Over the last decade or so there has been a growing consensus that the climate change is a real problem. Estimates suggest that the global average temperature has increased with 0,75oC since 1900 and that it will continue to rise somewhere in the range of 1,1 and 6,4oC from 1990 to 2100 (NOU, 2009:16). The International Panel on Climate Change (SFT, 2007) assesses that it is more than 90% probable that this development is caused by human activities through excessive emissions of climate gases, in particular CO2. According to the Stern Review (2006), the increase of the average temperature level may cause severe impacts on social and economic activity. The unambiguous conclusion of the report is that the benefits of immediate action outweigh the future costs of ignoring the development.
It is emphasized both in the Stern Review and by the IPCC that technological innovation and advancements are essential in order to reduce emissions of climate gases. This concerns both abatement technology and renewable energy technology. As expressed by the IPCC:
Climate change is one of the great challenges of the 21st century. Its most severe impacts may still be avoided if efforts are made to transform current energy systems. Renewable energy sources have a large potential to displace emissions of greenhouse gases from the combustion of fossil fuels and thereby to mitigate climate change. (IPCC, 2011, front page)
National governments and supranational institutions have initiated measures supporting emerging renewable energy technology. In 2001 the European Union implemented the Renewable Energy Directive, which was replaced by a more comprehensive version in 2009. The intention is to reduce emissions of climate gasses, make member countries less dependent on imported energy and encourage technological innovation in the renewable energy industry. In the Renewable Energy Directive is a stated objective of increasing the share of renewable energy consumption to 20% of the total energy consumption in the EU within 2020.
The Norwegian government presented the white paper on climate efforts (klimameldingen) on the 26th of April 2012. The white paper builds on the 2008 agreement on climate policy (klimaforliket) where it was established an objective of reducing emissions with 30% within 2020 compared to 1990 levels and of 2/3rds of these reductions being carried out in Norway. One of the measures stated in the white paper is the creation of a fund for climate, renewable energy and energy transformation. The Renewable Energy Directive has been implemented in Norway, but as is noted in the white paper (Mld. St. 21 (2011–2012)), the effects of further development of renewable energy will be limited as almost all of Norway’s energy consumption is produced by hydropower. However, it is also noted that the potential for further renewable energy development in Norway is significant and that there could be environmental benefits in increasing the renewable energy production.
Specifically, it is pointed out that increasing the power surplus in Norway and the export of electricity from renewable energy sources may suppress production and thereby emissions from gas power and energy produced by combustion of fossil fuels in the importing countries. Furthermore, this increase in exports could back up renewable energy projects in other countries. On the hand, increased electricity production could increase consumption equivalently or reduce quota prices and thereby also the incentives to invest in green technologies. However, it is assumed that the effects on the quota prices would be limited given the size of the Norwegian energy production.
In practice, green energy projects concerning onshore and offshore wind power, hydropower, solar power etc. require licenses granted by national authorities to be executed. This authority is executed by the Norwegian Water Resources and Energy Directorate (NVE) in Norway. The most common form of analysis performed to evaluate such projects is cost-benefit analyses (CBAs). Whenever the socio-economic benefits of a project outweigh the costs, the project is deemed welfare enhancing and granted a licence, and the application is denied when not.
However, regarding green technology projects, standard CBAs do not quantify and include one particular type of benefits: learning effects generated in the development of green technology by a specific firm which become freely available to other firms in the industry. The spillover of learning constitutes a market failure as the developers who incur the costs of generating knowledge through “learning-by-doing” are not compensated for their positive contribution to other developers.
In this thesis an attempt is made of calculating and including learning effects in a CBA of a green energy project.
In the first chapter a general presentation of cost-benefit analyses is provided. Main elements and considerations will be described, in addition to some criticism and practical shortcomings of this type of analysis.
A presentation of the concept of learning curves is given in chapter two. A “learning curve” refers to a decreasing relationship between unit costs and accumulated production as a result of “learning by doing”. This learning effect is present in most production processes, but has important implications regarding green technologies when a certain degree of spillover is assumed, as noted above. Specifically, it will be argued that two market failures in the market for green technologies reduce the incentives to invest in emerging green technologies, these being the positive learning externality and a negative environmental externality generated in the production of substitutes.
Presented in chapter three is a simple model of learning based on the learning curve methodology and optimal control theory. The model is of a global market for electricity which includes the market failures discussed in the previous chapter. In this model, the value of learning is set as the shadow price on the accumulated production, reflecting the increase in the present value of welfare when the accumulated production increases marginally. An analytical expression for the value of learning generated in the production of green energy will be derived.
By comparing the social planner’s solution and the market solution, it is shown formally that the provision of renewable energy is lower in the unregulated market relative to the first best solution. The optimal regulation is then analyzed in different scenarios and it will be discussed whether or not other policy rationales apply to green technologies compared to other innovations.
Finally, a cost- benefit analysis of the Norwegian offshore wind power project Havsul I is performed in chapter four. Here the outcome of the analysis when learning is ignored and when learning is included will be compared. By applying the expression for the value of learning from the theoretical model it will be estimated how large the value of learning generated by the Havsul project will be. Given the model specification and the underlying assumptions, it is demonstrated that the Havsul project is estimated to yield a negative net present value in the cost-benefit analysis when socio-economic benefits from spillover of learning are ignored. However, the inclusion of value of learning in the cost-benefit analysis yields the opposite result, rendering the project a welfare enhancing undertaking.