German electricity industry - Impact of possible design options for an emissions
trading scheme on innovation strategies in the German electricity industry
Martin Cames1and Anke Weidlich2
1 Oko-Institut - Institute for Applied Ecology, Novalisstr. 10, 10115 Berlin¨ m.cames@oeko.de
2 nowanke.weidlich@iw.uni-karlsruhe.de
Summary. The paper examines what impact different design options of emissions trading have on the innovation process in the electric power industry. Recent con- cepts of innovation research in evolutionary economics are reviewed and investment cycles in the German power sector are examined before taking a closer look at differ- ent emissions trading design options and their respective impact on power generation costs.
Keywords: climate change, emissions trading, innovation, electricity, in- dustry, new entrants, plant closure, windows of opportunity
1 Introduction
The European emissions trading scheme has been introduced in order to stim- ulate innovation in the direction of a more efficient and less CO2-intensive means of production, especially in the electricity sector. The hypothesis of this paper is that the impact of this new instrument on the innovation process depends on the way in which it is designed.
In this paper, emissions trading is put into the context of the findings of modern innovation research. Section two provides a brief introduction to selected elements of innovation research. The current situation in the German power sector is reviewed in section three: investment cycles and the stages of technological development of two important power technologies - advanced lignite-fired plants and combined-cycle gas turbines - are examined.
Section four describes possible design options for an emissions trading sys- tem and their respective innovation effects. The focus of this paper will be on
the examination of different regulations concerning the method of allowance allocation (auctioning or free allocation) and the treatment of plant closures and new entrants. This enables the likely general innovation effect that emis- sions trading has on the German power sector to be deduced, in addition to an estimate of the importance that the cited technologies will have for power production under the new conditions of CO2emissions trading. These aspects are dealt with in section five.
2 Innovation and windows of opportunity
Innovation can be of a technical, social or socio-technical nature and is al- ways the result of planned human action. Innovation includes the invention, development, adaptation and diffusion of new products or product compo- nents, new materials, new production processes and new organizational set- ups. Changes in lifestyle, institutions, values and other aspects of social life can also be regarded as innovation.
In neo-classical economic theory, technology and innovation are largely seen as an exogenous factor; the causes of and incentives for innovation are not further examined. In evolutionary theory, however, technological innova- tion is seen as a fundamental source or endogenous factor of economic growth, and the driving forces and dynamics of technological change are placed at the center of examination. According to evolutionary theory, economic de- velopment is characterized by a sequence of rather stable phases with only incremental innovations, and by unstable phases that represent opportuni- ties for basic technological changes, where already implemented technologies can be replaced by new, alternative technologies. These unstable phases are considered windows of opportunity. In unstable phases, insignificant initial advantages in favour of a particular technology can become a self-reinforcing factor due to learning effects (learning by doing, learning by using), network externalities and economies of scale. This can, in certain conditions, push de- velopment along a particular path and lead to the success of a technology that may be technologically inferior to other solutions (David 1985).
Windows of opportunity summarize a set of favourable conditions for in- novation. These conditions can be observed at different levels. Most important is the techno-economic level of competing technologies. Zundel et al. (2003) differentiate between two different constellations of techno-economic windows:
• Innovation competition between new technologies that are at a similar stage of maturity. This kind of time window is particularly important at an early stage of competition in a newly emerging market.
• Competition between an old, dominant technology and new technologies.
This competition becomes topical when the investment cycles of the dom- inant solutions come to an end and new technologies are potentially com- petitive.
Unstable phases thus mainly depend on the dynamics of the old technology.
In capital-intensive sectors such as the power sector, sunk costs and the du- ration of development periods and investment cycles are especially sensitive to the time factor. Investing in a new technology means high sunk costs for a company that cannot be recovered for a long period of time. At the end of an investment cycle, when investments are written off, sunk costs are zero and a switch to a new technology is easier. When investment cycles are synchronous in an industrial sector, this idea can be applied to the entire sector (Zundel et al. 2003). The end of investment cycles in an industrial sector thus opens techno-economic windows of opportunity.
Besides the techno-economic factors, other, especially political and insti- tutional factors determine the emergence of time windows. In the case of competition between an old dominant technology and new technologies, po- litical and institutional factors are highly relevant for the emergence of time windows. Dependence on the institutional path (determined by norms and standards, lobbying by syndicates, “regulatory capture” etc.) linked with de- pendence on the technological path, stabilizes the dominant path and may hinder the use of a techno-economic time window (Nill 2002).
