planetary economics slide pack here

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Michael Grubb With

Jean-Charles Hourcade and Karsten Neuhoff

Routledge/Taylor & Frances, Published March 2014

Energy, Climate Change and the Three Domains of Sustainable Development

Planetary Economics

http://www.routledge.com/books/details/9780415518826/


• Nature of the energy challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement • Pillar II: Markets and Pricing• Pillar III: Strategic investment• Growth theory and macroeconomic linkages • Policy Integration• Joint Benefits• The Economics of Changing course

An integrated approach to Energy Transition


The energy challenge of decarbonisation

Global energy efficiency

Glo

bal c

arbo

n in

tens

ity

0

0.5

1

1.5

2

2.5

3

0 2.5 5 7.5 10 12.5 15 17.5Energy Productivity (GDP/Energy bn$2000/Mtoe)

Historical Decarbonisation/EnergyProductivity

20% by

50% by 2050

Globalemissions reduction below 1990 level

1980

1990

2010

Combination needed for percentage emissions reduction

Possible future paths

Historic average: 1.3%/yrD

ecar

boni

satio

n(C

O2/

Ene

rgy

MtC

O2/

Mto

e)


0

0.5

1

1.5

2

2.5

3

China

Russia

JapanEU15

Australia

EUNew

India

USA

World

Figure 1.6 Trends in carbon intensity, by region and globally from 1980‐2008 Source: Authors. Data from IEA (2010) and World Bank (2011)

Carbon intensity has fallen but countriesremain at widely varying levels


0

5

10

15

20

25

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

CO2em

issionstonnespercapita(tCO

2)–World

Bank

GDPpercapitaPPP($bn 2000)

USA

Australia

UK

RussianFederation

IndiaBrazil

China

France

Germany

JapanKorean

Canada

Poland

Figure 1.7 Per‐capita CO2 emission trends in relation to wealth ‐ trends of major countries from1990‐2008 Data from World Bank (2011) and IEA (2010)

… last few decades, largely stable per-capita emissions in industrialised countries with little sign of convergence


• The proportion of national income spent on energy has remained surprisingly constant- for more than a century - for most countries

- Despite huge variations in energy prices (Bashmakov)

- This cannot be explained through the classical measures of in-country consumer price response (elasticities) but needs also to invoke: – Energy efficiency regulation and related policy responses– Innovation throughout energy supply and product chains

The “Bashmakov-Newbery Constant”


RiskConception

BasicBelief TypicalStrategy

Societalprocess

Time‐scaleofclimatechange

Indifferentor

disempowered

Notproven, or“Whatyoudon’tknowcan’thurt

you”

“Ignorance isbliss”

Environmentalgroupcampaignsvs .resistancelobbying

Firstfewdecadesofclimatechange

Tangibleandattributedcosts

Weighupcostsandbenefits

Actatcostsupto“socialcostof

carbon”

Technocraticvaluationandpoliticsofpricing

Asimpactsriseabovethenoise– nextfewdecades

Disruptionandsecuritization

Personalorcollective

securityatrisk,climatechangeasa“threatmultiplier”

“Containmentanddefence”

Mitigate asmuchaspracticalandadapttotherest

Ultimately,forall(systemicandglobalrisk)Most

vulnerable,sooner,withinternationalspillover

Prelude: three levels of risk conception ..


• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course

Three Domainsand the

Three Pillars of Sustainable Development

An integrating approach to climate policy


Fig. 2 ‐3 b Resource trade‐offs with the other two domains

Three Domains – an Economic Interpretation

Res

ourc

e U

se /

Ener

gy &

Em

issi

ons

Economic Output / Consumption

3rd Domain

1. Real-world individual and organisational decision-making

“Transforming” behaviour

“Optimising”behaviour

1st Domain“Satisficing”

behaviour

2nd Domain

3. Innovation & evolution of

complex systems


The Three Domains rest on different fields of theory that apply at different scales

Neoclassical and welfare

Evolutionary and institutional

TIME

HORIZON

SOCIAL

SCALE

Behavioural and organisational


Cost$USD/tonneofCO2e(inMillions)

‐100

‐80

‐60

‐40

‐20

0

20

40

60

80

100 EstimatesofGlobalMitigationCostsandPotentialby2030

Annualabatementin2030GtCO2e

Source:PlanetaryEconomics,utilisingMcKinseydatafromPathwaystoaLowCarbonEconomy(2009)

AdvancedEconomiesEmergingAsiaRestoftheWorld

SmarterChoices(PillarI)

5 10 15 20 25

Choosingcleanerproductsandprocesses

(PillarII) InnovationandInfrastructure(PillarIII)

Three realms of abatement opportunities- Global estimates for 2030 highlight first two ..


