Green innovations: The challenge of shaping technological trajectories through policy

1. Green innovations: The challenge of shaping technological trajectories through policy   University of Sussex, Science and Technology Policy Research Brighton, 1 November 2013 Tilman Altenburg, DIE

2. Innovation for a green transformation: Why Sustainability-oriented Innovation Systems (SOIS)require specific policy design • Shaping technological trajectories through policy: The challenge of rent management • Path divergence in green industries? Preliminary findings from ongoing research

3. 1. Sustainability-oriented Innovation Systems: Specific policy requirements

4. SOIS = Networks of institutions which create, import, modify and diffuse new technologies that help to reduce environmental impacts and resource intensity to a level commensurate with the earth’s carrying capacity Compared to most other IS, SOIS need to cope with additional challenges:

5. Additional challenges for SOIS : • Unprecedented urgency and scale of low carbon transformation • Need to internalise environmental costs • Additional market failures related to systems transformation • Balancing old and new objectives • Need for a New Social Contract • Each calls for specific policy responses

6. Specific SOIS requirements:(1) Urgency and scale of reform • To avoid > 2° C global warming, industrialised countries need to reduce emissions by 80-95% in 2050 relative to 1990. • Delays make it more difficult and costly. Tipping points. Cost of current rate of global warming in 2050: 14% GDP (OECD 2012) • Rapid replacement of carbon-intensive technologies • The first major industrial transformation that has a deadline !!

7. Specific SOIS requirements:(1) Urgency and scale of reform E.g. Energy system: Ambitious decarbonisation required

8. 1200 Savings Geothermal Solar 1000 Wind Hydro Nuclear 800 Gas Oil Coal Biomass 600 EJ 400 200 0 1850 1900 1950 2000 2050 Specific SOIS requirements:(1) Urgency and scale of reform E.g. energy system: Radical structural change required Renewables Gas Nuclear Oil Coal Biomass

9. Specific SOIS requirements:(1) Urgency and scale of reform Markets respond – but not fast enough: Shifting focus from fossil and nuclear to climate change mitigation technologies: Patent data Source: OECD

10. 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 Specific SOIS requirements:(1) Urgency and scale of reform 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

11. Specific SOIS requirements:(1) Urgency and scale of reform • Current decoupling of growth from resource consumption far too slow, “rebound effects“ ! • „Carbon lock-in“ and time-lag effects.

12. Specific SOIS requirements:(1) Urgency and scale of reform • Need to accelerate transformation: • Subsidise deployment of green alternatives • Adopt measures to phase out less sustainable incumbent technologies (“destabilise old socio-technical regime“) • Deployment an end in itself !! • Subsidies => economies of scale => earlier parity

13. Potential of Cost Reductions for Electricity from Renewables Specific SOIS requirements:(1) Urgency and scale of reform Source: Grubler et al., 2011

14. Specific SOIS requirements:(2) Environmental externalities In sum: Change must be ambitious, radical, and fast ... against vested interests and lock-in effects ... but today’s markets do not provide the right incentives: 2. Need to internalise environmental externalities ... • New policy instruments, from carbon cap-and-trade systems to green credit lines and environmental labels, carbon footprinting ... need to be explored • Markets (ETS, RPO, CDM ...) need to be socially constructed • best-fitting policy mix for each specific situation needs to be developed.

15. Specific SOIS requirements:(3) Additional market failures 3. Other market failures also much more severe when systems changes are pusued: Coordination, information, capital market failure Low carbon transformation presupposes simultaneous long-term R&D and large-scale investments in ... • New power plants (wind, solar, ... ) • Second-generation biomass (=> land use changes), • Energy storage • Transmission lines • Internationalization of grids (to balance fluctuations) • Smart grid technologies • Carbon sequestration technologies ... Hugeinformationandcoordinationfailuresinvolved!

16. Specific SOIS requirements:(3) Additional market failures Information and coordination failure even at lower technology levels NiCd hybrid engines Optimizationofcombustionengines Buildingsector Air Li-ion Batteries Electrificationofpowertrain CO2 reduction Transport sector Road Li-S Fuel cellstechnologies Energysector Rail …….. …….. ……..

