The energy situation

Investment

From Jun 2 Economist leader: In 2003, the most recent year for which figures are available, America's power-generation business, arguably the world's biggest single polluter, spent a rather smaller proportion of its revenues on R&D than did America's pet-food business. But that's beginning to change, as our survey this week makes clear.

Global investment in renewable power-generation, biofuels and low-carbon technologies rose from $28 billion in 2004 to $71 billion in 2006, according to New Energy Finance, a research company.

Costs
As the likes of General Electric and BP put money into cleaner technologies, costs will fall. The price of a watt of solar photovoltaic capacity dropped from around $20 in the 1970s to $2.70 in 2004 (though a silicon shortage, caused by rocketing demand as a result of madly generous German subsidies, has pushed it up since). The price of wind power has fallen from $2 per kilowatt hour in the 1970s to 5-8 cents now, compared with 2-4 cents for coal-fired power. More investment will bring prices down further; and, as the gap shrinks, so the costs of switching from dirty energy to the clean sort will fall.

Risks
Yet business's new enthusiasm for clean energy is a fragile green shoot in a dark landscape. Much could happen to crush it. A sustained fall in the oil price, for instance, would undermine investment in costlier, cleaner technologies. But the bigger risk is political. Businesses are investing in alternatives to fossil fuels because they assume that carbon emissions will be constrained in the future. If governments do not act to curb emissions, those investments will eventually wither.

Carbon Tax
The best way for governments to encourage investment in cleaner energy is to make the polluter pay by putting a price on CO2 emissions. According to the Intergovernmental Panel on Climate Change, the body set up under the auspices of the United Nations to establish a consensus on global warming, a price of somewhere between $20 and $50 per tonne of CO2 by 2020-30 should start to stabilise CO2 concentrations at around 550 parts per million (widely reckoned to be a safeish level) by the end of this century. A $50 price tag would raise petrol prices in America by around 15% and electricity prices by around 35%—hardly draconian when set alongside recent fluctuations. The IPCC reckons that stabilising at 550ppm would knock around 0.1% off global economic growth annually.

A carbon price can be established either through a tax or through a cap-and-trade system, such as the one Europe adopted after signing up to Kyoto. A carbon tax would be preferable, because companies would then be able to build a fixed price into their investment plans; but businesspeople and politicians are both strangely averse to the word “tax”. A cap-and-trade system can be made to work, but the price has to settle at a level that affects commercial decisions. Europe's hasn't: the price has been too volatile, and, for much of its existence, too low, to shift investment patterns much.

Europe has tightened its system up, and the carbon price has risen to a level which could start to make a difference. But Europe, by itself, will not save the planet. It is America that matters, not just because it is the world's biggest polluter, but also because without its participation, the biggest polluters of the future—China and India—will not do anything.