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Industrial policy for low carbon development. LAC-EU Economic Forum 2013 Santiago de Chile, 21 January 2013. Tilman Altenburg, DIE. Industrial policy debate in a nutshell. Industrial policy debate converging towards “pragmatic heterodox strategies” - PowerPoint PPT Presentation
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© 2008 Deutsches Institut für Entwicklungspolitik
Industrial policy for low carbon development
LAC-EU Economic Forum 2013
Santiago de Chile, 21 January 2013
Tilman Altenburg, DIE
© 2008 Deutsches Institut für Entwicklungspolitik
2
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.
Industrial policy debate in a nutshell
© 2008 Deutsches Institut für Entwicklungspolitik
3
Why low carbon industrial policy is systematically different and particularly challenging
© 2008 Deutsches Institut für Entwicklungspolitik
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LCIP require stronger government intervention than “BAU industrial policy” => larger risks => additional demands on governance ... due to:
a. Mixed objectives: economic and environmental
b. Unprecedented scale and urgency of low carbon transformation
c. Additional and more severe market failure
Extra challenges of Low Carbon Industrial Policy
© 2008 Deutsches Institut für Entwicklungspolitik
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LCIP pursues growth /employment AND environmental objectives
… may involve difficult trade-offs as well as win-win opportunities:
(a) Mixed objectives
© 2008 Deutsches Institut für Entwicklungspolitik
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Policy trade-offs:
1. 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
2. Local Content Requirements: useful to build local capabilities, but increase costs and reduce investment incentives
(a) Mixed objectives
© 2008 Deutsches Institut für Entwicklungspolitik
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.. and win-wins, even in emerging economies:
1. Growing markets: e.g. renewable energy/storage/energy efficiency market 2010: 313 bn €, 2025: 1060 bn.
2. Huge renewable energy potentials in the “South”
3. Successful catching up in the South, e.g. Chinese solar and wind, Indian wind industry, Brazilian biofuels
(a) Mixed objectives
© 2008 Deutsches Institut für Entwicklungspolitik
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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“ !
(b) Unprecedented scale and urgency
© 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% 3.5% 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
(b) Unprecedented scale and urgency
© 2008 Deutsches Institut für Entwicklungspolitik
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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 !!
(b) Unprecedented scale and urgency
© 2008 Deutsches Institut für Entwicklungspolitik
Actual electricity costs in Germany, renewables vs. fossil electricity
Photovoltaics small 1100*Photovoltaics free 1300*Wind onshore 2000**Wind offshore 3200**Power mix (fossil, nuclear) (BMU, 2012)
**kwh / m2 / per module
* full load hours / a
Source: FH ISE (2012) p. 18
Actu
alel
ectr
icity
cost
s(€
/ kw
h)
(b) Unprecedented scale and urgency
© 2008 Deutsches Institut für Entwicklungspolitik
Differential costs of renewable energy development for electric energy
Diff
ere
nti
al co
sts
(bn €
(2
009)
/ 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
(b) Unprecedented scale and urgency
© 2008 Deutsches Institut für Entwicklungspolitik
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Need to mobilise upfront investments: 200-210 bn US$ until 2030 to reduce global carbon emissions 25% below 2000 level (UNFCCC 2008);
Political capture may increase the cost substantially; several examples of distorted incentive schemes (European Emissions Trading, biofuel subsidies …) (Helm 2011)
Germany loses 7 bn € /a for unnecessary exemptions from ETS that are not needed to protect industry against international competition;
Importance of smart policy designs, periodic policy revisions, political checks and balances
(b) Unprecedented scale and urgency
© 2008 Deutsches Institut für Entwicklungspolitik
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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
(c) Additional market failures
© 2008 Deutsches Institut für Entwicklungspolitik
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What can be done to accelerate low carbon technological change?
© 2008 Deutsches Institut für Entwicklungspolitik
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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)
Low carbon industrial policy implications
© 2008 Deutsches Institut für Entwicklungspolitik
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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
Low carbon industrial policy implications
© 2008 Deutsches Institut für Entwicklungspolitik
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Good examples exist, including developing countries. E.g. India’s solar mission:
1. Mobilised investments: installed cap from 18 MW (2010) to 1000 MW (2012).
2. reverse bidding brought prices down from 24 to 11 cents/kWh within one year,
3. Target for retail grid parity revised down from 2022 to 2017
LCIP is necessary – and possible !
Low carbon industrial policy implications