Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of transition
• Old Narrative and the New Questions for Europe
• Economic Fundamentals
• The energy and climate dimension
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
Of the six broad scenario types examined by the Global Scenarios Group, are we now heading for some form of Barbariza7on ….?
Source: Global Scenario Group, h=p://www.gsg.org/scenario_descripBons.html
The ‘old narra7ve’ of climate policy • Treat it as an environmental problem, an external cost • Nego7ate burden-‐sharing at global level • Internalise through adequate carbon pricing and suppor7ve
measures … has largely failed.
Under the onslaught of separa7st and populist forces, new ques7ons include: • What can be expected of energy and climate policies? • Can they make a posi7ve contribu7on to economic and social
development? • How might they relate to the existen7al challenges now facing the
EU?
Old Narrative, and some New Questions
Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of populism
• Old Narrative and the New Questions for Europe
• Some Economic Fundamentals
• The energy and climate dimension
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
Transforming (3rd Domain)
Innovation & evolution of complex
systems
Satisficing (1st Domain)
Diverse individual and organisational
decision-making
Optimising (2nd Domain)
Idealised / ‘representative’
optimising behaviour
Economic Output / Consumption Behavioural and organisational
economics
Neoclassical and welfare
economics
Evolutionary and institutional economics
Typical social and organisaBonal scale
Typical Bmescale
Resource use / Energy & Emissions
For a problem which spans from -‐ the inaXen7ve decision-‐
making of seven billion energy consumers, to
-‐ long-‐term transforma7on of vast and complex infrastructure-‐based techno-‐economic systems
First step: Broaden economic horizons
To date, far more progress on energy efficiency and technology / renewables etc policy than carbon pricing
Link the broadened framework to debates about macroeconomic growth
• Neoclassical economic growth models have consistently found a ‘residual’ accoun7ng for typically half of observed economic growth that cannot be explained by resource and capital accumula7on (Ch.11 the “Dark MaXer” of growth)
• Economic research points two broad explanatory areas: – Tackling subop7mal performance of many economic actors and structures – Educa7on, infrastructure and innova7on
• ie. First and Third domain processes are recognised as important for macroeconomic growth. Yet these remain – largely absent in global (or na7onal) modelling – poorly charted in policy
• Energy is a par7cularly strong candidate because – Pervasive input to numerous produc7on sectors – Fossil fuel markets are intrinsically unstable – Excep7onally low rates of innova7on par7cularly electricity & construc7on
Fig.9.3 R&D expenditure by top companies in different sectors as % of sales, 2011
Fig.9.7
…. So this is both a challenge and an opportunity
The ‘technology valley of death’ caused by high up-‐front innova7on costs & long lead 7mes => large risks weak demand-‐pull and large market risks in innova7ng for policy-‐dependent value
We are seeking to transform some of the least innova7ve sectors of our economies
H
M
L
HHighest relevance
MMedium relevance
LLowest relevance
Satisfice
Transform
Optimise
Domain Standards & Engagement
Markets & Prices
Strategic Investment
Smarter choices
Cleaner products & processes
Innovation & infrastructure
1 2 3
L/M
H
L/M
L
M
H
Policy pillars
Ideal policy comprises a package which matches the best instrument to the respective domain of decision-making
… Thereby bringing the social and investment dimensions squarely into picture – not just about energy-‐climate policy, but about economic recovery
The profound oddity of our current situaBon • Stagna7on and trepida7on in the Eurozone • Trapped in old debate about fiscal austerity vs neo-‐Keynesian
s7mulus • Deep concern about public debt but mountains of private money
unsure where to invest • Social unrest driven by economic stagna7on, sense of disengagement
and the divorce of consumer from producer interests: – As consumers we want cheaper products (eg. energy), a cleaner environment, more efficiency etc
– As producers (workers) we want less compeDDon (“migrants and cheap imports”), higher demand, higher wages
– As members of society we are profoundly confused and split between these desires
• The ‘Three Domains’ perspec7ve may offer a way to get beyond some of the old divisions … par7cularly pertaining to energy
Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of populism
• Old Narrative and the New Questions for Europe
• Some Economic Fundamentals
• Energy - climate – economy linkages
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
• Sufficient affordable energy is fundamental to economic and social wellbeing, but excessive dependence on fossil fuel imports has been a periodic problem
• Energy is a major investment sector of the economy – energy transi7on poten7ally €100bn / yr in EU, €1trn /yr globally
• Renewable resources are plen7ful for EU, predominant in rural areas, but also require coopera7on between Member States
• The ‘tragedy (and opportunity) of the horizons’: – Eternal concerns that the financial sector is too short-‐term – At typical 7me horizons of markets and consumers, and returns typically
sought by equity investors, renewables are expensive; – At the 7me horizons that reflect public concern on environment, or at the
actual prevalent interest rates, renewable and infrastructure investment are highly economically aXrac7ve
– We can be certain is that people will s7ll want energy over coming decades (and the pressure of climate change will rise) : the product itself will ‘not go out of fashion’
