Over the past decade, the transition to a clean global economy has become much more feasible and affordable due to dramatic cost reductions in multiple technologies
Governments, including Ministries of Finance, have played a central role in accelerating innovation for renewable energy and other clean technologies, and the arrival of low-cost clean energy should be viewed as the accumulation of purposive public investment by multiple governments over decades.
- The cost of solar panels has declined by 85%, onshore wind power by 56%, and batteries by over 90% in the past 10 years.
- Examples of countries purposively investing in clean energy include Denmark in wind power, Germany in solar power, and China in batteries.
- Modeling of future costs and adoption of clean technologies would benefit from explicit characterization of key drivers for cost reductions via learning curves (a power function that describes the relationship between costs and experience) and S-shaped adoption curves (which outline the slow and then rapid diffusion of technology, until saturation). Learning and adoption support each other, giving governments a significant role in implementing policies that encourage early adoption.
- Improvements in analytical methods include integrating up-to-date information on technologies and the dynamic evolution of technology costs into economic models to bring them closer to real-world conditions. Including representation of the adoption of small-scale end-use technologies, making linkages across sectors of the economy, and a more realistic treatment of the potential for demand-side solutions would also be helpful.
The implication for MoFs, and governments more generally, is that putting diverse and non-correlated policy instruments in place can help create an expectation for large and growing markets that are robust to political changes, business cycles, and changing social priorities. This helps foster an environment for long-term investment in the energy transition.
Policy instruments can include funding innovation directly, for instance through R&D; derisking novel technologies by co-funding technology demonstrations; creating early markets via advanced market commitments; stimulating broader adoption through subsidies; pricing pollution to improve the competitiveness of clean technologies; and coordinating international cooperation. All of these are only possible with the investment of public funds raised by MoFs.
Keywords
modelspolicy designpolicy mixpublic investmenttechnology