3 Time windows in the German electricity market
In large-scale technological systems with long investment cycles, several at- tempts - in the sense of good opportunities - are usually required to give new direction to a system’s development (Zundel et al. 2003). Evolutionary economics show that far-reaching innovation beyond dominant development paths requires, at the same time, favourable conditions at different levels. It is highly likely that a technological regime change can only be successful if favourable social, political and economic factors come together at one period of time and reinforce each other.
In order to get an indication as to how emissions trading might affect investment decisions and the direction of innovation, these timing aspects will therefore be further examined in the following sections. Investment cycles in the German power sector will be identified and a closer look taken at the development stages of two competing energy technologies - combined-cycle gas turbines and advanced lignite-fired power plants.
3.1 Investment cycles in the German electricity sector
As mentioned above, decisions in favour of certain technologies create sunk costs that cannot be recovered for a long period of time. This is particularly true for the electricity industry, where the technical lifetime of investments in power plants is usually 30 years and more. As a consequence, today’s energy- technology decisions determine the characteristics of the energy system for
several decades. As pointed out by Roehrl and Riahi (2000), “research, de- velopment and demonstration efforts as well as investment decisions in the energy sector over the next two to three decades are critical in determining which long-term technological options in the energy sector may be opened, or which ones may be foreclosed”. Due to the long lifetime of investment in power plants and the partly synchronous phasing-out of many investment cycles in the German power sector, there are certain time windows for investments in new plants. These are different in the eastern and the western part of Ger- many. In the 1990ies, replacement and modernization investment in power production was primarily carried out in eastern Germany, whereas little new capacity was constructed in western Germany. In the former, considerable renewal investments will not be necessary during the next 15 to 20 years, whereas in the latter, a significant number of power plants will reach the end of their technical lifetime, at the latest from 2010 onwards. These plants either have to be replaced by new plants or compensated by considerable electricity savings (Enquete-Kommission 2002).
Under the new conditions of liberalized markets, it can be assumed that operators are anxious to reduce existing excess capacity and to extend the lifetime of power plants with low fuel and operating costs by means of main- tenance investment that is less capital intensive. However, even under the assumption of such strategies, the Enquete-Kommission (2002) comes to the conclusion that 40 to 60 GW3of new power plant capacity needs to be erected between 2010 and 2025, if electricity consumption does not decrease signifi- cantly. This investment will mainly take place in the western part of Germany, whereas in the eastern part, capacity replacement will not be required before the end of the 2020ies.
With implementation periods of five years and more for planning, ap- proval and construction of new power plants, long-term investment decisions on new generation capacity are likely to coincide with the start of the EU- wide emissions trading system. Given long technical lifetime and considerable investment volume, the electricity sector plays a key role in the sustainable organization of the energy system. In connection with the time-related consid- erations mentioned above, investment decisions during the coming 15 years - at least for large power plants - will largely determine the level of green- house gas emissions in the year 2050. Emissions trading, if well designed, will therefore noticeably contribute to a reduction of this emission level.
The following brief overview of the institutional and techno-economic de- velopment of advanced lignite-fired power plants and combined-cycle tech- nology will help to detect possible windows of opportunity for technological change in the German power sector.
3 Which is equivalent to one-third or half of existing electricity generation capacity in the year 2001.
3.2 Advanced lignite-fired power plants
Lignite exploitation for power production has a long tradition in the German energy sector. As a domestic fuel, coal (both lignite and hard coal) has al- ways been the most important energy source in Germany, and its utilization in steam turbines remains the dominant path for electricity production. In contrast to hard coal, lignite is not directly subsidized in Germany. However, exemption of coal from the eco-tax and tax on fuel consumption is clearly a preferential treatment of this energy source in comparison with other fuels (for example, natural gas). Lignite-fired power technology has improved con- siderably during the last century, although radical innovations have not taken place. The actual state of the art in lignite power production is so-calledBoA4 technology, which has increased net efficiency to 43 %. This improvement has been achieved through economies of scale, the use of advanced supercritical steam cycles and more efficient turbines as well as other incremental improve- ments. A further 3-5 % improvement has been projected for the BoA-Plus system through pre-drying coal with waste heat. According toRWE Rhein- braun, the major company in the German lignite industry, new lignite-fired power plants, constructed in the present decade, will use the BoA technology.