Economic linkages between economy, energy and climate
12
Australia Czech Republic
France
Germany
Hungary
Italy
Japan
Korea
Netherlands
Poland
Slovak Republic
Sweden
UK
USA
0
100
200
300
400
500
600
700
800
900
1000
0 0,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45 0,5
Aver
age
ener
gy p
rices
($/t)
Average energy intensity (kg oil equivalent/$2005 GDP)
EU 15
With declining energy prices, climate change gives an opportunity to ‘buck the historical paIern’ of slipping into inefficiencies and underinvestment that have characterised energy cycles for the last half forty-‐five years
National energy intensity approx inversely proportional to long-run prices - %GDP spent on energy remarkably similar (‘Basmakov–Newbery constant’)
Energy Prices and Bills not synonymous
13
Prices trends of the big renewables within range – but also show the centrality of policy risk
Recent trends in international costs and contracted prices for wind and solar (source: UCL Submission)
• Rapid fall in renewable energy costs • Declining energy prices • Paris Agreement • Rising geopoli7cal concerns • System-‐level changes needed in power genera7on
Now is a Bme …
Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of populism
• Old Narrative and the New Questions for Europe
• Some Economic Fundamentals
• Energy - climate – economy linkages
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
Low innovation, little connection between innovators and markets R&D intensity < 1% (eg. energy & construction)
Market pull Technology push Technology
Valley of Death
Figure 9.7. InnovaBon intensity and the broken chain
Spanning the innova7on chain (& infrastructure blockages)
Money =========! (at rising scale)
" ======= Markets (credible and strategically growing)
The EU Energy Union R&I strategy needs to be an RI&I* strategy
* Research, Innova7on and Investment
17
Standards & Engagement
Markets & Prices
Strategic Investment
POLICY PILLARS
Technology options &
competitiveness
Manage bills, increase
responsiveness
Revenues, revealed costs, strategic value
Values, pull & preferences
Attention, products &
finance
Education, access & control
Markets and prices as part of the package
Source: Planetary Economics, Chapter 12 Changing Course, Figure 12‑1
Enhanced efficiency
BeXer technologies & systems
.. A package which can both raise tens of €bns and aIract private sector investment
Must change!! four concep7ons of carbon pricing From expression & internalisa?on of damage / risk: Expression of a single, universal valua7on of global damage
– Explicit (damage es7mates) or implicit (backcas7ng) – No7onal global decision-‐maker with foresight, low discount rate influencing a self-‐op7mising global economic
system including fully compensa7ng interna7onal transfers – A wonderful modelling device – Value highly con7nent on vast range of dominated by discount rate and risk-‐aversion
Expression of global damage as evaluated by a naDonal decision-‐maker – Discount rate, influence on others, domes7c costs etc a strong func7on i.a. of stage of development
… to an Instrument of change and support – ‘posi?ve carbon pricing’: Driver of operaDonal subsDtuDon to reduce emissions in (mainly market) decision-‐making
– Eg. coal-‐gas switching in power genera7on – Useful for value to be somewhat reflexive eg. in rela7on to coal-‐gas price differen7als
Incen7ve to investment and strategic decision-‐making including risk management – Eg. Expected returns to ‘ins7tu7onal investors’ in low carbon assets – Cost/benefit analysis of public decision-‐making in rela7on to infrastructure, innova7on etc
Source of funding for energy-‐related private (eg. energy efficiency, ‘prosumers’) or public (eg. innovaBon, technology cooperaBon etc) benefits
A market-‐based complement to public ‘strategic investment’ in innova7on etc
ConcepDons of the purpose of pricing
Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of populism
• Old Narrative and the New Questions for Europe
• Some Economic Fundamentals
• Energy - climate – economy linkages
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
The central achievement of European Union efforts on energy to date is the liberalisaBon and integraBon brought together in the Third Package • This is a valuable achievement: do not mess it up • But it only addresses one domain of the needs in the sector • … taking the IEM as The Only Goal threatens to make it fundamentally destrucDve
The focus on Third Package market & liberalisaBon is no accident • The main legi7macy of most European ins7tu7ons, and also most na7onal
regulatory agencies, founded on the principles of Second Domain economics • Has also been applied to clearly 3rd Domain areas like DG-‐Climate – hence central
focus on EU ETS with very mixed results and many policy tensions • Aside from explicitly non-‐economic ins7tu7ons (like Foreign policy & security) the
only EU ins7tu7ons with some clear “Third Domain” remits are European Investment Bank and R&D programmes
“Today, the European Union has energy rules set out at the European level, but in prac7ce it has 28 na7onal regulatory frameworks. This cannot con7nue”
Energy – European Governance Dimension
The Single European Act fostered the Single Market as an end, not a means … • Good for aggregate efficiency • But not for the distribuDonal implicaDons • A poli7cal en7ty defined by ‘Second Pillar’ economics without recourse to
the roles of First and Third Pillar is inherently unstable – The EU can be blamed for distribu7onal consequences – Publics look to their Member State to solve the resul7ng problems
The Eurozone reflected the philosophy
• A common currency without a fiscal capacity • … or strategic capability ?
