet the
technology challenge. The reason is that much of the investment would have to be in science-
driven, “basic” R&D, with highly uncertain outcomes, which even if shown to be promising

10 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

in the laboratory, would still require extensive testing and demonstration to prove reliability
and scalability. Private investors are unlikely to undertake such risky investments on their
own, and even if successful, expected commercial payoffs typically would be decades away,
and might not accrue to the R&D investors in any case, because intellectual property protec-
tion is not given to scientific knowledge as such (Nemet 2009, 2010; Popp 2010). In these cir-
cumstances, the attempt to impose substantial reductions in energy-related CO2 emissions
without assurance that the required low-carbon technologies are ready could be costly. A sim-
ple “thought experiment” shows why.

Suppose we use the Kaya identity to calculate the rate at which the carbon intensity of output
would have to be reduced in order to lower global emissions to 50 percent below current lev-
els by 2050 (an average of 1.7 percent per year), while maintaining annual growth in gross
world product at its 40-year historical average of 2.3 percent. Our calculations indicate that
the carbon intensity of output would have to decline at an annual average rate of 4.0 percent.
Achieving this rate of reduction would require huge and rapid improvements in low-carbon
energy technologies. Even if improvements in energy technologies enabled the carbon inten-
sity of output to decline at a highly optimistic 3.0 percent annual rate (more than double the
average annual rate of decline since 1970), the cumulative loss of gross world product between
2010 and 2050 would be almost 20 percent (see table 2), up to an order of magnitude higher
than the estimates of 1 to 5 percent cited above.

Table 2: Global cost of “brute force” emissions reduction1 The example illustrates the potentially high
cost of what we term “brute force” emis-
Average annual change in Cumulative loss of global
carbon intensity of output gross world product sions reduction — the attempt to reduce
(%) (%) emissions without having sufficient capa-
-3.5 -10.3 bilities on the energy technology side. In
-3.0 -19.3 this case, emissions reductions, if pursued
-2.5 -27.2
-2.0 -34.2 vigorously with current technology capabil-
-1.4 -41.4 ities, would reduce global economic growth
Source: Authors’ calculations.
drastically. In short, mitigation cost esti-
1
The calculations in this table are based on (1) a global-emissions reduction tar- mates of 1 to 5 percent are plausible only if
get that requires a 1.7 percent average annual rate of decline in carbon emissions
over a 40 year period from 2010 to 2050; and (2) an assumption that in the
the required low-carbon technologies were
absence of “brute force” attempts to meet the emissions reduction target, the available, reliable and scalable. But we do
global economy would grow at 2.3 percent.
not think the evidence is strong in support
of this contention. Yet, the IPCC, in its
third assessment report, states that the required technologies are available and that no “dras-
tic” technological breakthroughs are needed. It then draws the troublesome conclusion that
mitigation is not primarily a technological problem but one of political will (IPCC 2001, 9).
The IPCC’s fourth assessment report (IPCC 2007b) essentially repeats this mantra.

Our conclusions also differ substantially from those of other Canadian studies such as Labriet
(2001), Jaccard, Nyboer, and Sadownik (2002), Jaccard and Rivers (2007), and Bataille, Dachis,
and Rivers (2009), which have a much more sanguine view of the capabilities of existing tech-
nologies. In good part, this is because of assumptions in those studies about the degree to

IRPP Study, No. 34, July 2012 11

A Technology-Led Climate Change Policy for Canada

which consumers would be willing and able to switch from high- to low-carbon energy
sources, as well as assumptions about the availability and scalability of current low-carbon
energy that are much more optimistic than we think is warranted by the evidence. Our con-
clusions are, however, consistent with a growing body of literature that is critical of the rosy
view of the state of low-carbon energy technology that has prevailed in much of the research
literature (see, for example, Fischer and Newell 2008; Helm 2008; Tavoni and Tol 2009;
Acemoglu et al. 2012; Baker and Peng 2012; Fischer and Sterner 2012).

Stimulating Technological Change: Market- versus Policy-Based

Approaches

M any observers, including many economists, accept the need for new and improved
low-carbon energy technologies, but assume that the market would induce the neces-
sary innovation effort if a rising price were placed on carbon emissions (see, for example,
Grubler 2002; IPCC 2007a, chap. 11; Nordhaus 2008). This argument would be plausible if the
required technologies were commercially available (or close to being so) and scalable, even if
at a somewhat higher cost than that of carbon fuels. But if, as we suggest above, technologies
with these characteristics are not available, the picture is different.

A carbon price is unlikely to induce the required investment in basic R&D, testing and demonstra-
tion, in large part because of the “public good” factors surrounding the outcomes of such invest-
ment. In addition to issues of uncertainty, distant payoff dates and non-appropriability, there is
another problem. Present governments cannot tie the hands of future governments to set carbon
prices high enough to allow investors to recoup their up-front investments in R&D and production
costs for technologies that prove to be commercially successful in the future (Montgomery and
Smith 2007). There is, thus, a fundamental time inconsistency in proposals to leave inducements
to the market (via aggressive carbon pricing): even if the market were to recognize the importance
of actions to advance energy technology to achieve emissions reduction goals far in the future,
investors would lack the economic incentives and financial rewards for doing so. All this points to
an important role for governments in facilitating these upfront investments.