From 2015 onwards, BoA-Plus technology will be commercially available, and after 2020, BoA-Plus plants with higher steam temperatures, resulting in a level of efficiency of more than 50 %, will come into operation (Lambertz 2003).
With regard to emissions trading, the main disadvantage of lignite is that it has the highest direct CO2 content of all fossil energy sources. In addi- tion, the efficiency of lignite-fired power production is comparably low, thus increasing CO2emissions per kWh of electricity produced. Even advanced lig- nite technologies cannot compete with the efficiency of hard-coal-fired power plants or combined-cycle gas turbines (CCGT). Moreover, specific investment costs and construction times are higher for lignite-fired than for hard-coal- fired power plants, and considerably higher than for CCGT plants. On the other hand, lignite-fired power plants have longer lifetimes; but in liberalized markets with short payback periods, this argument is probably of declining importance. Despite these obvious disadvantages in times of liberalized elec- tricity markets and higher public awareness of environmental problems, lignite still plays a dominant role in German power production. In 2002, it accounted for 27.4 % (BMWA 2003) of total electricity production, more than any other fossil fuel. This is partly because lignite has low and stable fuel costs and thus guarantees high supply security in the electricity sector.
But additional factors contribute to the importance of lignite in the Ger- man energy sector, namely path dependence and lock-in. Parallel to depen-
4 German abbreviation for “Braunkohlekraftwerk mit optimierter Anlagentechnik”
(that is, an advanced pulverized-lignite-fired plant with supercritical steam con- ditions); in the year 2002, a 950 MW BoA plant commenced operation at the power production site of Niederaußem
dence on the technological path (centralized, large-scale steam turbine tech- nology has been the dominant path in power production since the beginning of industrialization), dependence on political and institutional paths can be observed in the lignite industry. The tight network of a few big, vertically- integrated companies in the lignite sector and political decision-makers in the coal regions stabilizes the dominant path and often makes it more prof- itable for established firms to invest in the dominant technology, rather than in a radical innovation. Moreover, mutual arrangements or traditional rela- tionships between political institutions and companies in the lignite industry create lock-in situations that make it difficult to depart the traditional path.
TheKraftwerkserneuerungsprogramm5(power plant renewal programme), set up in 1994 by RWE Rheinbraun and the government of the federal state of North Rhine Westphalia, is one example of this kind of arrangement. The introduction of emissions trading at a European level influences decisions on investment in new lignite-fired plants, as the example of Rheinbraun shows. It is doubtful, however, whether it will fundamentally change the German power production structure.
3.3 Combined-cycle gas turbines
Among gas-fired power plants, combined-cycle gas turbine technology (CCGT) is at the focus of interest, since it can play an important role in climate protec- tion strategies. Allowing for the conversion of low-carbon natural gas into elec- tricity with a high level of efficiency, CCGT results in low CO2emissions per unit of electricity produced. Sartorius (2002) examined the techno-economic development of gas turbines and CCGT technology under the framework con- ditions of energy and environmental regulation in Germany and the USA. He points out that the techno-economic window for CCGT opened in the early 1980ies, when this technology overcame the technological lock-in situation to which it was subjected by existing technology, the steam turbine. Through a recombination with exactly this technology, the advantages of the former could be used without giving up the benefits contributed by the gas turbine, which had already successfully entered the market in the 1960ies (at first as an auxiliary or peak-load device, then later becoming competitive in base-load electricity generation).
In Germany, however, the economic window of opportunity of CCGT was narrowed down by industrial policy in 1999. In this year, the eco-tax came into force. Despite its name, the new tax does not account for the carbon content of different fossil fuels. Instead, coal is exempted from imposition and
5 RWE Rheinbraun plans to gradually replace old lignite power plants by 8-10 new plants with state-of-the-art technology within the coming 30 years. The federal government has supported this project by granting the required permits and assuring favourable conditions. One new power plant has already been built in Niederaußem; at present, further investments are postponed, so long as the final design of the European emissions trading regime has not been decided.
the level of the tax on natural gas was increased (gas used for electricity generation being exempted from that increase, however). Nevertheless, the eco-tax and the tax on mineral oil and gas products systematically favours coal compared with other energy sources. Later in 1999, attempts were made to exempt natural gas for power production from the mineral oil tax. There was strong opposition to this attempt on the part of the coal lobby and other
“pro-coal” players. In the end, exemption of natural gas from the mineral oil tax was only applicable for CCGT plants with an efficiency of at least 57.5 % that start operation within a certain time-frame.6
As a result, in the case of CCGT the economic and institutional window of opportunity in the German power sector could be considered to be virtually closed at present. However, under the new conditions of liberalized markets, and with the introduction of emissions trading in Germany, this situation might change in the near future. Combined-cycle technology offers several ad- vantages, such as low investment costs, short construction periods and a high degree of modularity and flexibility that take effect in a liberalized electricity market. Moreover, its comparatively low CO2emissions are advantageous un- der an emissions trading system, so that a window of opportunity for CCGT in Germany might possibly open in the course of the present and the following decade.
