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© 2008 Deutsches Institut für Entwicklungspolitik 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
© 2008 Deutsches Institut für Entwicklungspolitik2 1.Innovation for a green transformation: Why Sustainability- oriented Innovation Systems (SOIS) require specific policy design 2.Shaping technological trajectories through policy: The challenge of rent management 3.Path divergence in green industries? Preliminary findings from ongoing research
© 2008 Deutsches Institut für Entwicklungspolitik3 1. Sustainability-oriented Innovation Systems: Specific policy requirements
© 2008 Deutsches Institut für Entwicklungspolitik4 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 earths carrying capacity Compared to most other IS, SOIS need to cope with additional challenges:
© 2008 Deutsches Institut für Entwicklungspolitik5 Additional challenges for SOIS : 1.Unprecedented urgency and scale of low carbon transformation 2.Need to internalise environmental costs 3.Additional market failures related to systems transformation 4.Balancing old and new objectives 5.Need for a New Social Contract Each calls for specific policy responses
© 2008 Deutsches Institut für Entwicklungspolitik6 To avoid > 2° C global warming, industrialised countries need to reduce emissions by 80-95% in 2050 relative to 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 !! Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik7 E.g. Energy system: Ambitious decarbonisation required Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik EJ Savings Geothermal Solar Wind Hydro Nuclear Gas Oil Coal Biomass Coal Renewables Nuclear Oil E.g. energy system: Radical structural change required Gas Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik9 Markets respond – but not fast enough: Shifting focus from fossil and nuclear to climate change mitigation technologies: Patent data Source: OECD Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik 10.3% 15.0% 13.8% 16.3% 25.9% 26.2% 34.2% 43.7% 3.6% 4.6% 5.3% 7.9% 17.3% 18.3% 23.9% 30.7% 4.3% 4.6% 5.0% 5.4% 6.1% 6.9% 7.9% 9.2% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0% 0% 10% 20% 30% 40% 50% 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 10.3% 15.0% 13.8% 16.3% 25.9% 26.2% 34.2% 43.7% 3.6% 4.6% 5.3% 7.9% 17.3% 18.3% 23.9% 30.7% 4.3% 4.6% 5.0% 5.4% 6.1% 6.9% 7.9% 9.2% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0% 0% 10% 20% 30% 40% 50% 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 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) Time lags: Rapid expansion of renewables investments – little change of global power mix Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik11 Current decoupling of growth from resource consumption far too slow, rebound effects ! Carbon lock-in and time-lag effects. Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik12 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 Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik Potential of Cost Reductions for Electricity from Renewables Source: Grubler et al., 2011 Specific SOIS requirements: (1) Urgency and scale of reform
© 2008 Deutsches Institut für Entwicklungspolitik14 In sum: Change must be ambitious, radical, and fast... against vested interests and lock-in effects... but todays 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. Specific SOIS requirements: (2) Environmental externalities
© 2008 Deutsches Institut für Entwicklungspolitik15 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... Huge information and coordination failures involved! Specific SOIS requirements: (3) Additional market failures
© 2008 Deutsches Institut für Entwicklungspolitik16 CO2 reduction Transport sector Road Electrificati on of powertrain Batteries Li-ion Energy sector Rail Fuel cells technologie s Li-S Building sector Air Optimizatio n of combustion engines hybrid engines NiCd … ….. Information and coordination failure even at lower technology levels Specific SOIS requirements: (3) Additional market failures
© 2008 Deutsches Institut für Entwicklungspolitik17 Capital market failure: Need to mobilise upfront investments: 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 Specific SOIS requirements: (3) Additional market failures
© 2008 Deutsches Institut für Entwicklungspolitik Differential cost of electricity from renewable vs. fossil sources In: UBA 2012 Specific SOIS requirements: (3) Additional market failures
© 2008 Deutsches Institut für Entwicklungspolitik19 Poverty / jobs Competitiveness Energy security Mitigation Different policy priorities of countries Country A Country B Specific SOIS requirements: (4) Balancing old and new objectives
© 2008 Deutsches Institut für Entwicklungspolitik20 4. Balancing old and new objectives implies trade-offs 1.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 ? 2.Local Content Requirements: May help building local capabilities … but may slow deployment down Specific SOIS requirements: (4) Balancing old and new objectives
© 2008 Deutsches Institut für Entwicklungspolitik21 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 Specific SOIS requirements: (5) Need for a new Social Contract
© 2008 Deutsches Institut für Entwicklungspolitik22 2. Shaping technological trajectories through policy: The challenge of rent management
© 2008 Deutsches Institut für Entwicklungspolitik23 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
© 2008 Deutsches Institut für Entwicklungspolitik24 May increase the transformation cost substantially; several examples of distorted incentive schemes (European Emissions Trading, biofuel subsidies …) 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 ! Managing green rents
© 2008 Deutsches Institut für Entwicklungspolitik25 Example of Indias 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
© 2008 Deutsches Institut für Entwicklungspolitik26 Looking at NSM policies through rent management lens: 1.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 2.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 3.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
© 2008 Deutsches Institut für Entwicklungspolitik27 3. Path divergence in green industries?