A common concern expressed by those who oppose a government role in funding energy R&D is
that such investments might “crowd out” other, more valuable uses of public research funding. In
our view, however, this argument is not compelling, for at least three reasons. First, until a recent
uptick, energy R&D had declined over the preceding quarter-century in most industrialized coun-
tries and arguably is now grossly underfunded even as it becomes more economically and socially
beneficial (Margolis and Kammen 1999; Grubler and Riahi 2010; Hoffert 2011). Second, what is
contemplated here is a long-term commitment to public funding for basic R&D, testing and
demonstration in amounts that are small relative to the economy, but cumulatively important.
Finally, with population growth and the substantial worldwide increase in educated brainpower,
there should be plenty of human capital available to conduct expanded long-term R&D of new
and improved energy systems without shortchanging other fields of research.

That said, the real problem, we believe, is to design “incentive-compatible” R&D programs
that increase the likelihood of producing useful results with a minimum of waste, in-fighting,

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 A Technology-Led Climate Change Policy for Canada

jurisdictional disputes and lock-in to technologies that are inferior to later arrivals. Skepticism
that such a design can be found and implemented is a more cogent reason for doubts about
the efficacy of government funding for an energy technology race than are the induced-tech-
nological-change and crowding-out arguments.

In an earlier study (Galiana and Green 2010), we examined the literature on inducements to
R&D and innovation, much of it drawn from the field of industrial organization, including
the roles of market structure, patents and prizes. The long-term and public-good nature of the
R&D, testing and demonstration that we believe are essential to transformational changes in
energy technology suggests that the mechanisms to fund these activities should be designed
in such a way as to: (1) assure a long-term pool of funds to finance energy R&D and related
activities; (2) insulate the funds as much as possible from political influence and lobbying
activities; (3) assure that at least some funds are channelled into advanced ideas, ones that
might appear to hold little chance of success and even less of a near-term payoff but that have
a big potential if proven successful; (4) avoid trying to “pick winners,” while assuring that sub-
stantial funds go toward opportunities that appear highly promising; and (5) reduce the likeli-
hood of lock-in to early successes that turn out to be inferior to later arrivals.

Why a Technology-Led Climate Change Policy? A Canadian Perspective

A technology-led climate change policy would address or avoid many of the problems associ-
ated with a regime that focuses on date-specific emissions-reduction targets. Target setting
rarely gives adequate consideration to whether the implied emissions reductions are supportable
given the state and capabilities of available low-carbon technologies. And in the rare cases where
such consideration is given, the targets are criticized as not ambitious enough, as was the case
for Japan in 2009 (Pielke 2009). In contrast, a technology-led policy would foster the develop-
ment of technologies capable of eventually supporting deep reductions in emissions.

However, a technology-led policy should not be seen as a stand-alone response to the potential
effects and damage wrought by climate change. It is not a substitute for investments in infra-
structure, know-how and rapid-response capabilities that would reduce vulnerabilities and
enhance adaptation to climate change and resilience to severe weather events. Nor is it a substi-
tute for attention to other environment-related problems associated with climate change and
local carbon “footprints.” These issues are beyond the scope of this study, but they do require
the development of appropriate policy instruments.

Does the global case for a technology-led climate change policy apply specifically to Canada?
Why should Canada adopt a technology-led policy when no other country has yet adopted
one, at least not formally? Would it be in Canada’s interest to take the lead in adopting such
a policy? What would Canada have to gain or lose? We begin by addressing the last question,
because the response does help clear the stage for considering an alternative approach.

Abandoning emissions-reduction targets

The main thing Canada would give up if it were to adopt a technology-led climate change
policy would be emissions-reduction targets. These have been the core guideposts (if only in

IRPP Study, No. 34, July 2012 13

A Technology-Led Climate Change Policy for Canada

theory) of Canadian policy since 2002, when Canada ratified the Kyoto Protocol, thereby for-
mally committing to reducing emissions 6 percent below 1990 levels by 2012. But in 2002
emissions were already 21 percent above 1990 levels, and Canada lacked any coherent plan,
much less feasible means, of achieving such a daunting target.

In 2007, with emissions 25 percent above 1990 levels, the Harper government effectively gave up
on Canada’s Kyoto commitment, which could not be met even though the carbon intensity of
Canadian output had declined at a rate of 1.3 percent per year since 1990. (From this perspective,
Canada’s formal withdrawal from the Kyoto protocol in December 2011 was inevitable.) Soon
thereafter, in its Turning the Corner plan (Environment Canada 2007), the Harper government set a
new emissions-reduction target of 20 percent (later reduced to 17 percent) below the 2005 level
by 2020, and also set a more notional long-term target of at least 50 percent below 2005 levels by
2050. To reach the 2020 target, the government mandated reductions in emissions intensity for
five industrial sectors (electricity generation, pulp and paper, cement, oil and gas extraction and
iron and steel). Firms unable to meet the mandated emission intensity reductions can purchase
credits from other firms that are able to exceed them or, alternatively, contribute to a technology
fund at a rate of $15 per tonne of CO2 emitted. However, because the new policy targeted reduc-
tions in emissions intensity, rather than in the absolute level of emissions, it was never clear from
the outset how GHG emissions would fall by 17 percent by 2020 (particularly in the context of
sustained economic growth in the wake of the 2008-09 recession). Indeed, recent analysis by the
environment commissioner indicates that the absolute emissions reductions promised will not
materialize (Office of the Auditor General of Canada 2012), and the National Round Table on the
Environment and the Economy (NRTEE) concludes that Canada will only achieve 50 percent of
the target (NRTEE 2012). We would argue that, without new and improved low-carbon energy
technologies, the longer-term target, too, will go by the boards in time.