H

M

L

H Highest relevanceM Medium relevanceL Lowest relevance

Satisfice

Transform

Optimise

DomainStandards & Engagement

Markets & Prices

Strategic Investment

Smarter choices

Cleaner products & processes

Innovation & infrastructure

1 2 3

L/M

H

L/M

L

M

H

To deliver

Policy pillars

Solutions need to harness corresponding policy pillars based on the three domains, to transform energy systems




First Pillar of Sustainable Development



ENDUSE

Buildings and appliances

Industry

Transport

CHANNELS

Direct fuels and heat

Electricity system

Refined fuels system

FUEL

Coal

Gas

Petroleum

Fig.3.1a

Agriculture Landuse , other gases

Process emissions

Emissions from fuel extraction

Energy and emission flows within the fossil fuel systemNote: The lower panel gives the numeric breakdown at each stage illustrated in the upper panel. Numbers at each step in the Chart (fuel, channel, end‐use) independently add to 100%.[All data from the International Energy Agency, accessed through ESDS.


In transforming energy systems globally, all three domains are

• … approximately equally important – Cost curve data – Difference between in-country and international elasticities– Observed policies of the most successful countries – Suggestive evidence from economic Growth Accounting& individual pillar ‘bottom up’ evidence

• .. and interdependent– The pillars are complementary, not competing – “Any pillar on its own will fail”

But the relative importance of different measures varies across sectors and nature of co-benefits are diverse


Riskconception/Domain

Dominantscale Decision

frameworkFieldoftheory

Mitigationeconomicprocess

Realmofopportunity

Pillarofpolicy/response

Ignore/Satisfice

Shortterm /local Indifferentor

disempoweredBehavioural &Organisational

Moveclosertothe‘bestpracticefrontier’’

‘Smarterchoices’

Standardsand

engagement

(PillarI)

Compensate/Optimise

Mediumterm/regional

Costs/impactsaretangibleandsignificant

Neoclassical&welfare

economics

Make besttrade‐offsalongthefrontier

Substitutecleaner

production&products

Marketsandpricing

(Pillar II)

Secure/Transform

Long term/global

Transformationalrisksandopportunities

Evolutionary&Institutional

Evolve thefrontier

Innovation&infrastructure

Strategicinvestment

(PillarIII)

Figure 2‐6 Alignments within each domain

A key to Planetary Economics – and politics – lies in the potential to align different levels of risk conception with the

different pillars of response


• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement for Smarter

Choices• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course


First Pillar of Sustainable Development



Energy efficiency remains controversial amongst economists

• 'the energy efficiency role in climate change policy is based on two flawed arguments: that energy efficiency will substantially reduce general energy demand; and that there are lots of projects with positive returns. The former is hard to substantiate, the latter... is open to serious doubts and depends in any event on the price of energy...'.

- Helm (2011)

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. RoutledgeSource:Authors,withdatafromMcKinseyPathwaystoaLowCarbonEconomy(2009)

Evidence confirms potential exists across individuals and organisations and many sectors, and endless scope to argue about how ‘big and real’ it

is …

Domesticbuildings‐electric

Commercialbuildings‐electric

Petroleum&Gas‐General

Commercialbuildings‐thermal

Transport‐ Carsandvans(efficiency)

Waste‐ Landfill

Cement‐Clinkersubstitution

Waste‐ Other

Chemicals‐ General

Iron&Steel‐ Energyefficiencyandco‐

generation

Otherindustry

Cement‐ Alternativefuels

Domesticbuildings‐thermal

‐80

‐70

‐60

‐50

‐40

‐30

‐20

‐10

0 5

10

Annualabatementin2030GtCO2eCost$USD/tonneofCO2e

Hidden&Implement‐ation costs

A.ECONOMICSCEPTICISM

B.BUILDINGSEXPERTS

Default(inefficient)baselines&

holisticsolutions

D.REBOUND

Warmerhomes,moredrivingwithlowerenergycosts

C.CO‐BENEFITS

Health,energysubsidies,environmentalbenefits


Only about a quarter of recommendedmeasures which take longer than a year topay back were implemented by the time offollow‐up survey, and the proportionimplemented varies little for longerpayback times.

