© 2008 Deutsches Institut für Entwicklungspolitik Green innovations: The challenge of shaping technological trajectories through policy University of Sussex,

© 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


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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


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1.

Sustainability-oriented Innovation Systems: Specific policy requirements


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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:


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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


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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 !!

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


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E.g. Energy system: Ambitious decarbonisation required



1850 1900 1950 2000 2050

EJ

0

200

400

600

800

1000

1200SavingsGeothermalSolarWindHydroNuclearGasOilCoalBiomass

Biomass

Coal

Renewables

NuclearNuclear

Oil

E.g. energy system: Radical structural change required

GasGas



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Markets respond – but not fast enough:Shifting focus from fossil and nuclear to climate change mitigation technologies: Patent data

Source: OECD



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% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1%6.0%

0%

10%

20%

30%

40%

50%

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

10.3%

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% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0%0%

10%

20%

30%

40%

50%

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 capacityRenewable 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



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Current decoupling of growth from resource consumption far too slow, “rebound effects“ !

„Carbon lock-in“ and time-lag effects.



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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



Potential of Cost Reductions for Electricity from Renewables

Source: Grubler et al., 2011



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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.

Specific SOIS requirements:(2) Environmental externalities


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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


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CO2 reduction

Transport sector

Road

Electrification of

powertrain

Batteries Li-ion

Energy sector

Rail

Fuel cells technolog

ies

Li-S

Building sector

Air

Optimization of

combustion engines

hybrid engines

NiCd

……..

……..

……..

Information and coordination failure even at lower technology levels



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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



Differential cost of electricity from renewable vs. fossil sources

In: UBA 2012



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Poverty / jobs

Competitiveness

Energy security

Mitigation

Different policy priorities of countries

Country A

Country B

Specific SOIS requirements:(4) Balancing old and new objectives


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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


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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


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2.

Shaping technological trajectories through policy:

The challenge of rent management


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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


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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’


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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


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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


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3.

Path divergence in green industries?


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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


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Poverty / jobs

Competitiveness

Energy security

Mitigation

Different priorities => different policies => different pathways

Country A

Country B



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Regulatory standards (here: admissible fleet emissions) drive technology choice

McKinsey 2011: Boost. Transforming the powertrain. p. 7



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Stylised differences in market conditions, Germany &China + hypothesis reg. technological trajectoriesGermany China

Specific elements of the policy environ-ment for EV

Demand conditionsHigh average income, demanding customers Stagnating home marketMobility culture, high regards for range => improved ICE and hybrid technologyInnovation system performanceGlobally leading carmakers, particularly in up-market segmentsLong- established research centres Strong R&D performance along entire supply chainCollaborative R&D well establishedPolitical/policy environmentMarket-based experimentationDemocratic system less likely to provide regulatory big pushes Policy priority for climate mitigation => electricity from renewables

Demand conditionsLow average income, many first use customers Huge auto market expansionMegacity development with urban air pollution and space restrictions Innovation system performanceDomestic carmakers lagging internationally behind; strong presence of MNC/ JVRapid catching up in research centresFew R&D performing domestic SMEsLack of collaborative research traditionPolitical/policy environmentTop-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 demandPolicy 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



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Thank you for your attention !

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© 2008 Deutsches Institut für Entwicklungspolitik Green innovations: The challenge of shaping technological trajectories through policy University of Sussex,