Suppose, instead of using industry regulations to achieve emissions-reduction targets, Canada

decided to put all its policy eggs in the carbon tax basket. The idea would be to set a carbon
price that was high enough or rising quickly enough to obtain, on paper at least, substantial
emissions reductions. The chips would be left to fall where they may with regard to the precise
effect of the carbon price on the level of emissions. The Liberal Party of Canada’s “Green Shift”
proposal in the 2008 federal election campaign might be described as just such an initiative,
though it did not articulate specific emissions-reduction targets. The proposal received plaudits
from many in the economics profession, but it proved economically and politically toxic.
Moreover, had Canada implemented the proposal unilaterally, emissions-intensive activity like-
ly would have shifted to other countries, at least partially offsetting emissions reductions
achieved in Canada. The main problem with the Green Shift and similar carbon-pricing pro-
posals is that they put the emissions-reduction chicken before the energy-technology egg.

It is important to point out that abandoning emissions targets in favour of a technology-

led approach to climate change mitigation does not necessarily mean that Canada should
abandon current policies designed to curb emissions. We emphatically do not support
abandoning measures related to fuel efficiency, hybrid vehicles, green building codes and
countless others that are currently in force, provided they are effective at achieving their

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 A Technology-Led Climate Change Policy for Canada

intended goals. (In fact, one could argue that the mechanism by which firms can con-
tribute to a technology fund in lieu of meeting the emissions-intensity mandate under the
Turning the Corner plan is consistent with a technology-led policy.) We simply believe that
these measures, by themselves, will not be able to achieve the emissions reduction targets
established, so it makes little sense to commit to such targets in the first place.

In recent years, Canada has openly adopted the position that its climate change policy should
keep in step with that of the United States. In the first 18 months of the Obama administration,
this appeared to portend a relatively active policy, but the window for US climate policy activism
soon closed. First came the ambiguous outcome of the UN climate talks in Copenhagen in
December 2009. Then came the failure of the US Senate to pass any climate change legislation in
2010, much less to agree to the cap-and-trade/offset-heavy Waxman-Markey bill that had passed
the House of Representatives in 2009. By summer 2010, it was evident that the United States
might not do much, if anything, on the climate policy front in the near future. That impression
was confirmed in the mid-term congressional elections in November 2010. Many of the tri-
umphant Republicans (and at least one prominent and successful Democratic senatorial candi-
date) had successfully run against cap and trade (calling it “cap and tax”). Some went further,
questioning the scientific basis for predictions of global warming. The result has been effectively
to shelve any major national climate change policy initiative in the United States for the time
being. And Canada has followed step. Indeed, as long as climate policy advocacy at home contin-
ues to deem emissions-reduction targets the only game in town, Canada probably has no alterna-
tive but to lie low.

Yet the climate change problem has not gone away and will not do so. It thus does not make
sense to wait to see if the inherently flawed Kyoto-type approach to climate change mitigation
once again gains political favour. Instead, progress requires a new direction for climate policy (see
Prins et al. 2010). Looked at through the prism of past failures and futilities, Canada does not
appear to have anything to lose by seeking a fundamentally new means of tackling climate
change.

Advantages of adopting a technology-led policy

It is much more difficult to determine what Canada would gain from adopting a technology-
led policy than what it would lose, which, the preceding section suggests, is essentially noth-
ing. We must acknowledge, however, that any move away from the current emissions-
reduction-target focus would be accompanied by criticism from quarters that are wed to past
regimes and climate politics. But criticism of Canadian climate policy is nothing new, and will
probably continue as long as Canada fails to meet targets that are arbitrarily set and impossi-
ble or costly to achieve.

What, then, would Canada have to gain from a technology-led policy on climate change? The
alternative is to continue relaxing under the US umbrella or, in the extreme, to freeride — to wait
until other nations develop the technologies necessary for climate change mitigation. Although,
in purely economic terms, freeriding might seem a low-cost option, there are a number of bene-
fits for Canada of adopting a technology-led policy, even if it is one of the first countries to do so.

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A Technology-Led Climate Change Policy for Canada

A real effect on long-term global climate change mitigation

The primary reason for a technology-led policy is that it is the only way for Canada to con-
tribute meaningfully to global climate change mitigation. Canada accounts for less than 2 per-
cent of global emissions, and that share will continue to decline due to the rapid economic
rise of developing countries, particularly China and India. Even if Canada were to meet its
emissions targets and reduce its contribution to global emissions by 17 percent, this would
still amount to less than 0.34 percent of global emissions. Put bluntly, Canada’s GHG emis-
sions are irrelevant to global climate change, but very relevant indeed is Canada’s capacity to
develop replicable technologies that could help it and, more important, help large emitters
reduce their emissions.

But why should Canada lead? As we have seen, breakthrough technologies will require basic
research with “public good” characteristics that allow others to benefit from it. There is thus a
strong temptation to freeride. One argument for action, which is also invoked by those who
focus on meeting emissions targets, is that there are political and diplomatic gains from being
a leader. For instance, Canada’s international stature was enhanced for many years by its lead-
ership in international peacekeeping. But there are additional practical reasons for wanting to
be at the forefront of the next generation of energy technologies. As a large producer of both
fossil fuels and renewable hydroelectric power, Canada could benefit directly from the devel-
opment of new technologies in these sectors. As a hypothetical example, development of a
technology to capture and sequester carbon emissions from automobiles, thus converting con-
ventional cars into zero-emission vehicles, would have profound positive economic implica-
tions for Canada’s oil sands sector, by rendering fossil fuels a low-carbon energy source for
transportation.2

Spillover benefits to other industries

Canada also might reap more broad-based economic benefits as a result of technological,
product and/or productivity spillovers from actively engaging in a technology-led approach,
with its accent on basic R&D, testing and demonstration. Although it is almost by definition
impossible to calculate the potential economic benefits of spinoffs from breakthrough carbon-
reducing energy and environmental technologies (since they have not yet been developed), a
review of spinoffs from other “big-science” efforts in the past shows that they exist and can be
substantial.