The increased use of natural gas for power production in Germany would be a considerable innovation. It might initiate a development away from a base-load-orientated, centralized power production system towards more flex- ible, decentralized electricity distribution, and could seriously question the protection and subsidization of the German coal industry. This might, in consequence, give rise to more innovation in other energy technologies; for example, renewable energy or small-scale, decentralized power plants.
4 Innovation incentives of different allocation methods
Emissions trading systems are not specifically designed to foster technologi- cal change, but they do have innovation effects. By modifying the price of the commodity that creates externalities - that is, fossil fuel - an emissions trading system provides continuous financial incentives for emitters to adopt innova- tions that reduce their CO2emissions. The incentives basically depend on the targets: stronger targets will induce higher prices for emission allowances and, thus, possibly accelerate investment rates and induce more innovation. The basic hypothesis of this paper is that different design options for an emissions trading scheme create different innovation incentives and thus influence the level and structure of innovation and technological change in the electricity industry. Central design options that might initiate or delay innovation and technological change are described in the following sections.
6 For a more detailed description of the conflict on modern CCGT plants in the context of ecological tax reform, see Stadthaus 2001.
4.1 Initial allocation
Two basic methods of allowance allocation to existing plants are at the fo- cus of public discussion:auctioning and free allocation. Emission allowances might either be auctioned among the emitters of greenhouse gases, who would consequently have to pay for each unit of CO2 released into the atmosphere, or they can be allocated free of charge, according to a fixed allocation method.
Free allocation on the basis of past emissions in a selected baseline period is referred to as grandfathering. It has the effect that an equal percentage re- duction is required from all emission sources over the same period of time.
This percentage is expressed in a fulfilment factor, which adapts the available amount of allowances for different sectors (the cap; top-down approach) to the aggregate past emissions of each individual installation in the baseline period, calculated on the basis of a bottom-up approach. Another option for free initial allocation is the benchmarking approach, where emission allowances are distributed on the basis of output in a recent reference period and an overall target, expressed in CO2 per unit of output. Plants that are more efficient than average state-of-the-art plants would receive more allowances than they need for production, and plants below this standard would have to buy additional allowances. Three alternative benchmarking methods can be differentiated: fuel-specific, average and best available technology (BAT) benchmarking. In case of fuel-specific benchmarking, several benchmarks are calculated for each fuel (lignite, hard coal, natural gas etc.) whereas only one benchmark is calculated for all power generation technologies in the case of average benchmarking. The BAT benchmark is similar to the average bench- mark, but is based not on the average technology, but rather on the best available technology.
The method of allowance allocation to existing installations does not ba- sically affect the static efficiency of an emissions trading system. However, Milliman and Prince (1989, 1992) and Jung et al. (1996) argue that auc- tioned allowances would create greater incentives for technology diffusion and adoption than allowances allocated free of charge, since technology diffusion reduces the price of allowances. The innovator can benefit from this fall in prices, since he will not have to pay as much for the rest of his emissions.
Fisher (2000) points out that, on the contrary, in the case of free allocation the fall in prices due to innovation would lower the value of the innovator’s allowances, which makes innovation less attractive. Thus, free allowances pro- vide less incentive to innovate than auctioned allowances.
The EU opted in its Directive for an emissions trading scheme for largely free distribution of emission allowances. Auctioning is only permissible for 5 % of allowances in the pilot phase (2005 to 2007) and 10 % in the second period of European emissions trading, which runs from 2008 to 2012 (2003/87/EC) but will not be applied in Germany before 2012.
While overall investment patterns and dynamic efficiency under such an emissions trading system depend mainly on the stringency of the overall emis-
sion cap and, thus, on the resulting price of allowances, the allocation method affects the competitive situation of companies. Some companies that would be net sellers under grandfathering could become net buyers under benchmarking (IEA 2001).
