Industrial policy for low carbon development

1. Industrial policy for low carbon development LAC-EU Economic Forum 2013 Santiago de Chile, 21 January 2013 Tilman Altenburg, DIE

2. Industrial policy debate in a nutshell Industrial policy debate converging towards “pragmatic heterodox strategies” • Focus no longer whether IP is needed, but how it should be implemented Growing consensus on: • developing “latent” comparative advantages (Lin); • subsidising search costs (Rodrik); Remaining dissent on • big push policies to overcome major coordination failures.

3. Why low carbon industrial policy is systematically different and particularly challenging

4. Extra challenges of Low Carbon Industrial Policy LCIP require stronger government intervention than “BAU industrial policy” => larger risks => additional demands on governance ... due to: • Mixed objectives: economic and environmental • Unprecedented scale and urgency of low carbon transformation • Additional and more severe market failure

5. (a) Mixed objectives • LCIP pursues growth /employment AND environmental objectives • … may involve difficult trade-offs as well as win-win opportunities:

6. (a) Mixed objectives Policy trade-offs: • Stricter environmental regulations may reduce competitiveness … but they may also induce innovations that more than compensate for compliance costs (Porter);Mixed evidence: ++ wind turbines/Denmark, ++ flexfuel motors/Brazil: -- solar photovoltaics/Germany • Tough decisions whether to opt for early mover advantages or let others bear the costs of early experimentation • Local Content Requirements: useful to build local capabilities, but increase costs and reduce investment incentives

7. (a) Mixed objectives .. and win-wins, even in emerging economies: • Growing markets: e.g. renewable energy/storage/energy efficiency market 2010: 313 bn €, 2025: 1060 bn. • Huge renewable energy potentials in the “South” • Successful catching up in the South, e.g. Chinese solar and wind, Indian wind industry, Brazilian biofuels

8. (b) Unprecedented scale and urgency • Urgency to act !!! To avoid > 2° C global warming, industrialised countries need to reduce emissions by 80-95% in 2050 relative to 1990. Cost of current rate of global warming in 2050: 14% GDP (OECD 2012) => The first major industrial transformation that has a deadline !! • Current decoupling of growth from resource consumption far too slow, “rebound effects“ !

9. Note: Renewable power excludes large hydro. Renewable capacity figures based on Bloomberg New Energy Finance global totals. Source: Moslener, based on UNEP, BNEF, FS (2012) 50% 43.7% 40% 34.2% 30.7% 30% 26.2% 25.9% 23.9% 18.3% 20% 17.3% 16.3% 15.0% 13.8% 10.3% 9.2% 10% 7.9% 7.9% 6.9% 4.6% 6.1% 5.3% 5.4% 4.3% 4.6% 5.0% 3.6% 6.0% 5.1% 4.5% 4.0% 3.8% 3.6% 3.5% 3.5% 0% 2004 2005 2006 2007 2008 2009 2010 2011 Renewable power capacity change as a % of global power capacity change (net) Renewable power generation change as a % of global power generation change (net) Renewable power as a % of global power capacity Renewable power as a % of global power generation (b) Unprecedented scale and urgency 50% 43.7% Time lags: Rapid expansion of renewables investments – little change of global power mix 40% 34.2% 30.7% 30% 26.2% 25.9% 23.9% 18.3% 20% 17.3% 16.3% 15.0% 13.8% 9.2% 10.3% 10% 7.9% 7.9% 6.9% 4.6% 6.1% 5.4% 5.3% 4.3% 4.6% 5.0% 3.6% 6.0% 5.1% 4.5% 4.0% 3.8% 3.6% 3.5% 3.5% 0% 2004 2005 2006 2007 2008 2009 2010 2011 Renewable power capacity change as a % of global power capacity change (net) Renewable power generation change as a % of global power generation change (net) Renewable power as a % of global power capacity Renewable power as a % of global power generation

10. (b) Unprecedented scale and urgency LCIP needs to change entire economic subsystems (energy, transport, land use …) …. and to accelerate transformation: • Adopt measures to phase out less sustainable incumbent technologies • Subsidize deployment of green alternatives: • Deployment an end in itself !!

11. (b) Unprecedented scale and urgency

12. (b) Unprecedented scale and urgency Differential costs of renewable energy development for electric energy Differential costs (bn € (2009) / a) Scenario A: substantial in-crease of fossil energy costs Scenario B: moderate Scenario C: very low External costs internalized As-is state Source: DLR/IWES/IFNE (2011). The differential costs are based upon Scenario A

13. (b) Unprecedented scale and urgency • Need tomobiliseupfrontinvestments: 200-210 bn US$ until 2030 toreduce global carbonemissions 25% below 2000 level(UNFCCC 2008); • Political capturemayincreasethecostsubstantially; severalexamplesofdistortedincentiveschemes (European EmissionsTrading, biofuelsubsidies …) (Helm 2011) • Germany loses 7 bn € /a for unnecessary exemptions from ETS that are not needed to protect industry against international competition; • Importanceof smart policydesigns, periodicpolicyrevisions, politicalchecksandbalances

14. (c) Additional market failures Change must be radical, systemic and fast ... Against vested interests and lock-in effects: ... But today’s markets do not provide the right incentives: • Environmental externalities • Coordination failure • Information failure • Capital market failure

15. What can be done to accelerate low carbon technological change?

16. Low carbon industrial policy implications • LCIP is essential. Postponing action boost costs for future generations • Internalize environmental costs: carbon price, water prices • Reduce number of exemptions • Phase out harmful subsidies (2010: 409 bn $ fossil energy subsidies. (IEA 2011) • Technology push policies (R&D, deployment subsidies, standards) • Ensure policy coherence (e.g. preferential FIT may reduce prices of emissions certificate = disincentive)

17. Low carbon industrial policy implications • Mobilise finance: creation of policy rents and predictable long-term policy frameworks (guaranteed tariffs, soft loans, investment guarantees ...). => High demands on governments. Need to improve policy learning, minimize political capture

18. Low carbon industrial policy implications Good examples exist, including developing countries. E.g. India’s solar mission: • Mobilised investments: installed cap from 18 MW (2010) to 1000 MW (2012). • reverse bidding brought prices down from 24 to 11 cents/kWh within one year, • Target for retail grid parity revised down from 2022 to 2017 LCIP is necessary – and possible !

19. Thank you for your attention !