One example is defence R&D spending in the United States during the Cold War. The explicit
goal was to counter the Soviet military threat, and technology development was a big part of
nearly all aspects of the associated arms race. Defence R&D accounted for 50 percent of total
US R&D expenditures in the 1950s before falling to about 30 percent in the 1960s and 1970s.
Numerous case studies have shown that this spending contributed to the growth of entire sec-
tors of the economy, notably computers, semiconductors, mobile telecommunications and
commercial aviation (Gamota 1985; also see Jenkins et al. 2010). The most commonly known
spinoff of military technology is the Internet, whose communications protocols and infra-
structure were developed by the US Defense Advanced Research Projects Agency (DARPA).
Although the question of whether the technology would have been developed in the absence

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 A Technology-Led Climate Change Policy for Canada

of DARPA’s efforts is an open one, the large commercial and economic benefits that ultimately
resulted from them are undeniable. In an analysis of the effects of US military R&D spending
on various measures of nonmilitary economic performance over the period from 1955 to
1988, Chakrabarti and Anyanwu (1993) find a strong relationship between military R&D and
commercial patents, which suggests the existence of spinoff technologies. Another important
finding is that defence R&D did not “crowd out” nondefence R&D, suggesting that knowledge
spillovers from defence R&D augment, rather than substitute for, technology development in
the commercial sector, although the direct linkage between defence R&D and the civilian
economy was too small to have a statistically significant impact on overall US GDP.

Another big-science initiative whose spinoffs have been extensively studied is the US space
program in the 1950s and 1960s. In 1962, at the request of the US Congress, the National
Aeronautics and Space Administration (NASA) created a technology utilization program to dis-
seminate NASA R&D to the public. By its own account, NASA is directly responsible for more
than 1,500 spinoff technologies in fields that include computer technology, environment and
agriculture, health and medicine, public safety, transportation and recreation. Some of the
more widespread and well-known technologies include freeze-dried food, lightweight and
heat-and flame-retardant firefighting equipment, water purification equipment, high-efficien-
cy solar cells and computer-aided design software. Empirical studies in the 1970s (summarized
by Hertzfeld 1985) of the economic effects of NASA’s R&D spending on US gross national
product show mixed results, mainly because of the difficulty of controlling for non-NASA
R&D, capacity utilization, industry mix and other factors that influence economic output.
Microeconomic studies of specific successful commercial spinoffs, however, provide more reli-
able information on the benefit of targeted R&D for other sectors of the economy, and find
that benefit-cost ratios for spinoff technologies vary widely from 4:1 for cardiac pacemakers to
68:1 for nickel-zinc batteries.

These findings suggest that government investment in basic and applied research projects
aimed at achieving specified long-term goals can foster the creation and growth of entirely
new commercial industries, as well as create spinoff technologies that can improve products in
a diverse array of existing industries. Although the most-studied examples are in the United
States, there is little reason to believe that similar dynamics would not be at play in Canada.

Reframing the role of carbon taxes in climate change mitigation

A technology-led approach to climate change policy would enhance the case for putting a
modest price on carbon — by adopting a carbon tax or fee — that would have minimal
adverse macroeconomic effects (Galiana and Green 2009). In addition to requiring long-term
and secure funding and future incentives to deploy new and improved technologies, such a
policy would avoid the pitfalls associated with the traditional rationale for carbon pricing.

Virtually all policy discussions of putting a price on carbon — either directly via a carbon tax
or indirectly by adopting a cap-and-trade system of emissions permits — posit that the pri-
mary goal of such a policy should be to reduce GHG emissions directly. To that end, carbon
pricing has long been a leading instrument in the toolkit of economists and since the early

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A Technology-Led Climate Change Policy for Canada

2000s has gained favour among climate policy activist groups. The assumption is that carbon
pricing would induce not only the substitution away from carbon-based fuels by consumers
and businesses, but also innovation leading to new and improved low-carbon technologies.

There is, however, justified skepticism that carbon pricing would do what its proponents
suggest. Substitutes for carbon-based energy are often limited — in particular, low-carbon
alternatives to fossil fuels are currently limited in both their application and scalability.
Moreover, as we have noted, there are reasons to believe that carbon pricing on its own is
a weak reed with which to induce the private sector to undertake risky investments in
next-generation low-carbon energy technology and innovation whose payoffs, if success-
ful, have distant dates and doubtful appropriability. Ignoring these risks could make car-
bon pricing culpable as an accomplice to costly “brute force” mitigation. That said,
carbon pricing, if properly framed — especially in the form of a low, gradually rising car-
bon fee or tax, as opposed to tradable emissions permits — could play an important, even
essential role. If carbon pricing is viewed as necessary to developing and then deploying
new and improved energy technologies, then there is a reasonable chance that, if appro-
priately explained, it could be made acceptable.

In sum, there is clearly a case for carbon pricing, but on a less aggressive scale than is usually
proposed.3 Until recently, carbon pricing and government-supported technological innovation
policy have often been treated as substitutes for each other, with the latter considered inferior
to the former. To the extent that promotion of innovation has been deemed important, car-
bon pricing rather than direct support of basic R&D, has been considered the primary policy
lever, thus relying on market incentives to drive new technology development. In contrast,
the technology-led approach we propose recognizes an essential complementarity between
carbon pricing and technology policy.

