What I am researching and why

Wed, 05 Dec 2018

At the time of writing this, I am two months into my PhD, and I’m starting to get some clarity to the question of what I’m researching and why.  For the benefit of any friends who want to know but are scared to ask (rumours of my ability to talk about it for hours without end are admittedly fairly accurate), I decided to write a blog post outlining my area of research.  Needless to say, it is a rapidly evolving field, and I plan on changing my opinions many times over the next 3-4 years, so please don’t count on my final dissertation to stick too closely to what I’ve written here.

The background to my research is society’s need to reduce its carbon footprint (net emissions of greenhouse gases), in order to reduce our exposure to climate change.  I’m not claiming to know exactly how climates will change nor their impact, but I do accept that: a) we risk serious economic and social consequences from climate change, b) there are lots of actions we could take to reduce that risk, and c) many of these actions make sense: their benefits in terms of risk reduction outweigh their costs.  

In many spheres of economic life, people are already incentivised to do the best action (or at least a pretty good one).  Laws, markets, social pressure and evolution give us reasons, for example, to follow traffic laws, go to work, and be polite to each other.  Unfortunately, these factors don’t work as well in incentivising us to take the right actions to reduce our exposure to climate change. I blame this on the fact that climate change is subject to massive uncertainty (in terms of what actions could be taken, how much they will cost, and much impact they will have), and that both the problem and actions to address it operate over the whole planet and long timescales.  

In light of this, one answer is for people to just go and do the right thing on climate change, irrespective of incentives that make it tempting to leave action for another day, another person in another place.  I do know people that are doing the right thing, and I commend them for that. However, I am looking to contribute to another approach that I believe is also important: to improve incentives so societies and individuals make fewer suboptimal decisions, by understanding the possible interactions between regulations, market structures and social forces. An example of this has been the decision by the UK to force supermarkets to charge customers for plastic bags, massively reducing the number of bags given out.        

Situation 1: Guarantees of Origin (Green Certificates)

The main situation that I’m focussing on is incentivising individuals and companies to reduce the carbon footprint associated with energy purchases (sometimes referred to as scope 2 emissions).  This can be done by reducing energy consumption, but it can also be done by reducing the carbon intensity of the energy consumed. It is actually quite challenging to think about where the electricity you consumes comes from.  Does everyone use the same grid average, or is there a way to allocate the greener portions to those customers that are willing to pay most for it? Many markets take the second approach, with the European Union (including the UK) introducing a requirement for electricity retailers to disclose their fuel mix, based on tradable Guarantees of Origin (that certify that a unit of energy has been generated renewably).

Allowing greenness to be traded between customers (or at least energy retailers) should, at least according to economic theory, provide better incentive to decarbonise electricity supply.  However, how well this works in practice is an open question. Obstacles can include a distrust in the meaningfulness of the allocation of greenness (the term ‘greenwashing’ or ‘cheat electricity’ gets used).  Calculations can lack transparency, introducing the risk of double-counting or computational errors. If not all guarantees of origin contributes equally to decarbonising, a market may lead to customers acquiring the inferior ones. For example, buying excess Guarantees of Origin from old Norwegian hydro stations does less to decarbonise the UK’s electricity than supporting the construction of a new wind farm.  Finally, the whole market process may be so expensive and administratively burdensome, wasting money and time that would be much better spent directly decarbonising.

I am therefore researching the ways in which we can improve the incentives offered by tradable markets for guarantees of origin.  This is a fun topic, giving me a chance to learn more about renewable energy technology, market mechanisms, and social dimensions. New computing technologies have the potential to make markets more effective, but if implemented poorly could prove counterproductive, for example if they end up wasting undermining trust or wasting money.

Situation 2: Flexibility of Demand

Another situation that I’m very interested in is how we incentivise flexibility in energy demand.  The background for this is that the cheapest sources of electricity (especially when the cost of emissions is taken into account) are variable, and storage is expensive.  If we can incentivise electricity demand to adjust to availability, we can considerably reduce the cost to decarbonise. For example, as battery electric vehicles become more prevalent, there is a huge gain to be achieved if we can incentivise the coordination of charging according to grid capacity and available supply.  Longer term storage, for example dealing with seasonal imbalances or months with lower than expected wind generation, is even more expensive. As a result, we should be incentivising companies to develop longer term flexibility - perhaps an ability to schedule energy intensive processes for times of the year when renewable electricity is abundant.  Time-of-use tariffs, imbalance markets at the retail level, and peer-to-peer trading, are all possibilities for incentivising socially optimal behaviour. (This isn’t to rule out small nuclear reactors or fossil fuel with carbon capture and storage, if we can get them cheap enough without excessive risk, though I’m not prepared to assume we will.)

Two questions: fairness, and use of emerging technologies

These two situations intersect with two important questions that are receiving increasing attention at present.  The first is the question of fairness of arrangements, which has historically been neglected by economic literature.  For example, is it fair if a wind farm, which has received public funding, earns Guarantees of Origin? Is it fair if a government disqualified biomass generators built in the expectation that they would receive guarantees of origin?  Is it fair for tenants to pay more for their electricity when they have limited ability to modify their demand? As well as there being a moral argument in favour of fairness, there is also an economically rational argument that unfair arrangements are ultimately unsustainable, and may lead to much worse outcomes than we might achieve if we took fairness into account.

The second question is how we should use new computing technologies to improve incentives.  In particular, distributed ledger technologies (for example those underpinning bitcoin and blockchain) are currently being tested both for trading of Guarantees of Origin and for demand flexibility. Depending on who you listen to, these technologies might be the answer to all our problems, a massive distraction, or actively harmful.  My current belief is that there will be scenarios in which some of these technologies will prove useful. However, more importantly than deciding whether to use them, I do believe considering these technologies forces us to think about some questions, which are crucial even if we’re not using distributed ledger technologies. For example, how do we balance user privacy and the transparency necessary to prevent cheating?  How do we balance the contractual or regulatory certainty required for investment with the flexibility needed to cope with uncertainty? How do we balance efficiency of incentives with fairness and protecting vulnerable citizens?

I’m really excited to have found such an interesting area to research - one that feels relevant and following quite naturally from my previous work experience and study.  I will try to occasionally blog about books and papers I read, and ideas that I am thinking about. And please do ask if you’re interested in talking about any aspects of my research in more detail.