Green industrial policy: The political economy of managing the transition to a sustainable economy CEPAL, Santiago de Chile 19 November 2013 Tilman Altenburg, DIE 2008 Deutsches Institut für Entwicklungspolitik
1. (Why) Do we need Green Industrial Policy? 2. (How) Is Green Industrial Policy different? 3. The political economy of GIP 2008 Deutsches Institut für Entwicklungspolitik 2
1. (Why) Do we need Green Industrial Policy? 2008 Deutsches Institut für Entwicklungspolitik 3
Environmental urgency World is approaching planetary boundaries Radical and rapid decoupling of economic development from resource consumption Carbon: To avoid > 2 C global warming, industrialised countries need to reduce emissions by 80-95% in 2050 relative to 1990. 2008 Deutsches Institut für Entwicklungspolitik 4
EJ 1200 1000 800 600 400 E.g. energy system Savings Geothermal Solar Wind Hydro Nuclear Gas Oil Coal Biomass Renewables Gas Nuclear Oil 200 Coal Biomass 0 1850 1900 1950 2000 2050 2008 Deutsches Institut für Entwicklungspolitik
But can t nation states free-ride? Why should they enact national GIP? Free-riding is possible (although not globally responsible) But also national interests: Local environmental benefits. Resource efficiency may increase competitiveness Building early mover advantages / avoid being decoupled from global technological trends 2008 Deutsches Institut für Entwicklungspolitik 6
Does the creation of environmental lead markets lead to early mover advantages and even lasting competitive advantages? some evidence (Denmark s wind turbines, Brazil s flex fuel) but not necessarily sustainable in a global economy (Germany s solar industry) 2008 Deutsches Institut für Entwicklungspolitik 7
3. (How) Is Green Industrial Policy different? 2008 Deutsches Institut für Entwicklungspolitik 8
Market failure justifies industrial policy Coordination & information failure, dynamic scale economies & knowlege spillovers, externalities but also risks of government failure Incomplete information and political capture Question is not whether IP, but how much intervention, what instruments in a particular context. Green Industrial Policy: Much deeper market failure more intervention needed to construct markets higher risks of misallocation and capture more need for good policy desin 2008 Deutsches Institut für Entwicklungspolitik 9
Four additional challenges for GIP: 1. Big policy push needed under time pressure and uncertainty 2. Need to internalise environmental costs, combine first and second best policies 3. Additional market failures related to systems transformation 4. Balancing several objectives 2008 Deutsches Institut für Entwicklungspolitik 10
(1) Policy push under time pressure and uncertainty First industrial transformation that has a deadline is deliberately enacted. We know roughly what kind of technologies we need (energy storage, second generation biofuels, ) but not exactly which ones will first become commercially viable Current decoupling of growth from resource consumption far too slow, rebound effects! Carbon lock-in and time-lag effects. 2008 Deutsches Institut für Entwicklungspolitik 11
50% 50% 40% 40% 30% 30% Time lags: Rapid expansion of renewables investments little change of global power mix 25.9% 26.2% 25.9% 26.2% 34.2% 34.2% 23.9% 23.9% 43.7% 43.7% 30.7% 30.7% 20% 20% 10% 10% 0% 0% 18.3% 17.3% 16.3% 18.3% 15.0% 17.3% 13.8% 16.3% 15.0% 13.8% 10.3% 10.3% 7.9% 4.6% 6.9% 7.9% 6.1% 4.3% 4.6% 4.6% 5.3% 5.4% 6.9% 6.1% 4.3% 3.6% 5.3% 5.0% 5.4% 4.6% 3.6% 5.0% 3.5% 3.5% 3.6% 3.8% 4.0% 4.5% 3.5% 3.5% 3.6% 3.8% 4.0% 4.5% 7.9% 7.9% 9.2% 5.1% 6.0% 6.0% 5.1% 2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011 9.2% 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 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) 2008 Deutsches Institut für Entwicklungspolitik
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 2008 Deutsches Institut für Entwicklungspolitik 13
(2) Need to internalise environmental costs First best options: Carbon price, environmental taxes But not (yet) politically feasible (and not sufficient) Need for combination of first and second-best policies But tricky: may create perverse incentives 2008 Deutsches Institut für Entwicklungspolitik 14
(3) Additional market failures Green transformation requires systems innovation, presupposes simultaneous large-scale investments... 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! 2008 Deutsches Institut für Entwicklungspolitik 15
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 2008 Deutsches Institut für Entwicklungspolitik 16
(4) Multiple objectives Mitigation Country A Competitiveness Poverty / jobs Country B Energy security 2008 Deutsches Institut für Entwicklungspolitik 17
imply trade-offs Stricter environmental regulations may undermine effects on competitiveness Local Content Requirements may slow deployment down make it difficult to measure performance and hold politicians accountable 2008 Deutsches Institut für Entwicklungspolitik 18
3. The tricky political economy of GIP 2008 Deutsches Institut für Entwicklungspolitik 19
Need to create artificial markets for environmental goods (ETS, CDM, REC, PES ) Need to subsidize heavily at a pre-commercial stage without market discipline Politicians decide on technological pathways 2008 Deutsches Institut für Entwicklungspolitik 20
Regulation determines technology choice Regulatory standards (here here: admissible fleet emissions) drive technology choice McKinsey 2011: Boost. Transforming the powertrain. p. 7 2008 Deutsches Institut für Entwicklungspolitik 21
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). In sum: Green rents needed but risks of misallocation and political capture high especially under enormous uncertainty and time pressure of green transformation Smart policies needed! 2008 Deutsches Institut für Entwicklungspolitik 22
Thank you for your attention! 2008 Deutsches Institut für Entwicklungspolitik 23