ISES 2013 - Day 1 - Michael Grubb (Professor, University of Cambridge) - Investments for Sustainable Development

www.eprg.group.cam.ac.uk

Professor Michael Grubb

4CMR University of Cambridge Centre for Mitigation Research

Editor-in-Chief, Climate Policy journal

Senior Advisor, Sustainable Energy Policy,

UK Office of Electricity and Gas Markets (Ofgem)

Planetary Economics: Energy, Climate Change and the

three domains of sustainable development


Contents

Pillar 1

• Standards and engagement for smarter choice • 3: Energy and Emissions – Technologies and Systems

• 4: The Energy Efficiency Resource – Technologies and Systems

• 5: Tried and Tested – Three Decades of Energy Efficiency Policy

Pillar II

• Markets and pricing for cleaner products and processes

• 6: Pricing Pollution – of Truth and Taxes

• 7: Cap-and-trade & offsets: from idea to practice

• 8: Who’s hit? Handling the distributional impacts of carbon pricing

Pillar III

• Investment and incentives for innovation and infrastructure

• 9: The Philosopher’s Stone? Innovation, Growth and Finance

• 10: Bridging the Technology Valley of Death

• 11: Transforming systems

1. Introduction: Trapped?

2. The Three Domains

12. Conclusions: Changing Course


Three Broad Questions

• What have we learned?

• What is the role of economics?

• What should we do differently?


What have we learned – risks and perceptions

Climate change:

• It is hard to motivate people about climate risks

– A huge ‘psychological distance’

• We have been entirely unable to quantify climate damages in terms of

monetary equivalent

– Time (Stern), Equity (Dasgupta), Planetary risks (Weitzman)

• Climate change ultimately has more in common with security assessment

Energy

• Most people (and organisations) have little awareness of energy

– They are not ‘optimisers’, inefficiency is rife

• Systematically poor foresight on energy markets

– The Economist’s “drowning in oil .. @ $5/bbl?” (2000)

• Key energy issues are also about risk, volatility and security


Economic Outputs (production & consumption)

Innovation moves the frontier

Inertia increases the cost of moving along the frontier, eg. in response to changing resource prices.

Current “best practice frontier” of energy & emissions in producing

economic output

Neoclassical / welfare economics assumes and facilitates behaviour aimed to optimise mix of resources, given technologies

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In practice there are three domains of economic processes - all are relevant

“Business as usual” innovation

Accelerated low carbon innovation

Purely carbon-price-driven innovation

3rd Domain

Sectors/ countries

Innovation And System Trajectories

“Pareto” improvements

1st Domain

Fig. 2 -3 b Resource – output relationships across the three domains

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Economic Outputs (production & consumption)


.. they rest on three fundamentally different fields of theory, relevant to different scales


They appear to offer three roughly equal realms of opportunity (in all regions)

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100 Estimates of Global Mitigation Potential by 2030

Annual abatement in 2030 GtCO2e

Source: McKinsey data from Pathways to a Low Carbon Economy (2009)

Advanced Economies Emerging Asia Rest of the World

Smarter Choices

5 10 15 20 25

Choosing cleaner products and processes

(Pillar II) Innovation and Infrastructure (Pillar III)


Realm of

Opportunity

Smarter choices (eg. energy efficiency)

Cleaner

products and

processes

Innovation and

infrastructure

investment

Field of

theory

Behavioural &

psychological

Classical and

welfare

economics

Evolutionary &

institutional

Standards & engagement

They require three fundamentally different types of policy

All charts from M.Grubb, J.C.Hourcade, and K.Neuhoff, Planetary Economics and the Three

Domains of Sustainable Energy Development, Taylor and Francis, forthcoming 2013


Dominant timescale / Domain

Decision framework

Field of theory

Mitigation economic process

Realm of opportunit

y

Pillar of policy/

response

Short term –

Ignore / satisfice

Ignorant or disempowered

Behavioural &

organisational

Move closer to the ‘best practice

frontier’’