Figure 4‐4 Proportion of Carbon Trust recommendations to UK business implemented: dependence on pay‐back periodNote: The graph shows combined responses of public, services, retail and chemical sector regarding recommendations identified in 2006-2007.Source: Source: Carbon Trust, based on Carbon Management/Energy Efficiency Advice Close-out database (personal communication)

… valuable progress made but still big potentialseven for corporate energy use…


Figure 5‐1 EU Energy Efficiency Labels (a), and (b) market share of appliances in Europe over time since introducing labels

Source: IPCC (2007) and European Commission (2010)

Policies have had a huge impact in specific product markets- Example of EU refrigeration response to labels + standards


Figure 5‐7 Long‐term energy savings from efficiency improvements of all sectorsSources:(IEA 2008).Note: The estimation is based on data from 11 IEA countries (Australia, Denmark, Finland, France, Germany, Italy, Japan, Norway, Sweden, the UK, and the US).

… but aggregate impact insufficient to halt increasing demand across IEA countries in aggregate, and slowed after

1990 ..


Figure 5‐11 Embodied energy in buildings

Source: Allwood and Cullen (2012)

But in both buildings & vehicles, balance is moving towards embodied energy


Consumer-driven energy & emissions

Use EmbodiedEfficiency of Stock

Buildings

Industry

Transport

•Insulation•Integrated heating and cooling system.•Efficient appliances

incorporated

•Efficiency of machinery used•Modes of transporting goods incorporated•Vehicle efficiency

•Avoid dripping taps or showers dripping

•Closing windows while heating or cooling system is operating•Avoid dripping taps or showers dripping

•Efficient use of materials•Heat cascading•Maintenance

•Mode of transport•Tyre pressure•Maintenance.

•Surrounding infrastructure

•Construction materials •Construction and transport •Surrounding infrastructure

mines, pipelines

•Raw materials used: extraction, transport and processing•Leakage from mines, pipelines•Raw materials in vehicle construction•Vehicle disposal

Figure 5‐10 The scope of consumer‐driven emissionsNote that these categorisations of the consumers’ part are not entirely independent of one another. For example the emissions from the industrial process make up the embodied emissions of consumer goods and services.Source: Authors

Taking energy / resource efficiency much further is likely to require digging into dimensions of use and embodied energy


• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing for cleaner products

and processes• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course


Second Pillar of Sustainable Development



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

A��

A�� 2005 GDP�

EU15

Figure 6‐1 The most important diagram in energy economics Note: The graph plots average energy intensity against average energy prices (1990‐2005) for a range of prices. The dotted line shows the line of constant energy expenditure (intensity x price) per unit GDP over the periodSource: After Newbery (2003), with updated data from International Energy Agency and EU KLEMS

Prices Matter!

National energy intensity approx inversely proportional to long-run prices - across countries the % of GDP spent on energy is remarkably constant


‐20

‐10

0

10

20

30

40

50

60

70

80

EstimatesofGlobalMitigationPotential2030

10 15

AdvancedEconomiesEmergingAsiaRestoftheWorld

Annualabatementin2030GtCO2e

Figure 6.5 Abatement options in the Second DomainRaw data Source: McKinsey data from Pathways to a Low Carbon Economy (2009)

Chemicals -

5

Cost$USD/tonneofCO2e(inMillions)

Other IndustryIron & Steel – energy efficiency and co-generation

Other Industry

Power -small hydro

Power – shift of coal new buildsto increased gas

Other Industry

Cement –alternative fuels

Chemicals -general

Chemicals -general

Power –small hydro

Power -nuclear Power -nuclear

Power –onshore windPower - solar

Power –offshore wind

Power -solar

Power -nuclear

Power – biomass CCS and co-firing

Pow

er –

onsh

ore

win

d

Power - solarIron & Steel –process changes

Power –offshore wind

Pow

er –

Coal

CCS

Power –biomass CCS and co-firing

Power – Coal CCS

Power – biomass CCS and co-firing

Industrial CCS

Power – Gas CCS

‘Pillar II’ opportunities dominated by substitution in production –mainly low carbon power generation – ie. investment choices by large companies determined by market structure and perceived

risks and relative prices

Carbon-related prices matter especially for decarbonising elec & industry


ETS (42%)Non-

ETS (58%)