17. Specific SOIS requirements:(3) Additional market failures Capital market failure: • Need to mobilise upfront investments: 200-210 bn US$ til 2030 to reduce global carbon emissions 25% below 2000 level (UNFCCC 2008); • E.g. energy transition requires 20 years upfront investment, afterwards huge long-term savings. • Capital market do not provide right incentives, especially when future gains depend on long-term policy frameworks

18. Specific SOIS requirements:(3) Additional market failures Differential cost of electricity from renewable vs. fossil sources In: UBA 2012

19. Specific SOIS requirements:(4) Balancing old and new objectives Mitigation Different policy priorities of countries Country A Competitiveness Poverty / jobs Country B Energy security

20. Specific SOIS requirements:(4) Balancing old and new objectives 4. Balancing old and new objectives implies trade-offs • Stricter environmental regulations may have different effects on competitiveness: • undermine due to regulatory costs • Stimulate early movers and strengthen home economy (wind turbines Denmark) • Stimulate, but benefits captured by outsiders (German and Chinese solar) • Invest in ‘early mover advantages’ or wait until others have absorbed costs of infant development ? • Local Content Requirements: May help building local capabilities … but may slow deployment down

21. Specific SOIS requirements:(5) Need for a new Social Contract 5. Markets provide limited guidance, sustainability-oriented transformation presupposes socially agreed direction of structural change. • Build consensus on national ‘green transformation project’ and respective reallocation of rents; help organize change coalitions, compensate losers when necessary. • Explore new sustainable principles of sustainable economic development; rethink growth paradigm; change unsustainable consumption patterns. • explicitly normative role of innovation policy

22. 2. Shaping technological trajectories through policy: The challenge of rent management

23. Need for policy to create (& reallocate existing) economic rents to lure capital into socially desired activities • Rents = “risk-adjusted payments to a resource owner above the amount his resources would command in their next best alternative use” (returns > opportunity returns). .. but risks of rent creation well-known: • Misallocation due to wrong technology or policy choices • Many green markets are politically defined (ETS, tradable REC, CDM, FiT.. ) • Rent-seeking, political capture – especially under enormous uncertainty and time pressure of green transformation

24. Managing ‘green rents’ • May increasethetransformationcostsubstantially; severalexamplesofdistortedincentiveschemes (European EmissionsTrading, biofuelsubsidies …) • Germany loses 7 bn € /a for unnecessary exemptions from ETS that are not needed to protect industry against international competition !!! • But greatest risk is NOT to act ! • Smart policy design matters !

25. Example of India’s National Solar Mission: • ramp up capacity of grid-connected solar power generation to 20GW , plus 2 GW off-grid, by 2022 • reach retail grid parity by 2022 • Build up domestic solar manufacturing capability • Main policies: • Preferential tariffs • Purchase obligations and tradable certificates • Local content requirements

26. Looking at NSM policies through rent management lens: • How to ensure that preferential tariffs are neither too low (no investment) nor too high (unnecessary rent transfer)? Finding: Smartly designed reverse bidding triggered substantial investments while keeping rents low • How are purchase obligations allocated across Indian States? If state governments set low targets, they create more tradable certificates for “their” local companies.Finding: Strategic behaviour by States, e.g. setting less ambitious targets to increase rents • How to define local content requirements in a way that creates the necessary rents for a nascent national industry?Finding: LCR distorted technology choice, failed o have infant industry effects

27. 3. Path divergence in green industries?

28. Path divergence in green industries • NIS and technological trajectories always diverge ! (evolutionary economics! Path-dependency, co-evolution ...) • ... but there are also “dominant designs” • Sustainability-oriented innovations likely to diverge more because objectives depend on societal consensus – and national preferences diverge strongly: • ... whether nuclear, CCS, agro-based fuel are acceptaböle options or not, • ... how different objectives are balanced ..

29. Path divergence in green industries Mitigation Different priorities => different policies => different pathways Country A Competitiveness Poverty / jobs Country B Energy security

30. Path divergence in green industries Regulatorystandards (here: admissiblefleetemissions) drivetechnologychoice McKinsey 2011: Boost. Transforming the powertrain. p. 7

31. Path divergence in green industries

32. Thank you for your attention !