4.2 New entrants
In the case of free allocation of allowances to existing installations, innova- tion incentives will also be influenced by the way new plants (including the extension of capacity in existing installations) are provided with allowances.
Either they will have to buy required emission allowances on the market, or they will also receive their allowances free of charge.
The advantage of the first option is that companies have to incorporate the “cost” of CO2 emissions into their calculations of profitability and only enter into the market when expected revenue is higher than expected costs, including CO2 costs. On the other hand, this option puts new entrants at a disadvantage compared to existing operators and may constitute an obstacle to market entry, especially when the price of allowances is high. If the barriers to market entry are high, and this is especially the case when additional costs arise at the beginning of an investment cycle, new companies have less incentive to invest. In this case, new entrants cannot sufficiently “menace”
existing operators; the market power of the latter is reinforced. This situation slows down innovation and restructuring processes.
In the case of free distribution of emission allowances to new entrants, the allocation methods discussed in the previous section on initial allocation can be applied. In the case of grandfathering, it has to be assumed that new entrants will receive allowances according to their needs, but reduced by the fulfilment factor. We have assessed the effects of these different allocation methods on the basis of a levelized cost model7, which calculates specific electricity generation costs for the main competing base-load technologies in Germany - that isBoA andCCGT power plants - commencing operation in 2005. The model follows the full-cost principle and thus represents one impor- tant criterion for the investment decision of an operator that might decide to invest in a BoA or a CCGT plant. It thus differs from the operational view, where decisions on the output level in existing power plants are based only on variable operating costs. Within our model, allowances allocated free of charge are considered as income that can only be realized when the corresponding in- vestment is carried out whereas allowances needed for operation of the power plant constitute an expenditure. The difference between the expenditure for required allowances and the income represented by freely allocated allowances are the actual costs of a plant’s emissions. In the case of benchmarking, these
7 For details on the model design the reader is referred to Schneider 1998.
costs can also be negative as a result of “over-allocation”. The results of the simulation are shown in Tab 1.8
Table 1. Impact of different methods of allocation on competing electricity gener- ation technologies
Price per allowance No ET Auct. GF Av. BM BAT BM Fuel BM Change in specific generation cost due to emissions trading BoA
5 EUR/t CO2 5.7% 0.5% 2.8% 2.7% -0.1%
10 EUR/t CO2 11.5% 1.0% 5.6% 5.5% -0.1%
15 EUR/t CO2 17.2% 1.5% 8.4% 8.2% -0.2%
CCGT
5 EUR/t CO2 2.0% 0.2% -0.7% 0.2% 0.0%
10 EUR/t CO2 4.0% 0.4% -1.5% 0.4% 0.1%
15 EUR/t CO2 6.1% 0.5% -2.2% 0.5% 0.1%
Difference in specific generation cost of CCGT compared BoA 5 EUR/t CO2 6.2% 2.5% 5.9% 2.6% 3.6% 6.3%
10 EUR/t CO2 6.2% -0.8% 5.5% -0.9% 1.1% 6.4%
15 EUR/t CO2 6.2% -3.9% 5.2% -4.2% -1.3% 6.6%
In the first place, the results show that auctioning (without redistribution of revenues) causes substantially higher cost increases than free allocation. In the case of grandfathering or fuel specific benchmarking, cost increases are rather limited (less than 2 %), even if the price of allowances is relatively high (15 /t CO2). Apart from auctioning, only average and BAT benchmark- ing would cause substantial changes in specific generation costs of new power plants, resulting in an increase in generation costs for BoA plants and a de- crease for CCGT plants.
In the present situation without emissions trading, generation costs are about 6 % higher in CCGT plants than in BoA plants. If grandfathering were chosen as allocation method, the cost advantage of BoA plants would hardly change. In the case of fuel-specific benchmarking, BoA plants would even gain in competitiveness. Only if auctioning, average or BAT benchmarking were applied, would CCGT plants improve their competitiveness. However, they can only catch up with BoA plants if the expected price of allowances increases to at least 10 /t CO2. Surprisingly, the average-benchmark approach leads to almost the same results as the auctioning of allowances. From an innovation perspective, and given the political decision to exclude auctioning
8 Own calculations; for BoA plants, we assume an efficiency of 44.5 %, a capacity of 950 MW and a depreciation period of 30 years. In case of CCGT plants, we assume 57.5 % efficiency, 800 MW plant capacity and a depreciation period of 20 years. Operation time is assumed to be 7,000 hours per year for both types of plant. GF = Grandfathering, BM = Benchmark
as an allocation method, only the average and BAT benchmarking approaches would again widen the window of opportunity for CCGT plants, whereas fuel- specific benchmarking would narrow it further.