Implementing a Technology-Led Policy

I n essence, the key element of a technology-led climate-change mitigation strategy for

Canada is an initially very low, but slowly rising, carbon tax whose primary purpose would
be to provide long-term and stable funding to develop the breakthrough technologies neces-
sary to meet long-term global (not just Canadian) GHG emissions-reduction targets, and
whose secondary purpose would be to send a forward price signal to deploy these new tech-
nologies as they reach the shelf.

To put such a strategy into operation, we propose a $5-per-tonne carbon tax on either CO2
emissions or the carbon content of fossil fuels, depending on the stage at which the tax is
applied. The tax would be earmarked for a trust fund, kept at arm’s length from government, to
underwrite the costs of basic research, testing and demonstration of breakthrough technologies
that hold promise for significantly accelerating the decline in the carbon content of output.

The tax would add an estimated 1 cent per litre to the price of gasoline and $8.10 per thou-
sand cubic metres to the price of natural gas — in effect, it would be virtually invisible to con-
sumers and businesses. To magnify the price signal over time as new technologies are

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 A Technology-Led Climate Change Policy for Canada

developed, the tax could be, let’s say, doubled every decade (a 7 percent annual increase).
Although this might seem like a large amount, the tax would reach just $10 per tonne by
2022 and $20 per tonne by 2032.4 But the continued doubling of the tax each decade would
mean that, by 2050, the carbon price would reach $80 per tonne, sufficient to have an impor-
tant effect on low-carbon energy choice. Indeed, long before 2050, a powerful signal would be
sent to start deploying, or planning to deploy, new and improved technologies.

A carbon tax of $5 per tonne would raise on the order of $3.4 billion per year, which would
serve as the budget for a low-carbon energy research council (LCERC). This would amount to
0.2 percent of Canada’s GDP, which is actually more in relative terms than NASA’s R&D budg-
et during the height of the Apollo mission to land a man on the moon.5 It is also more than
three times as large as the Natural Sciences and Engineering Research Council of Canada’s
2010-11 budget of $1.1 billion.

Although an LCERC would share some similarities with existing granting councils, it would
need to have some critical differences in order to be effective. To provide secure funding for
energy innovation, the source of finance should be insulated, as far as possible, from the vagaries
of the business cycle, the whims of legislative and budgetary processes and the influence of lob-
byists. In an era of budget cutting and deficit worries, energy R&D funding should come not
from general revenues but from a dedicated revenue source (in this case the $5 per tonne carbon
tax) that is functionally related to the use of the funds. A model is the US federal excise tax on
gasoline, the revenues from which are placed in the Interstate Highway Trust Fund, which, for
almost 60 years, has been used to construct and maintain the US interstate highway system. In
2007, the Quebec government instituted a modest carbon tax (equivalent to less than 1 cent per
litre of gasoline) collected from the province’s approximately 50 producers of refined fossil fuels.
The approximately $350 million raised by the levy annually is earmarked to a provincial Green
Fund whose mission is to support sustainable development programs and, in particular, to
finance several governmental climate action plan initiatives. Although the activities it funds are
geared more toward exploiting existing technologies than breakthrough basic research, the use
of an earmarked carbon tax is along the lines of what we are proposing.6

A second difference concerns the scope of activities eligible for funding. In general, existing
granting councils fund basic research that leads to inventions, but usually stop short of fund-
ing large-scale testing and demonstration. However, this stage of development – the gap
between invention and commercialization — is known as the “valley of death” because of the
difficulty of finding private sector financing for these activities. For this reason, the mandate
of an LCERC should be to fund not only basic research to discover the next generation of
clean energy technologies, but also next-stage testing, demonstration and scalability.
Increasing funding support at the upstream end of research, where there is a much more com-
pelling economic rationale, would bolster the case for reducing downstream subsidies for
existing clean energy technologies — such as tax credits for hybrid cars and subsidies for solar
power, wind and ethanol — that have proven to be costly and largely ineffective (Jaccard and
Rivers 2007), as evident in the Solyndra fiasco in the United States or Ontario’s costly feed-in
tariffs for solar and wind energy.7

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A Technology-Led Climate Change Policy for Canada

The proposed LCERC should be outside the government budget process, be managed by both
private sector and government-appointed officials, and use a panel of experts to allocate the
funds among prospective projects. One possible model for awarding grants is that used by the
Gates Foundation, a private sector foundation that has funded many human health and educa-
tion projects. It provides an independent source of funding for projects of high priority chosen
by a panel of experts acting as judges in an R&D competition. This model minimizes the risks of
a government-picking-winners approach and “locking-in” to early, perhaps technologically infe-
rior, discoveries, and is generally free of political interference and lobbying influence. Another
model is the Advanced Research Projects Agency for Energy (ARPA-E) in the United States, which
is itself modelled after the successful DARPA. This agency provides modest initial financing to
public-private, high-risk, high-reward projects that, while having low probability of success,
would have large payoffs if successful. ARPA-E is, however, administered by the Department of
Energy, which opens the possibility of political interference in the agency’s work. Effective gov-
ernance of an LCERC would be essential to assuage the concerns of the many knowledgeable
observers who are skeptical about a big government role in innovation, based on past failures of
government R&D to bridge the gap between invention and commercialization (see, for example,
Freed et al. 2009; Perelman, 2011) and the virtually limitless sinkhole created by subsidies to the
producers and users of green energy. For illustrative purposes, the appendix offers a non-exhaus-
tive list of potential research paths that could be considered for support.

