The trickle-down theory of renewable energy

By Fran Sussman

Andrew Revkin’s column in DOT Earth about Harvard’s decision not to divest its investments in fossil fuels included some observations by Robert Stavins, a noted Harvard economist. One was particularly provocative:

“If divestment were to reduce the financial resources of coal, oil, and gas companies (which it would NOT do), this would only reduce research and development at those same companies of: carbon capture and storage technologies; other key technological breakthroughs; and renewable sources of energy (the fossil fuel companies are carrying out much of the R&D on renewables).”

The implication of Stavins’ statement is that, at the margin, we should not reduce the resources available for investment (i.e., the profits) of fossil fuel producers because it will delay the development of renewable energy. But the margin works both ways; if we believe Stavins, then we should also believe that the best way to promote renewable energy—at the margin—is by putting more resources into the hands of fossil fuel producers. Huh?

[Economists love to talk about things at the margin—what would happen if we changed things just a little. Stay tuned for a post in coming weeks on “what economists say and what they mean”.]

Coal, oil, and natural gas companies may well be spending a lot of money towards developing renewable energy. It certainly is rational, from a business perspective as an energy company, to be looking towards the next energy source and diversifying. They may even—although I have no information about this—be the largest source of R&D, of any particular group. But that is not the same as saying that giving a dollar to fossil fuel companies is the most efficient path towards expanding our renewable energy capabilities.

Earlier this year, Ernst and Young released the 2013 Oil and Gas Reserves Study. The study added up 2012 capital expenditures from the 50 largest oil and gas companies in the US (ranked by size of reserves). Together, they spent $26 billion on exploration, $103 billion on development, $55 billion on acquiring proven and unproven properties, and a little bit on “other” — for a total of almost $186 billion. Oil and gas companies spend big money on other things too, like stock repurchases (according to the Center for American Progress), and buying other companies (sorry no citation).

But it seems that one thing they do not spend much on is R&D, according to data collected by the National Science Foundation (NSF) as part of its annual Business Research and Development and Innovation Survey (BRDIS), which looks at companies located in the US that perform R&D. For 2010, oil and gas companies spent less on R&D, as a percentage of worldwide sales, than most industries: about 0.6%, compared with a national average of 2.6%. Not surprisingly, biotechnology leads the list, with 27.5%, followed by other industries, such as nonfinancial property (like patents), pharmaceuticals, software publishers, electro-medical equipment, and semiconductors. A few industries are at the bottom, with less than 0.1%, such as messenger services, warehousing, and petroleum refining.

The NSF doesn’t collect information on what type of R&D is being conducted. The Natural Resources Defense Council (NRDC), however, did an analysis of oil companies’ investment in dirty and clean fuels.  They looked at the annual reports of five top oil producing companies and calculated that, between 2006 and 2010, the companies invested $660 billion in “upstream oil and gas exploration and production” and $0.7 bilion “in renewable fuels (conventional and advanced biofuels) development globally.” [Oh yes, and $210 billion in stock buybacks.] Investment in rewewable fuels was about 0.1% of investment in oil and gas.

Stavins’ argument sounds a bit like rationalization after the fact. And it brings up memories of President Ronald Reagan’s “trickle down theory”—that changing tax rules to put more money in the hands of the rich was a good way to get money to the poor, because it would trickle down. That wasn’t good economics either.

All in all—whether  we’re talking about divestment or direct investment, tax credits or other government subsidies, market development to boost sales, or anything else you might think of—it doesn’t look like helping out fossil fuels is the ideal path to a renewable future.

Thanks to PolitiFact for pointing to the data on R&D collected by NSF.

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2 Comments

  1. Brad

     /  October 22, 2013

    I think the more fundamental question about divestment is whether it actually accomplishes anything. It doesn’t “punish” the fossil fuel companies, because the stock market is a secondary market: when you buy or sell shares on the market, the company doesn’t see any of that money (unless it’s an initial offering). You’re buying shares from a former shareholder or selling shares to someone else. The company would only be hurt if there were no buyers for the divested shares, which would cause the price to drop. But once the price drops, it would probably attract buyers since they’d view the shares as a bargain at that price.

    I think divestment is more of an ethical/moral statement than a practical one. It makes the investor feel good, but does very little to help change the world. There’s an argument that if you want to influence the behavior of fossil fuel companies, you should buy a lot of shares so you can introduce and vote on shareholder resolutions, and thus have some influence in the company’s practices and business decisions.

    Reply
  2. Bob S

     /  October 24, 2013

    Very nice blog. It’s simplistic to assume, as Stavins apparently does, that fossil fuel producers and users are investing heavily in green energy technologies. Companies that mine and sell coal are not investing in renewables R&D. Indeed, they’re probably not investing in much R&D at all. Oil companies are a little more complicated. They’re certainly doing R&D on renewable transportation fuels (mostly for defensive reasons) but few of them have any interest in solar and wind because they’re just not electricity providers. Utilities don’t do a lot of R&D on power technologies; it’s mostly done by big vendors, like GE, Siemens and Babcock and Wilcox. The utilities will deploy these technologies if they work but aren’t making the upfront investment in R&D. Finally, much of the real innovation on green technologies is done by startups with clever ideas. These companies get financing from venture capitalists and sometimes from big vendors but rarely from fossil fuel producers. The issues around divestment are complicated but I don’t think it will necessarily result in less R&D on green technologies.

    Reply

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