Figure 7‐1 Coverage of the EU ETS Note: The darker shaded countries are those participating in the EU ETS. The bar shows the distribution of verified emissions over 2005‐8 between the different sectors covered under the EU ETSRaw data Source: European Commission and Ecofys (2009)

The European Emissions Cap-and-Trade system (EU ETS) – the first and by far the biggest attempt to put a price on CO2


0

5

10

15

20

25

30

35

Dez/04

Apr/05

Aug/05

Dez/05

Apr/06

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Aug/07

Dez/07

Apr/08

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Dez/08

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Dez/09

Apr/10

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Apr/11

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Dez/11

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Aug/12

Dez/12

Apr/13

EuropeanCO2pricePhaseI

EuropeanCO2pricePhaseII

EuropeanCO2pricePhaseIII

EUR/t(a)

Fig.7.2 Evolution of European carbon and international offset pricesData Source: European Climate Exchange

Evolution of the EU CO2 (spot) price

Murphy’s law: “If anything can go wrong, it will”


Carbon Abatement

Damagecostsarehighlyuncertainbutnot

sensitivetoemissionsoverashortperiod

Mitigationcostsareuncertainandflattenovertime

CO2Emissions

Cost

NearTermOutlook

Shor

t ter

m: b

ound

the

pric

e

Fig.6.6a

Classic argument on price vs quantity instruments (i) in the short term, fix the price


CO2 Abatement

Damagecostsarehighlyuncertainbutrisksrisesteeplywithcumulativeemissions

Mitigationcostsareuncertain,butfarmore

scopefordeepreductionsinlongterm(“flatter”)

CO2 EmissionsLong term: target safe quantityFig.6.6b

Figure 6‐6 Stylised benefits and costs of cutting emissions: implications for ‘tax or cap’?

Cost

Classic argument on price vs quantity instruments (ii) in the long term, fix a safe quantity


CO

2 Pr

ice

CO2 emissions

The price - where thelines cross- may be verysensitive to errors orchanges in underlyingdemand curve

Emissions cap: supply of emission allowances in a given period is fixed

Figure 7‐5 Source of price instability in an emissions trading system

Initial assumptions on emission trends and abatement costs tend to be conservative and to underestimate uncertainties

Real-world experience has confirmed the wisdom … with added twists


CO2Price

Figure 7‐7 a. Impact of emissions banking on carbon price in emissions trading system

Collapseofconfidence– ashorttermview

Decliningbutunstablepricebasedonfuture

expectations

Theoreticalvalueonlongtermview

CO2emissions

Emissionsbanking‘flattensthedemandcurve’(cf Fig7.5)by

extendingtimehorizon

Emissions banking supposed to be answer .. but is only stable within a certain range, otherwise amplifies risks


Price stabilisation mechanisms therefore essential for credibility – and also for linkages to other domains

Figure 7‐8 Steadying mechanisms for emissions trading systemsNote: The Figure illustrates mechanisms to help emissions cap‐and‐trade systems deal with deep uncertainties , so as to maintain a reasonable balance of price and quantity objectives. The mechanisms are most simply illustrated with respect to price floors and ceilings, in which case the shaded area indicates the likely region of price and quantity for a system with substantial surplus allowances. However the same principle could apply to other ‘threshold’ triggers, for example based on the level of cumulative surplus.

