the most promising technologies to invest in heavily than if we spread the money
around evenly.
The basic assumption of current finance theory, though, is that any
individual person’s investment is too small to affect the value of what’s being
invested in. Even in traditional finance, that assumption is problematic, but in the
context of new energy technologies, it’s catastrophic, eliminating these virtuous
cycles of investment and innovation from the very beginning. Essentially what’s
needed is a more powerful theory of optimization that can deal with these highly
complex, stochastic (i.e., random), non-linear problems.
Such optimization techniques are needed in a wide variety of other
contexts as well, for example, deciding when to recharge a battery and when to
withdraw energy from it, determining which power stations to use and when, and
deciding on the price at recharging stations for electric vehicles.
Another key to investment is for the market to provide the appropriate
incentives. When carbon can be emitted without cost, it is very difficult for cleaner
but more costly technologies to get a foothold. A cap-and-trade system is one
solution for this. This is a policy in which regulators set a target level of
greenhouse gas emissions (the “cap”) which can be reduced over time, and
energy producers either buy or are given permits to emit, which they can
subsequently buy or sell (the “trade”). The allure of this policy is that it has the
potential to allow the market to find the most efficient way of reducing emissions.
A coal plant, for example, wouldn’t be forced to shut down, but it would require
lots of permits that would make it more expensive to operate. If the plant is
located in an area with cheap coal and few other energy options, its owners
might choose to continue to operate it, paying the premium. But in an area with
abundant sunshine, it might be more profitable to build a solar thermal plant, shut
the coal plant down, and sell the unneeded permits to someone else.
The downside of cap-and-trade systems is that they can fail spectacularly
unless they’re carefully designed. When Europe implemented its cap-and-trade
policy in 2005, for example, the price of carbon emissions collapsed, emissions
targets were missed, prices to the consumer shot up, and energy companies
reaped enormous windfall profits.