This reflects the inconsistency at the heart of the EU – and particularly Eurozone – crisis
Sustainability Trumped?
Michael Grubb Professor Interna7onal Energy and Climate Change Policy, UCL
Editor-‐in-‐Chief, Climate Policy journal
Integration of EU energy, climate and economic policy in an age of populism
• Old Narrative and the New Questions for Europe
• Some Economic Fundamentals
• Energy - climate – economy linkages
• Social and finance roles of carbon pricing and policy integration
• Essence of the European challenge
• Return to origin: an energy transition for European recovery?
Goodwin Lecture University of Siena, Italy
11 November 2016
Energy Renewal -‐ a return to origins for European recovery?
Some sixty years acer the Coal and Steel Community and EurAtom -‐ …. Energy transforma7on needs to be placed back at the core of European economic
policymaking
This will not be funded and guided by the US Marshall Plan! -‐ It can be funded and guided by the conjoined needs of energy security and climate
change, Including a goal of social inclusion and common purpose -‐ With mul7ple forms of carbon pricing can help to provide finance and stabilise /
underwrite investor expectaDons
EU level framework Predominantly around collec7ve targets, infrastructure and review High-‐level regulatory governance around ‘Second Domain’ instruments principally -‐ The Single Energy Market (Third Package) -‐ Common carbon pricing under the EU ETS / MSR – if tenable? Geopoli7cal dimensions of energy security Common pool efforts on innova7on
To have any hope of tackling the issue, the EU needs a mul7-‐level governance approach
The challenge for EU governance
• NaBonal to regional level .. ? -‐ The principal decisions on Third Pillar investment strategies – including
na7onal infrastructure and renewables ‘demand pull’ -‐ Need to navigate State Aid rules to support appropriate strategic investment -‐ Regional energy coordina7on, interconnector investment, System Opera7on,
capacity pooling and balancing markets -‐ Carbon price floor …
• Energy regions and the Eurozone? -‐ ‘Enhanced coopera7on’ by 9 Member States Arts 326 & 334 TFEU)? -‐ A Eurozone carbon price corridor? -‐ … or carbon-‐backed investment guarantees or credit lines -‐ With a network of na7onal Green Investment Banks channelling a por7on of
carbon revenues to rural energy development, domes7c and agricultural energy prosumers & local networks
‘The Italian Job?’
[discuss]
Planetary Economics: Energy, Climate Change and the Three Domains of Sustainable Development
Pillar 1
• Standards and engagement for smarter choice • 3: Energy and Emissions – Technologies and Systems • 4: Why so wasteful? • 5: Tried and Tested – Four Decades of Energy Efficiency Policy
Pillar II
• Markets and pricing for cleaner products and processes • 6: Pricing Pollu7on – of Truth and Taxes • 7: Cap-‐and-‐trade & offsets: from idea to prac7ce • 8: Who’s hit? Handling the distribu7onal impacts of carbon pricing
Pillar III
• Investment and incenBves for innovaBon and infrastructure • 9: Pushing further, pulling deeper • 10: Transforming systems • 11: The dark maXer of economic growth
1. IntroducBon: Trapped? 2. The Three Domains
12. Conclusions: Changing Course
hXp://climatestrategies.org/projects/planetary-‐economics/ for further informa7on #planetaryeconomics