CO2Priceorrelatedindex

EmissionsVolume

Withheldallowancesreturned

Capalleviated

Allowanceswithheldatfloor

Additionalallowanceswithdrawn


0

10

20

30

40

50

60

Cos

ts /

GVA

%

41%ofEU‘valueadded’(GDP)inmanufacturingindustry+utilities

Motorvehicles(0.6)

Othermanufacturing(0.09%)

Construction(0.01%)

MiningandQuarrying(0.02%)

0

10

20

30

40

50

60

70

80

90

100

TheBigSix

Lime

Cem

ent

Coke Oven

Fertilisers and Nitrogen

Refined petroleum

Basic Iron and Steel

Aluminium Production

Other inorganic basic

chemicals

Paper

Mostofmanufacturingemissionsarefromc.2%‘valueadded’ofEUGDP

Figure 8‐4 Impact of carbon pricing on EU industry sectors and their share of the EU economyData source: Eurostat and EU Commission

Who’s hit? In industry – c. half a dozen primary commodity sectors


Costpassthrough

Freeallocation

Freeallocation

% o

f allo

wan

ces

rece

ived

for f

ree

Example of Blast Furnace Steel @ €30/tCO2

Increasedprofit

Reducedprofit

20%

100%

% o

f allo

wan

ces

rece

ived

for f

ree

0%

90%Pr

ofit

Mar

gin

0%

5%

10%

15%

End user price increase

CURRENTPROFITMARGIN

5% 10% 15%

0%

Figure 8‐1 Profit and loss depend on the combination of free allocation and cost pass through to final productsNote: the numbers on the graph correspond to one of the most carbon –intensive products, namely steel in Europe, at a carbon price of €20/tCO2, before international effects.

Distributional impacts 1: Up- or mid-stream, winners and losers depend on allocation and market structure


Cost of Carbon

Increased costs for ETS

companies

Price rises for ETS sector

products

Desired result – supply side

Product substitution and demand

reduction

Substitute low carbon products

developed

Reduced emissions

Desired result – demand side

Profitability of emissions

reducing actions improved

Low carbon technology developed

Reduced emissions

Impacts on trade patterns and

competitiveness

Reduced investment in factories in

ETS -

Fewer jobs in ETS region

Reduced operation in ETS

– Increased production and

emissions outside ETS

Undesirable side-effects

Price pass through

Cost of Carbon

Increased costs for ETS

companies

Price rises for ETS sector

products

Desired result – supply side

Product substitution and demand

reduction

Substitute low carbon products

developed

Reduced emissions

Desired result – demand side

Profitability of emissions

reducing actions improved

Low carbon technology developed

Reduced emissions

Impacts on trade patterns and

competitiveness

Reduced investment in factories in

ETS -

Fewer jobs in ETS region

Reduced operation in ETS

– Increased production and

emissions outside ETS

Undesirable side-effects

Price pass through

Figure 8‐2 Desirable and undesirable effects of carbon pricesSource: Adapted from Carbon Trust (2010)

Carbon pricing has benefits on both supply and demand side – the ‘carbon leakage’ problem lies in seeking both …


Price with carbon cost

Price without carbon cost

ETS ETS ETSRest of World

Rest of World

Rest of World

Adjust costs downwardsConditional allocation

Adjust costs at border

BorderAdjustments

Adjust global costs upwards

Global carbon pricing

Imports into ETS

Exports from ETS

Price with carbon cost

Price without carbon cost

ETS ETS ETSRest of World

Rest of World

Rest of World

Adjust costs downwardsConditional allocation

Adjust costs at border

BorderAdjustments

Adjust global costs upwards

Global carbon pricing

Imports into ETS

Exports from ETS

Figure 8‐5 Options for tackling leakageSource: Adapted from Neuhoff 2008

… a problem to which there are only three types of responses ..


0

5

10

15

20

25

30

Poorest20%

Middle Richest20%

Other Fuels

Gas

Electricity

0

1

2

3

4

5

6

7

8

9

Poorest 20% Middle Richest 20%

OtherFuelsGas

Aver

age

hous

ehol

d £

per w

eek

% o

f hou

seho

ld in

com

e

Figure 8‐7 Household expenditure on energy UK 2008Source: Office of National Statistics 2009.