The political economy of a technology-led policy

A technology-led approach would provide a firmer basis in both economics and politics for an effec-
tive long-term climate change policy. This approach would solve the “chicken-and-egg” problem of
meeting long-term GHG reduction targets by developing the game-changing energy technologies
that, in our view, have been largely assumed into existence by policy-makers. As we saw earlier, put-
ting the emissions-reduction “chicken” ahead of the technology “egg” will almost certainly lead to
unacceptably high costs. The 50 percent reduction in global emissions by 2050 proposed by the
Group of Eight major industrialized countries at their meetings in 2007 and 2008 could be very cost-
ly if energy technologies fell short of allowing a virtual tripling of the current global average annual
rate of carbon intensity decline from about 1.4 percent to 4.0 percent over the next 40 years. There
is simply no reason to believe, however, that current technologies would enable anything even close
to such a rate of decline. But by putting technology first, not only would the high costs (and likely
failure) of an emissions-reduction-first policy be avoided, but the conditions would be put in place
for even more rapid rates of decline in carbon intensity over the next several decades and beyond,
the only really feasible route to stabilization (see Galiana and Green 2010).

Conclusion

O ver the past 15 years, the policy focus on meeting GHG reduction targets has been a fail-
ure. An examination of the macroeconomic and demographic factors driving emissions
clearly shows why: even if aggressive carbon pricing were to encourage wider use of existing
low-carbon technologies, evidence casts considerable doubt on their ability to deliver the
improvements in energy efficiency and reductions in carbon intensity necessary to produce
deep reductions in global emissions — and certainly not without major negative economic
consequences. Long-term, technically feasible emissions-reduction targets at the global level

20 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

might make sense, but only if the technologies required to meet them are invented, developed
and deployed. Our fundamental argument is that this will not happen without a concerted
international effort, and Canada has the technological development prowess to contribute to
that effort.

Having an impact on climate change is often encapsulated in the phrase “think globally, act
locally,” but in Canada’s case that mantra needs to be cast in a slightly different light. By act-
ing locally to try to meet its greenhouse gas reduction targets, Canada can contribute essen-
tially nothing to the global climate-change mitigation challenge. Furthermore, those targets
cannot be met by getting all Canadian drivers to purchase hybrid vehicles and fluorescent
light bulbs or to engage in the many other environmentally friendly actions implicit in acting
locally. Even if Canada could meet its targets, global emissions would decrease by less than 0.5
percent, while the costs in terms of lost GDP growth would be prohibitively high.

The inability of current technologies to generate deep GHG reductions does not mean we
should stop encouraging their use — to the contrary, every little bit helps. But if Canadian
governments want to get serious about having a positive impact on climate change mitiga-
tion, they should adopt policies that help develop the breakthrough technologies needed to
reduce global GHG emissions significantly. In our view, a Low-Carbon Energy Research
Council funded by a modest carbon tax — which would initially add less than 1 percent to
end-user energy prices — would make a significant contribution to encouraging the develop-
ment of cost-effective and scalable low-carbon technologies by providing a source of secure,
long-term public funding for basic R&D, testing and demonstration. At the same time, proper
sequencing of technology development and emissions reduction is essential. Carbon pricing
can encourage the adoption of low-carbon technologies, but it is important to put the tech-
nology-development “egg” before the emissions-reduction “chicken,” to avoid potentially
costly brute-force climate-change mitigation policies.

By playing a leading role in basic research devoted to next-generation, low-carbon energy

technologies, Canada not only would show itself to be a leader in climate change policy (as
opposed to paying lip service to unattainable targets), it could also reap considerable econom-
ic benefits from the technologies that are ultimately developed and deployed. In this context,
Canada’s formal withdrawal from the Kyoto Accord — and the recognition that its targets are
not attainable using today’s technologies — might be a blessing in disguise for those who
truly want to enable deep greenhouse gas emissions reductions.

IRPP Study, No. 34, July 2012 21

A Technology-Led Climate Change Policy for Canada

Appendix: Possible Research Directions for a Low-Carbon Energy

Research Council
Carbon capture and storage

C anada is a leader in the development of carbon capture and storage (CCS) and home to
one of the few currently operational commercial scale CO2 storage sites, at Weyburn,
Saskatchewan. Both the federal and provincial governments are contributing to CCS projects
at the pilot and operational levels in the oil sands, in power plants and in the gas-processing
industries. A major hurdle is how to scale up capture and storage to levels that would reduce
emissions from heavy oil production and electricity generation substantially. Moreover, it is
still an expensive undertaking: Shell Canada recently reported an $865 million agreement
with the federal and Alberta governments (of which $120 million is to be provided by Ottawa)
to fund its Quest Carbon Capture and Storage demonstration project, which is intended to
capture and store one million tonnes of CO2 per year by 2015 from Shell’s heavy oil upgrader.

Shell’s Quest project indicates the seriousness with which the federal government is pursuing
CCS. But it also indicates that CCS is still a good distance from becoming truly scalable.
Consider that a medium-sized 400 megawatt coal-fired electricity-generating plant would emit
2.8 million tonnes of CO2 per year, and this does not take into account the 20 to 30 percent
energy sacrifice associated with post-combustion capture. Moreover, the Quest project’s high
cost in relation to the relatively small amount that will be stored indicates that costs will have
to fall substantially if CCS is to be applied to more than a small fraction of the 150 to 200 mil-
lion tonnes of CO2 associated with electricity generation and fossil fuel production in Canada
and the approximately 10 billion tonnes per year emitted from these sources worldwide. As
the US Interagency Task Force on Carbon Capture and Storage (United States 2010, 3) has
reported, “though CCS technologies exist, ‘scaling up’ these existing processes and integrating
them with coal-based power generation poses technical, economic and regulatory challenges.”
The report underlines why a technology-led policy and the funding that goes with it must
include testing and demonstration, not just basic R&D.