‘Smarter choices’

Standards and engagement

(Pillar I)

Medium term –

Cost / Optimise

Costs / impacts are tangible

and significant

Neoclassical & welfare

economics

Make best trade-offs along the

frontier

Substitute cleaner

production and products

Markets and pricing

(Pillar 2)

Long term –

Secure/ Transform

Transformational risks and opportunities

Evolutionary &

institutional

Evolve the frontier

Innovation and infrastructure

Public-led investment

(Pillar III)


Drivers

Financial Cost & Benefits

-Capital Cost/Constrains

Hidden and Intangible Costs

- Incompatibility

- Performance Risk

- Management Time

-Other Transaction

Market Misalignment

-Split Incentives (landlord/tenant, builder/buyer,

maker/user)

Behavioral Factors

- Loss Aversion

- Discounting Pyramid

- Risk Bias

- Procrastination

-Invisibility of Carbon/Energy

-Inattention

Financial Cost & Benefits

- Operational Savings

Hidden and Intangible Costs

- Increased Thermal Comfort -

Improved Working Environment

-Better Controls

Market Misalignment -Landlord/builder/Maker “build-in”

Behavioral Factors

-Corporate Social Responsibility

-Inherent Environmental Value

-Fashion

-Social Pressure

“Our worst property is 13 times less energy efficient than the best” – major UK retailer

“You should be pleased if you have the measurement systems in place to know that” – response from another retail company

Barriers

Pillar I – Standards and Engagement for Smarter Choices


‘There appears to be a nearly

inverse relationship between those

policies that policy analysts tend to

endorse as holding the greatest

promise .. and political feasibility ..’

Rabe 2008, 106

Pillar II – Markets and Prices for Cleaner Products and Processes

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CER (Phase IIallowances)

‘Energy forecasting was invented to

make economic forecasting look good’.

- Anon


Pillar III – Innovation in Energy

0

2

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12

14

16

R&D per Sales, % (2011)

We are seeking radical innovation in some of the least innovative sectors (energy, construction) in our economies …


INVENTION DIFFUSION

Highly innovating, close connection consumers & innovators (1st & 3rd Domains) R&D intensity 5-15%

INNOVATION

Moderate innovation, mostly business to business connection (2nd & 3rd Domains) R&D intensity 1-5%

Technology push

Technology push

Technolog

y push Market pull

Low innovation, little connection between innovators and markets, R&D intensity < 1%

Market pull

Market pull

Technology Valley of Death

Low innovation can be explained, and overcome by combination of pusher further and puller deeper - with clear potential for net gains


Pillar III is also about infrastructure and transformation


Planetary Economics

Some implications


The Future is Open and the default trajectory is neither optimal nor secure

0

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35000

0 10000 20000 30000 40000 50000 60000

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t C

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)

Global GDP ($bn)

Total Global CO2 Emissions

1980

1990

2007

‘Business as usual Frontier

Efficiency and innovation-led

frontier

Fig. 12 -1


Manage bills, increase responsiveness

Values & Preference

Prices, products and finance

I. Satisfice Foster smarter choices

II. Optimise Cleaner products and processes

III. Transform Innovation and Infrastructure

Technology Options Education & Access

- Enabling Environment

Revenues & Revealed costs

Standards & engagement

Markets & Prices

Strategic Investment

The key for policy is to integrate and synergise across all three domains


Planetary Economics

Domain and Pillar

Standards & Engagement for Smarter Choices

Enhanced efficiency, subsidy removal &

more rational choices

Prices and markets for cleaner products

and processes

Investor confidence,

revenues, energy security

Strategic investment for Innovation & Infrastructure

Accelerating Innovation in weak sectors, coordinate

supply chain & infrastrructure

Co-Benefits A New Framework

Role of Climate Policy to - Motivate - Stabilise - Coordinate - Finance

transformational policies to enhance growth, energy access & and climate security