As a result, free allocation of allowances for new entrants is most likely to promote innovation in the electricity industry under the planned European emissions trading system. Average or BAT benchmarking are more likely to stimulate a switch from the use lignite to natural gas in power generation and thus have stronger effects on the German fuel mix than grandfathering or fuel specific benchmarking.
4.3 Plant closure
Allowances allocated free of charge might expire if the plant to which they are allocated is shut down during the commitment period. This might motivate operators to extend the lifetime of their power plants in order to keep their allowances. Alternatively, allowances might retain their value for a certain time after plant closure, at the most until the end of the commitment period.
The latter option is often criticized as a premium for plant closure and seems to be politically not acceptable. However, this option gives more incentives to companies to close down CO2 intensive power plants and replace them by newer, less CO2 intensive ones. This incentive is reinforced if additional allowances are allocated to new power plants.
A third option might provide a balanced approach between political ac- ceptability and innovation stimulation: Operators can opt to keep the al- lowances allocated to an old installation if they replace it by a new instal- lation.9 If they do so, they are not endowed with additional free allowances for the new plant. They might still be interested in this option because the allowances they can retain from the old installation are higher in number than those they would get for a new power plant, because new plants are usually more efficient and thus emit less CO2. As this option generally results in an over-provision of allowances for the new plant, the innovation incentive is maintained.
5 Conclusions
Today’s energy technologies are strongly embedded in nearly all economic and social activities of everyday life. They are part of a complex system of inte- grated technologies for the production, distribution and use of energy, which interact with the socio-economic system from which they emerge. Investment cycles and sunk costs play a very important role in the energy economy. This
9 This option requires adaptation rules where the capacity of the old and new plant are different, or where closure and commencement of operations do not coincide.
system will not change solely through the development of individual alterna- tive technologies or the introduction of an emissions trading system. However, the approaching internalization of the environmental cost of greenhouse gas emissions by means of emission allowances is indeed one important instrument of climate change policy, but it should not be the only measure. Considering the main problems of technological change, changes in the price of one fac- tor are not likely to be sufficient to bring about the radical change in power production technologies that is needed from the perspective of sustainability.
Instead, a change in the techno-economic paradigm must involve an integrated process of change in science, engineering practice, physical infrastructure, so- cial organization and plant design. Emissions trading alone will not stimulate innovation in the sense of a radical shift away from the use of fossil fuels.
However, changes in the present fuel mix can contribute substantially to the achievement of medium-term mitigation goals. Whether there will be a fuel switch away from carbon-intensive lignite to natural gas largely depends on the design of the emissions trading system. Techno-economic windows can be widened for both: advanced lignite-fired power plants and CCGT technology.
In order to foster innovation in general, it is important that new entrants are treated similar to existing installations and therefore provided with al- lowances free of charge. Should auctioning, average or BAT benchmarking be applied for the allocation of allowances to new entrants, it will be more at- tractive for companies to invest in efficient, gas-fired CCGT power plants. In the case of grandfathering or a fuel-specific benchmarking system, this is less likely to be the case. The treatment of plant closure will also influence inno- vation incentives. However, with particular regard to this design feature, it is important to draw a balance between political concerns, which might emerge if new installations temporarily receive “double allocation”, and difficulties in properly identifying plant closures. Instead of allowances expiring at the end of a year or a commitment period when a plant is shut down, we therefore prefer a hybrid approach that would allow operators to retain their allowances to the end of the commitment period only if they build a new plant.
If these findings are considered in implementation of the European emis- sions trading directive in Germany, emissions trading might promote a sub- stantial shift within the present fuel mix and towards more climate-friendly technologies. However, to encourage energy technologies that are not based on fossil fuels and that would constitute a radical regime shift, a more integrated policy approach is probably needed, which would make use of the cumulative and self-reinforcing character of technological change.
Acknowledgment
This paper was prepared within the project “Transformation and Innovation in Power Systems” (TIPS - http://www.tips-project.de). The TIPS project is funded by the German Ministry for Education and Research (bmb+f) in the socio-ecological research framework (Sozial¨okologische Forschung).
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