Many other countries also have CCS projects under way, although few are as yet operational.
Thus, what we learn from the Shell project and projects like it could help pave the way for tech-
nologies capable of capturing a larger share of Canadian and worldwide emissions. Among
Canada’s advantages is that most emissions associated with electricity generation and oil and gas
production are located on or near the Pembina Basin, which spreads southeastward from north-
western Alberta to southwestern Saskatchewan. The basin’s sedimentary geology is favourable to
CO2 storage, a not-insignificant factor given that storage requires close monitoring for leakage.

Geothermal space conditioning

Geothermal space conditioning (GSC) is a relatively simple technology that uses heat
exchangers and pipes sunk in the ground beneath or next to buildings to supply heat in the
winter and air conditioning in the summer to residences, commercial establishments and
office towers. The technology might be mature, but innovation funding could be used benefi-
cially to demonstrate the scope for residential use of GSC and the extent to which it is possi-
ble to use GSC effectively in large commercial and office tower structures.

22 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

Put another way, scale-up probably awaits confirmation of the extent to which GSC makes it
possible to substitute other sources of energy, especially in larger buildings. Ultimately, the
main objective of funding would be to assure that scalability in the production and installa-
tion of the equipment contributes to savings in purchased energy and fuel. In the usual course
of things, it takes energy to produce energy. As with solar, wind, wave and tidal sources, geot-
hermal allows nature to do the work. Moreover, unlike other renewable energy sources (except
hydro), geothermal energy is available when needed.

Large-scale storage of solar and wind energy

Climate change policy advocacy typically is accompanied by a good deal of wishful
thinking about renewable energy — particularly solar and wind energy. Their still-tiny
contribution to total energy consumption, despite large increases in solar array and wind
farm capacities, is an indication of the current limitations of these sources in electricity
generation. The problem is easy to understand, but has been very difficult to solve.
Much of the time, the wind is not blowing or the sun is not out when the energy is
needed; at other times, these sources can deliver more energy than is needed. Thus,
insufficiency on the one hand and wasted energy on the other means these sources are
currently incapable of supplying (electric) energy reliably and cost-effectively. This lack
of reliability threatens blackouts and brownouts unless sufficient “spinning reserve”
(energy from backup sources) is available.

The solution is obvious: large-scale storage for intermittent solar and wind energy. But
the solution has been elusive once one looks beyond “pumped” hydro (the availability of
which is typically site specific) and compressed air energy storage, which is crude, cum-
bersome and has yet to be made operational for electric utility generation purposes.
What is needed is a scalable technology capable of reliably and cost-effectively storing
energy in a form that can be converted quickly to electricity. Without technological
breakthroughs in energy storage, solar and wind energy is likely to remain a small con-
tributor to the total energy picture. Relying on advances in electricity networks (such as
improving grid structure and “smartness”) and diversifying the location of solar arrays
and wind farms as an alternative to storage, as some energy analysts suggest (see, for
example, Delucchi and Jacobson 2011; Jacobson and Delucchi 2011), is not credible if
reliability is deemed essential.

The case for Canada’s contributing to solar and wind energy storage research is twofold.
First, most countries stand to gain greatly from technological breakthroughs that lead to
the successful storage of energy from intermittent sources on a very large or electric utili-
ty scale. Such success should then allow for downscaling to residential and commercial
storage. Second, the chances of success in this highly uncertain but important endeavour
would be increased if many groups of people work on a solution at the same time.
Therefore Canada should not work alone but should collaborate with other countries on
both designated R&D and funding. Such collaboration could be a model for other con-
sortia, and help generate a real technology race to find the holy grail of renewable ener-
gy storage.

IRPP Study, No. 34, July 2012 23

A Technology-Led Climate Change Policy for Canada

Smart grids
“Smart grids” are a much-discussed modernization of the electric grid that would improve the
system’s ability to monitor, protect and automatically optimize the operation of its intercon-
nected elements (EPRI 2011, 1-1). Smart grids can improve the balance between demand and
supply by the monitoring, communication and control of high-voltage systems and enhance
the remote monitoring of local distribution networks so as to reduce maintenance and operat-
ing costs, thus increasing reliability and improving the response to outages (see Joskow 2012,
35, 37). However, without additional technological breakthroughs, smart grids have a limited
ability to increase transmission capacity and, although they would complement grid-scale
storage, they are no substitute for such storage systems. Smart grids are an example where
research cooperation with the United States might be highly desirable.

Small-scale nuclear power

Until the March 11, 2011, tsunami seriously damaged the nuclear power plant at Fukushima,
Japan, nuclear electric energy was enjoying something of a renaissance. That event, however,
has slowed nuclear energy’s return to favour, if not dashed it altogether. But Fukushima is but
one part of nuclear energy’s problem. The other part is the cost of capital (including construc-
tion), approval, siting, meeting regulations and safety and security (see, for example, Bradford
2012; Davis 2012). Yet, without an enhanced contribution from nuclear energy, the attempt to
achieve substantial cuts in global GHG emissions by mid-century will be all the more difficult.
Might there be some salvation in smaller-scale nuclear power units, perhaps with a modular
construction? And if so, does Canada, once an important contributor to civilian nuclear power,
still have the expertise to pursue new nuclear initiatives? A “yes” or even “maybe” could be suf-
ficient to warrant investment in R&D, testing and demonstration in this area. Indeed, in the
face of rising fossil fuel prices, the territory of Nunavut is already considering the use of small-
scale nuclear plants to replace current diesel generators. Much depends on whether miniature
reactor designs can live up to safety standards and be constructed cost-effectively (Brusilow
2011). Given Canada’s vast territory and far-flung communities, there might well be important
payoffs to the testing and demonstration of small-scale nuclear generators.