© 2008 Deutsches Institut für Entwicklungspolitik28 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.. Path divergence in green industries
© 2008 Deutsches Institut für Entwicklungspolitik29 Poverty / jobs Competitiveness Energy security Mitigation Different priorities => different policies => different pathways Country A Country B Path divergence in green industries
© 2008 Deutsches Institut für Entwicklungspolitik30 Regulatory standards (here: admissible fleet emissions) drive technology choice McKinsey 2011: Boost. Transforming the powertrain. p. 7 Path divergence in green industries
© 2008 Deutsches Institut für Entwicklungspolitik31 Stylised differences in market conditions, Germany &China + hypothesis reg. technological trajectories GermanyChina Specific elements of the policy environ- ment for EV Demand conditions High average income, demanding customers Stagnating home market Mobility culture, high regards for range => improved ICE and hybrid technology Innovation system performance Globally leading carmakers, particularly in up-market segments Long- established research centres Strong R&D performance along entire supply chain Collaborative R&D well established Political/policy environment Market-based experimentation Democratic system less likely to provide regulatory big pushes Policy priority for climate mitigation => electricity from renewables Demand conditions Low average income, many first use customers Huge auto market expansion Megacity development with urban air pollution and space restrictions Innovation system performance Domestic carmakers lagging internationally behind; strong presence of MNC/ JV Rapid catching up in research centres Few R&D performing domestic SMEs Lack of collaborative research tradition Political/policy environment Top-down planning, with experimentation feeding back into political-making Autocratic system more likely to provide regulatory big pushes, e.g. inner-city restrictions for ICE, purchase subsidies, SOE fleet demand Policy priority for reducing urban air pollution, not overall emissions reduction, => electricity from convention power plants acceptable Hypothesis about EV technolo- gical trajectories Small 2-wheeler market high-end, leisure & sports hi-tech / high cost solutions, friction-free combination of electric +combustion engine, break energy recuperation, high demands on power electronics Geographic conditions favour high-range vehicles Battery Management Systems a brand- differentiating factor => batteries high cost and specific => no battery swapping Smart grid solutions to cope with renewables Young urban consumers =>new mobility concepts Huge market for e-two-wheelers Demand for very simple low-cost cars; "frugal" RREV (small motorbike motor only charges battery) promising for massive deployment Megacity conditions (space, air pollution) => demand for BEV Battery as commodity, exchangeable => battery swapping viable Smart grid solutions less important if constant fuel-based power supply Individual car ownership highly prestigious Source: own Path divergence in green industries
demand for BEV Battery as commodity, exchangeable => battery swapping viable Smart grid solutions less important if constant fuel-based power supply Individual car ownership highly prestigious Source: own Path divergence in green industries">
© 2008 Deutsches Institut für Entwicklungspolitik32 Thank you for your attention !
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