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In Search of an Optimal Climate Change Policy

A crucial step for establishing a national climate change policy, one of the biggest policy decisions facing this country and the world, is deciding which developing energy technologies will best maintain that policy once it’s in place. The next step is calculating exactly how much money to invest in R&D for each of those chosen technologies. These critical steps, in fact, describe the ongoing research of Dr. Erin Baker of the Mechanical and Industrial Engineering Department. Her research employs interviews with experts combined with sophisticated mathematical modeling techniques to inform government policy makers about what makes a good “technology R&D portfolio” for cutting greenhouse emissions cost-effectively in the future.

“Right now there is no real climate change policy at the federal level in this country,” says Baker. “But the writing is on the wall. We know that climate change is coming. We know that there is going to be climate change policy and regulation in the future. So agencies such as the Department of Energy are concerned about trying to get the energy technologies moving so that, once we have regulations, we’ll have the means to help support them. Even if you don’t have policies in place yet, this is the time to be investing in research and development.”

Baker’s research on a technology portfolio has been supported by a five-year, $430,000 grant from the prestigious National Science Foundation (NSF) Faculty Early Career Development (CAREER) Program and a two-year, $347,000 grant from the U.S. Department of Energy, among others. Last December, Baker was also invited by the Department of Energy to organize a workshop on “R&D Portfolio Analysis Tools and Methodologies.”

So far, Baker’s research has studied three major categories of alternative energy technology: solar photovoltaics, carbon capture and storage, and nuclear fission. The study has already created a portfolio for investing in the R&D of nine specific technologies under these three broad categories. The portfolio even provides real dollar amounts for investing in each technology, based on its potential for low carbon emissions, scientific breakthroughs, and playing a significant role in response to climate change.

All three forms of carbon capture and storage studied by Baker scored high marks in her investment portfolio. Carbon capture and storage is a means of reducing fossil fuel emissions by trapping carbon dioxide from large point sources such as fossil fuel power plants and storing it in such a way that it never enters the atmosphere.

“If you really want to have high standards of abatement in the level of greenhouse gases, then carbon capture is the way to go,” she explains. “It’s the easiest way to reduce emissions because it captures carbon before it’s released into the air and will allow us to keep using our coal-fired generators for a long time. Research into these three carbon capture technologies doesn’t cost as much as some of the other technologies we’ve studied, and the probability of success is high.”  

Climate change is one of the key public policy problems facing the world right now. It is a very difficult problem for a number of reasons, including the long timeframe the policy must cover, the global nature of the problem, and the deep uncertainty surrounding climate change damages.

“There is also uncertainty about technical change,” says Baker. “We don’t know which R&D projects will be successful at what level.”

One vexing issue faced by policy makers is how to allocate research budgets across a variety of energy technologies in order to reduce the future costs of controlling climate change. That’s where Baker’s technology portfolio comes in, and by the fall of 2011 she expects to include three additional categories in her technology portfolio: electricity from biomass, transportation from biofuels, and batteries for vehicles. Her portfolio will then contain six major technology categories in all.

So far, Baker’s portfolio makes sense in the context of several very different climate scenarios being predicted for our uncertain future. Baker tested her results against various reports and protocols aimed at setting differing standards for greenhouse emissions, including: The Stern Review on the Economics of Climate Change released by the British Government in 2006; The Kyoto Protocol to the United Nations Framework Convention on Climate Change, entered into force in 2005; and Al Gore’s recommendations for government regulation of greenhouse emissions.

“What we found is that our portfolio of R&D investment was robust to all of those policies,” notes Baker. “We still got the exact same optimal portfolio to invest in when it was applied to all of those policies. So whether our government decides to have a national abatement policy that is rather radical or not so radical, the portfolio our study came up with would work just as well.”

Senay Solak of the UMass Amherst School of Management has been collaborating with Baker on her research and publications. (February 2011)