.. downstream the direct impacts are ‘all losers’ and regressive: ‘bills constancy’ hinges on the other Pillars


Pillar II Conclusions

• Too much ‘looking under the lamppost’• The economics of carbon pricing are as much

about design and strategic credibility than level • The politics of carbon pricing are driven by

distributional impacts and the lack of clearly articulated positive narrative for either industry or consumers

• Links to the other two domains are central to any ‘tangible’ positive narrative, drawing on ‘Bashmakov’s Constant of Energy Expenditure’


• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment for Innovation and

Infrastructure• Policy Integration• Joint Benefits• The Economics of Changing course


Third Pillar of Sustainable Development



Fig.9.1 Immediate costs and future benefits of low carbon technology

From II to III: Clean tech innovation and benefits


0

2

4

6

8

10

12

14

16

Fig.9.3 R&D expenditure by top companies in different sectors as % of sales, 2011

Data source: EU Joint Research Centre on Industrial Investment and Innovation, R&D Scoreboard 2012,http://iri.jrc.europa.eu/scoreboard12.html

We are seeking radical innovation in some of the least innovative sectors of our economies


Diffusion

POLICYENVIRONMENT‐ taxincentives,subsidies,emissionspricing,regulations

Supply/Research

Demand/Consumers

FrameworkConditions– MacroeconomicStability,Education&Skills,IPProtectionEtc.

Market accumul

ation

Commercial-isation

Demon-stration

Applied R&D

Basic Research

Product/TechnologyPush

MarketPull

Fig.9.5 The Innovation Chain

“Invention” “Innovation” “Diffusion”

Technologies have to traverse a long, expensive and risky chain of innovation to get from idea to market


INVENTION DIFFUSION

Highlyinnovating,closeconnection

consumersandinnovators

‐ 1st &3rd Domains –

R&Dintensity5‐15%(eg.IT,drugs)

INNOVATION

Moderateinnovation,mostlybusinesstobusinessconnection

‐ 2nd &3rd Domains ‐

R&Dintensity1‐5%(eg.industrial&product

engineering)

Lowinnovation,littleconnectionbetweeninnovatorsandmarkets

R&Dintensity<1%(eg.energy&construction)

Market pullTechnology push Market pull

Technology push

Market pull

Technology push

TechnologyValleyofDeath

Market pull

Figure 9.7. Innovation intensity and the broken chain


Energy & related sectors are ‘complex sociotechnical systems’, with big evolutionary & lock-in characteristics

• Progress in clean energy industries impressive, but heavily dependent on public policy

• .. and so far outweighed by ‘carbon entanglement’• Consider response to oil price rises• .. and study the policy implications of evolutionary

economics:– Niche accumulation – Hybridisation strategies

• Industrial strategy is unavoidable • … with the potential positive side being

macroeconomic version of “Porter’s kick”


Transformation involves not just technologies but sectors – is possible, but complex

Three key “case studies”

• Transport in the Americas

• Electricity in Europe

• Urbanisation in Asia

The systems themselves also become more integrated


Global energy costs Annual

global emissions

Time‘Green’ futures

•Integrated energy system•Biomass and electricity in transport•Low‐carbon electricity•High capital costs….•……but low operating costs

‘Brown’ futures• Continued dependence on fossil fuels• Unconventional and synthetic oil in transport• Low capital costs…•…but high operating costs and a host of environmental issues beyond carbon

Number of potential energy futures near ‘minimum’ cost

Low Carbon High Carbon

Clustering of ‘low cost’ energy futures around higher and lower emissions, rather than in the middle, reflects divergent responses to depletion of

‘easy oil’

We are here

Figure 10-6: Two kinds of energy future – the carbon divideSource: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors


Some suggestive alignment of Three Domains with structure of the WEF Global Competitiveness Index …


The Three Domains also link to debates about macroeconomic growth

• Neoclassical economic growth models have consistently found a ‘residual’ accounting for typically half of observed economic growth that cannot be explained by resource and capital accumulation (Ch.11 the “Dark Matter” of growth)

• Economic research points two broad explanatory areas:– Reducing suboptimal performance of many economic actors and structures– Education, infrastructure and innovation

• ie. First and Third domain processes are recognised as important for macroeconomic growth. Yet these remain– largely absent in global (or national) modelling– poorly charted in policy

• Energy is a particularly strong candidate because– Pervasive input to numerous production sectors– Fossil fuel markets are intrinsically unstable– Exceptionally low rates of innovation particularly electricity & construction


Macro modelling : Global GDP in mid Century has little or nothing to do with global mitigation …

Figure 11.4 Gross World Product in 2050 (excluding environmental benefits) from a wide range of models

