On September 23rd California Governor Gavin Newsome announced a plan to halt sales of new gasoline-powered passenger cars and trucks in the state by 2035, a move he says will cut greenhouse gas emissions by 35%. This came two days after Tesla’s much-anticipated Battery Day, during which Tesla announced plans to manufacture “tabless” batteries which will improve its vehicles range and power. Further, Tesla teased a $25,000 electric vehicle.
The timing of these two events so closely together caused us to revisit the inter-dependence of public policy, technological innovation, and cost efficiencies that drive the Clean Energy Transition.
Public Policy Sets the Stage
Free markets are often very good at allocating capital. Exceptions can occur when there is a societal cost that private markets fail to consider. Governments have many tools at their disposal to more efficiently allocate the costs of carbon emissions. One set aims to make carbon emissions more expensive. Examples include carbon taxes and cap-and-trade systems. Others give economic incentives to the development of low carbon energy sources. These include tax incentives, renewable portfolio standards, and loan guarantees. Used in different variations and scale by different policy makers around the world, these policies have the net effect of making low carbon energy sources more cost competitive and serves to inspire technological innovation.
Policy Incentives Drive Innovation
Technological innovation plays a crucial role in the Clean Energy Transition by lowering costs and accelerating deployment. Examples of technological innovations in Renewables include artificial intelligence and digitalization of the power grid, energy storage, advances in solar panel efficiency, and larger, lighter and more efficient wind turbines. Economists sometimes refer to the learning curve of technology, which incorporates technological improvements, developer experience and scale, and industry maturity.
Innovation Reduces Costs
The rapid adoption of new technologies combined with developer experience and scale and industry maturity have driven costs of solar power, wind power, and battery storage lower. Lower costs induce more adoption but also importantly provide a positive feedback loop to public policy. When policy makers see desired results (lower costs, higher adoption rates) they enact more policy, which then encourages more innovation, which lowers costs and starts the virtuous cycle all over again.
This brings us full circle to the near-simultaneous announcements by Governor Newsome and Tesla founder Musk. We can’t help but think that Tesla’s pledge to deliver a $25,000 EV and comments on “tabless” batteries played a role in California’s policy initiative to ban the sale of new gas-powered vehicles in the state after 2035.