Hydrogen for heavy transport

A decade or more ago, hydrogen seemed to be the fuel of the future; indeed, there was much
talk of a “hydrogen economy.” In Canada, companies such as Ballard in Vancouver became
synonymous with hydrogen-powered vehicles and Stuart Industries in Toronto with manufac-
tured state-of-the-art electrolyzers for separating hydrogen and oxygen from water. But the
flower wilted as it became clear that hydrogen-powered vehicles required breakthroughs in
fuel systems and onboard storage and a large and complex infrastructure of refuelling stations.
If basic research could reduce the energy required to create hydrogen and address storage
problems, perhaps hydrogen could enjoy a revival, particularly if its role in transport were
directed away from light vehicles to heavy transport such as railroads and vehicles where the
refuelling infrastructure hurdles would be lower.

24 IRPP Study, No. 34, July 2012

 A Technology-Led Climate Change Policy for Canada

Notes
1 For a number of reasons, Pielke, Wigley, and Green’s “frozen
technology” baseline might somewhat overstate the size of
the technology challenge, and could be interpreted as a
worst-case scenario. First, it does not account for any energy
intensity decline attributable to a shift toward less energy-
intensive production (although this effect is small when
considered in global terms). Furthermore, modest efficiency
gains likely would be prompted by competition between
firms and the adoption of best practices. Nevertheless,
frozen baselines are an important benchmark for under-
standing that the challenge is much bigger than we are usu-
ally led to believe.

2 The idea is not as far-fetched as it seems. Researchers at the

Georgia Institute of Technology (2008) are working on a sys-
tem to capture and store carbon created by the combustion
of conventional fossil fuels in motor vehicles before it leaves
the tailpipe.

3 As a point of reference, the National Roundtable on Energy

and the Environment (2009) concludes that a price of $100
per tonne would be necessary to meet 2020 targets and a
price of $300 per tonne would meet 2050 targets.

4 As a point of comparison, the carbon tax proposed in the

Green Shift would have started at $10 per tonne and
quadrupled in just four years.

5 Significantly, NASA’s total budget for the Apollo program

increased to a much larger share of US GDP as investments
were made to develop the applications of the initial
research. Such complementary investments will undoubted-
ly be necessary as new energy technologies are discovered
and developed.

6 British Columbia has also enacted a carbon tax of $30 per

tonne of CO2 equivalent, but the resulting revenue is used
to reduce other taxes, rather than to support technology.
Alberta charges a penalty of $15 per tonne of CO2 equiva-
lent to firms that cannot meet their provincial emissions
targets or do not purchase offsets; the proceeds are put in a
technology fund. But because the penalty does not apply to
all emitters, it raises very little revenue.

7 Solyndra was a California-based manufacturer of solar pan-

els. Despite having received a US$535 million loan guaran-
tee from the US federal government and a US$25 million
tax break from the state of California, it abruptly ceased
operations and declared bankruptcy in September 2011. The
feed-in tariff program in Ontario pays providers of renew-
able energy above-market rates for power generation in
order to stimulate the development of renewable energy,
but there is little evidence that this market expansion strate-
gy or effort has lowered the production costs.

IRPP Study, No. 34, July 2012 25

A Technology-Led Climate Change Policy for Canada

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About This Study

This study was published as part of the Competitiveness, Productivity and Economic Growth research program
under the direction of Jeremy Leonard. The manuscript was copy-edited by Barry Norris, proofreading was by Zofia
Laubitz, editorial coordination was by Francesca Worrall, production was by Chantal Létourneau and art direction
was by Schumacher Design.

Isabel Galiana Galiana is a lecturer and PhD candidate in the Department of Economics at McGill University. She
specializes in modelling of climate change policy and international economics, including integrated assessment
models, induced technological change, innovation and productivity, international economics, and natural resource
economics. Her publications include “A Technology-Led Approach to Climate Policy,” and “Let the Global
Technology Race Begin,” in Nature, 2009. She is a member of the advisory committee on climate policy of the
Quebec Minister of the Environment.

Jeremy Leonard is research director at the Institute for Research on Public Policy. He has been affiliated with the
IRPP in a variety of research capacities since 1994. He is the coeditor of A Canadian Priorities Agenda: Policy
Choices to Improve Economic and Social Well-Being (2007) and directs the IRPP’s Competitiveness, Productivity
and Economic Growth research program. Prior to his association with the IRPP, Jeremy was a policy analyst with
the Committee for Economic Development, based in Washington, DC, and an economist with the Manufacturers
Alliance/MAPI in Arlington, Virginia. He holds an MA in economics (summa cum laude) from McGill University and
a BA in philosophy from the University of Pennsylvania.

Christopher Green is professor of economics at McGill University. He received his PhD in economics from the
University of Wisconsin in 1966 and taught three years at North Carolina State University before coming to McGill
in 1969. He began to research climate change in 1988 and started teaching on the topic six years later. His research
has focused on the energy technology requirements for effective mitigation of climate change. The work on a tech-
nology-led climate policy began in earnest in 2009 when he teamed up with Isabel Galiana.

To cite this document:

Galiana, Isabel, Jeremy Leonard, and Christopher Green. 2012. A Technology-Led Climate Change Policy for Canada.
IRPP Study 34. Montreal: Institute for Research on Public Policy.
Source: Institute for Research on Public Policy (www.IRPP.org).