Regulators please be brave

Why are we so demanding for the latest smartphone and yet so laid back for all the new technologies that have to do with energy. Today we have technologies that can make an airplane fly day and night without fuel, but also technologies to electrify transport, to properly insulate houses, to massively reduce energy wastage and even develop much more efficient industrial processes.

These technologies do exist but are stuck in startups, labs, universities, and sometimes even in big companies, not ever reaching final users. Why is this?

It’s partly because of the focus on only pushing innovation by using public money to provide subsidies. While still good, it can only bring good ideas so far. If they don’t fulfil a need, they will founder once they come into contact with the market. If we continue to allow people to pollute as they do today, most of the innovations in this field will remain unused. So conditions must be created to not just push but pull innovations to market, and one way to do it is to have ambitious regulations to help make that happen.

So we must observe what is the paradigm that prevents us from moving ahead, and change that paradigm. In this case, we have to understand that our liberal system, which is so regulation averse, will benefit from a legal framework that will oblige people to use more innovative and efficient technologies. Not only to protect the environment, but also to create jobs and boost economic development. 

We can do this by recognizing that protection of the environment has now become profitable. This is another paradigm shift. When it was not, people have simply ignored it. That means that it is financially viable to introduce a regulatory framework for the use of energy efficiency and renewable energies demonstrating that these technologies are not expensive or bad for industry, but are in fact just the opposite.

For example, today there is a new power plant built in Saudi Arabia, where the electricity from photovoltaics will be 1.8 cents per kWh. Mexico will have 1.77 cents. That is 10 to 15 times less expensive than what we pay here in Europe for dirty electricity.

As for energy efficiency, it is so incredibly profitable - estimated at $25 tn worth of infrastructure investment over the next decade and a half - that even those companies that pay a carbon tax are going to be more profitable than those that do not, because they are obliged to be more efficient, to save energy, to implement new technologies. 

Replacing the outdated systems with clean, modern, efficient systems represents the biggest market opportunity for industry this century.

However, markets enjoy two things; certainty and - particularly in such massive industries as energy - the status quo. Thus they resist the disruption and uncertainty that innovation brings. And the lack of a comprehensive regulatory system that promotes clean economic growth may actually be feeding uncertainty. Companies know legal frameworks that will put a price on carbon are forthcoming, but they don’t know what they will look like or how much it will cost. So they are taking a wait-and-see approach, remaining resistant to change. And the market is stuck, and innovation with it.

Consider the Nash equilibrium - the theory by mathematician John Forbes Nash Jr. - that helps to explain why every player in a market will make the best decision for themselves, based on what they think the others will do, and no player has anything to gain by changing only their own strategy. But If regulators can create laws that accurately reflect the cost of using old, dirty and inefficient technologies, and demonstrate the potential for clean solutions, regulators have the opportunity to quell this uncertainty and create the conditions to pull innovation to the market.

The science is sure, the technologies exist, the finance is increasingly in place and the political will is largely there. Now we need measures to make it happen.

Forward-looking companies are already taking the initiative by themselves; almost 1400 have set internal carbon prices to materially affect investment decisions and drive down GHG emissions in anticipation of a price on carbon, including more than 100 Fortune Global 500 companies with annual revenues of US$7 trillion. But these are the brave ones moving forward despite uncertainty. Regulation must capitalise on this momentum.

It can be quite paradoxical to ask for more regulation to spur economic growth. But when it can pull innovation forward and can help people to be more in the future than in the past, I think it’s worth it.

So my call is for regulators to be brave, and to make the legal framework in accordance with the evolution of the technology, and change the rules of the game. And what will happen when regulations that are really ambitious in terms of energy policy and protection of the environment are implemented? All the innovations, all the solutions, all the new technologies will be pulled, arrive on the market, and be put to good use.

This article was originally published in the January edition of European Files magazine