After Paris, LAC Should Focus on Clean Energy Innovation

As the close of the global climate talks swiftly approaches, governments must shift attention to how they will actually follow through on the commitments made in Paris. One concept is central to achieving that goal – innovation. Clean energy innovation is a critical driver to advance low carbon economic growth and tackle climate change, as a group of governments and private investors recently recognized in their pledge to increase investment in clean energy technology research.

Technological breakthroughs in recent years have helped reduce costs for clean energy solutions, from batteries for electric vehicles to solar power panels, and made possible energy consumption from new sources such as advanced biofuels and waste.

Clean tech and clean energy research and commercialization have taken off over the last decade. The annual number of clean technology patent documents more than tripled between 2000 and 2014, while venture capital investment in the clean tech sector overall doubled in 2010-2014 compared to the previous five years.

But more needs to be done. Governments must triple annual spending on energy R&D to more than $50 million to meet climate change mitigation goals, according to the International Energy Agency.

The bulk of clean energy technologies have been developed in industrialized nations, particularly the United States, Japan and European Union countries. In 2014, these countries together held almost two thirds of the world’s clean technology patents – the majority of which are in energy-related sectors, such as clean transportation, renewable energy generation, energy efficiency and energy storage. However, emerging markets are increasingly leading clean energy innovation. China, for example, has seen the largest growth in clean tech patent filings.

In Latin America, progress has been slower. Even Brazil, a global leader in biofuels production and technology development, has a small number of patent filings and low investment in clean energy research and development by global standards. All of the Latin American and Caribbean countries combined applied for a total of just 35 renewable energy patents through the Patent Cooperation Treaty, an international patent system, in 2011 compared to 1,498 in Europe and 1,759 in Asia. And in the two largest countries, Brazil and Mexico, residents applied for a total of around 5,000 and 1,200 respectively in 2013. 

Why is Latin America so far behind?

The top three barriers to clean energy innovation are access to capital, inadequate government incentives and lack of industry-academia ties.

Access to capital:

To bring groundbreaking technologies to market, entrepreneurs need access to capital. Venture capital is particularly important to fund clean energy start-ups because of its focus on early stage, high risk investments. Other vehicles for financing clean energy companies, such as debt, grants and equity from the public and private sectors, are also important sources of capital.

In Latin America, investors tend to be more risk-averse than their counterparts in places like California, and there is very limited venture capital allocated to technology development. Latin America also has very few clean energy companies listing stock in local capital markets, another potential form of raising funds. The dearth of early stage capital is a major barrier to entrepreneurship in Latin America in general and for clean energy innovation in particular.

Government incentives:

Clean energy innovation requires strong government support and incentives to drive both supply of new technologies and demand for clean energy solutions. Government support – through public investment in R&D, clean tech clusters and fiscal incentives – is needed to encourage researchers to create and improve new products and services. Governments can also provide incentives to create domestic markets for clean energy solutions through policies such as carbon markets, energy efficiency standards and renewable energy feed-in tariffs or auctions. Such support can propel investment in clean energy research and reduce risk for investors and entrepreneurs looking to take that research to the market.

While Latin American governments do invest in R&D efforts, investment figures are still too low. Moreover, environmental and clean energy regulations need to be strengthened and more consistently enforced. As Latin American countries boost their commitments to climate change mitigation and to upholding international environmental standards, stronger policies will further encourage clean energy demand and drive innovation.

Industry-academia ties:

For new technologies to reach and benefit consumers, they need to serve a market need. This requires researchers and government entities supporting R&D efforts to carefully coordinate their work with industry players.

However, in Latin America, there is often insufficient communication between academia and industry so that the supply of clean energy technologies does not match the needs of consumers. Researchers need to better connect with industry to understand how their work in the laboratory will eventually lead to a commercially-viable product or service. Likewise, government needs to work more closely with the private sector to formulate policies geared toward their needs.

Despite these challenges, there is a lot of potential for growth in clean energy innovation in the region. Many qualified Latin American researchers are experts in clean energy fields. Several top notch research institutions throughout the region are developing promising new technologies, such as advanced biofuels and new forms of solar power and ocean energy. Governments are increasingly providing incentives to encourage research and innovation, lower barriers to accessing capital and create demand for clean energy solutions through stronger environmental  and climate regulations. And many countries are reducing the barriers to starting a business, which will encourage entrepreneurs to market clean energy technologies.

Large economies in the region have a particular incentive to promote innovation locally because clean energy businesses have a large potential market for their goods and services. Indeed, the ambitious climate agenda being hashed out in Paris brings a great opportunity for Latin American countries to boost innovation to meet their climate change goals.

This blog post is based on a forthcoming Inter-American Dialogue report on clean energy innovation.