There is broad agreement that dealing with climate change will require new technologies, and developing and disseminating these technologies will require government intervention. This is firstly because encouraging research often requires government involvement, typically through creating an intellectual property (IP) system or through subsidies. Secondly, it is because the social benefits of reducing greenhouse-gas emissions are not yet generally reflected in cost structures, and firms often do not find it profitable to deploy socially desirable technologies. Governments have responded with a variety of regulations and subsidies to encourage the development and deployment of relevant technology.
Some are concerned that the presence of IP rights will be a barrier to the spread of technology to developing nations. Although this may sometimes be the case, the more serious issue may turn out to be governments trying to ensure subsidies benefit their own national industries. To explore this issue further, it is useful to look at some historical examples.
The US auto industry
In 1955, just as scientists were beginning to understand car pollution, members of the United States auto industry signed an agreement to exchange information on emissions-control devices. Each firm promised to share the information it held on pollution-control technology and permit other firms to use the technology without any need to pay royalties. This parallels what some now suggest to encourage the spread of technology. At the time, however, critics of the industry alleged that the agreement was a way to eliminate incentives to develop new technology. They were proved right. Technology moved slowly, with the only major advance at the time being a device to reduce crankcase emissions, a technology that had long been available. In 1969, the Antitrust Department filed a suit alleging the industry had conspired to eliminate competition in the research of emissions-control equipment. The suit was settled by a 1969 consent decree that ordered withdrawal from the agreement.
Government efforts to force technology development by imposing severe regulations followed. This created a sharp confrontation between the regulatory agency and the industry, but it also succeeded in encouraging conversion technology – and ultimately today’s use of on-board diagnostics.
In this new business environment, provisions from the antitrust consent decree came up for renewal. The government backed renewal, and the industry opposed. In 1981, the matter came to court, and the federal courts in California were effectively allowed to choose between the cooperative research pattern – envisioned by the 1955 agreement – and the competitive model of the 1969 decree. The courts opted for the earlier cooperative pattern, motivated by concerns about the risk and cost of technology development and the possible benefits of an agreement among industry, government, and academia.
The example suggests several principles to be taken into account when thinking about encouraging technological development and spread in an industry. The key question is whether the structure and regulation of the industry creates an adequate incentive to conduct research. There will be essentially no privately sponsored technological progress unless the members of the industry find it economically desirable to support research.
It also raises a question: if several entities are able to support research, should they be allowed to cooperate, or required to compete? The cost of cooperation is that each firm’s incentive to develop new technology is diluted, because there is no competitive advantage derived from a particular firm’s technological advance. The benefit is that the costs and risks of developing technology can be shared, and that the technology developed by any one firm can be used by all. The choice will vary from industry to industry; it will depend on the form of competition and on whether a variety of technologies are available.
There must also be actors with the size and financial ability to conduct research. This may have been easy in the auto industry, but it was not, for instance, in the US electrical utility industry. When that industry realised it could benefit from cooperative research, it set up the Electric Power Research Institute (EPRI) in 1972. This finances research and makes its results available to members. It was economically possible because the industry – unlike the car industry – involved local utilities that were not in direct competition with each other.
Appropriate regulations and subsidies, then, are crucial. If they are in place, new technologies can be spread as needed to help the world comply with environmental demands. There is some risk that IP will be a problem. However, in the wind-turbine sector, where there has been significant IP litigation, explicit royalties have generally been around the low figure of 1%. Other sectors might be different, but all face the need to compete with existing technologies, suggesting a need to keep royalties low.
The political issue is not only whether the technology is available, but also which firms will develop and market new technologies. Any global negotiations on climate change will demand that firms from developing nations such as China participate in relevant advanced industries.
It is useful to consider the early days of civilian nuclear power. Both France and the US subsidised their industries in the hope of creating national champions. Ultimately however, the French ended up licensing US technology for their civilian programme, in part because US companies had a lead due to learning curves. Doubling the number of plants built by a firm was expected to decrease both construction time and capital cost by around 10%, so that the leading firms would be able to underprice entrants who had produced fewer reactors. It was also because of a much broader nuclear safeguard and the political diplomacy of nuclear weapons, reflected in the 1958 agreement between the US government and Euratom.
Economic factors are important in the spread of advanced technology to industries in developing countries. Existing firms (usually in developed countries) have important advantages over others, sometimes derived from IP but more often because they have skilled employees and are further ahead on the learning curve. In some cases, they will willingly license technology to firms in developing countries. However, this will partly depend on whether they are confident they can supply core technologies without losing control over them. They are most likely to transfer technology as part of a deliberate globalisation strategy, normally to reduce production costs. The entry of firms from developing nations into markets for producing new high-tech goods is therefore economically difficult, but certainly not impossible. In the photovoltaic and wind turbine sectors, for instance, companies from developing nations have recently bought firms from the developed world – a new mechanism for technology transfer.
But, as in the nuclear reactor case, politics will be crucial. We will need to negotiate global restrictions on greenhouse-gas producing activities, and do so in ways that maintain trade and economic efficiency. And at the same time, we will have to integrate different national technology encouragement programmes to ensure there are incentives to develop and disseminate new technologies globally. This will not be easy. Regulatory and subsidy programmes will be difficult to design, especially in areas that are already regulated, such as electrical grids and nuclear power. Ultimately, the need for taxpayer support for subsidies will have to be balanced with the political need for developing-nation access to technology.
John H Barton is a professor at Stanford Law School, and has chaired or been a member of more than a dozen academic and international advisory commissions, most recently heading up the International Commission on Intellectual Property Rights.
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