Source: Energy Modelling Forum (2009). MF22 Database: Climate Change Control Scenarios. Available from:http://emf.stanford.edu/events/emf_briefing_on_climate_policy_scenarios_us_domestic_and_international_policy_architectures/

20 GtCO2 = halving of global CO2 emissions by mid Century




Planetary Economics


Fig. 12.3 Public and private returns in the 3 domains

Res

ourc

e U

se /

Ener

gy &

Em

issi

ons

Economic Output / Consumption

Pillar III

1. Private returns often suffice – but are not considered

=> Standards and engagement

Innovation and infrastructure

Cleaner products and processes

Pillar ISmarter choices

Pillar II

3. Public returns (including innovation,

security & environment) >> private returns

=> Strategic investment

Different pillars have different structures of returns -good design of markets & pricing pillar can expand its reach


Experience and theoretical reasoning on each pillar shows..

• There are multiple lines of evidence that in context of transforming the global energy system over a few decades, all three domains are of comparable importance

• Only approaches that integrate across all three domains have potential to generate ‘Green Growth’

• The dominant neoclassical ‘Second Domain’ theories emphasise instrument (pricing) that maximises political opposition unless it is nested in the complementary triad

• First and Third pillar policies can (and have) delivered multiple benefits, but ….


But no pillar on its own can credibly solve the problem – nor offers a politically stable basis for policy

• Energy efficiency policy on its own limited by: – Scale of intervention required– Growing scale satisficing behaviour – …. Leading to large Rebound effects

• Pricing on its own limited by:– Blunt nature of impacts First and Third Domain impacts– Rising political resistance to rising fuel bills – .. and competiveness concerns

• Innovation on its own limited by:– Lack of demand pull incentives– Scale & risks of investment costs– Political failures in absence of rising market feedbacks


Standards & Engagement

Markets & Prices


POLICY PILLARS

Technology options &

competitiveness

Changing course requires a sustained package -the key is to integrate and synergise across all three domains

Manage bills, increase

responsiveness

Revenues, revealed costs, strategic value

Values, pull & preferences

Attention, products &

finance

Education, access & control

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. RoutledgeFigure 12‐4 Potential joint benefits in energy and climate policy

Pillar

Standards&engagementforSmarterChoices

Enhanceefficiency,IndoorandLocal

healthsubsidyremoval..

PricesandmarketsforCleanerproducts

andprocesses

Stabilise investorconfidence,revenues,

airpollution&energysecurity

StrategicinvestmentforInnovation&Infrastructure

AccelerateInnovationinweaksectors,coordinatesupplychain&infrastructure

Co-Benefits Integration

ClimatePolicypotentialto

MotivateStabiliseCoordinateFinance

forlong‐runsecurity

efficiencygrowth

innovation

Whilst the underpinning evidence and theory of Planetary Economics suggests several routes to ‘co-benefits’


• Nature of the energy challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement • Pillar II: Markets and Pricing• Pillar III: Strategic investment• Growth theory and macroeconomic linkages • The Economics of Changing course• Policy Integration

• Joint Benefits• The Economics of Changing course

A peek at global some implications …

- An integrated approach


Mainstream economic models are weak in the dynamics of energy systems

• The vast majority of economic models assume a cost function in relation to the degree of abatement from ‘reference projection’ at time t

• This has no underlying history eg. DICE equations

Inertia, pathway etc effects have been introduced through • Capital stock lifetimes (many models) • Endogenous technological change (increasing

numbers of models but mostly in academia)


A simplifying approach with links to 3 domains

• Cost may also be represented in relation to both the degree and the rate of abatement– First is the classical representation– Second (rate dependent) represents inertia – Ratio represents adaptability - transitional costs with

enduring pathway impacts• This enables link to the 3 domains:

– Most First Pillar gains do not reverse: they have the characteristic of regulatory or behavioural innovation which saves costs

– Most Third Pillar gains do not reverse: infrastructure endures and innovation generally moves forward, not backwards


2025. 2040. 2055. 2070. 2085. 2100.Year

5

10

15

20

25

30

GtC yrAnnual emissions

Adaptive energy system

2025. 2040. 2055. 2070. 2085. 2100.Year

1000

1500

2000

GtCCumulative emissions


The ‘global optimal trajectory’ is radically different for an adaptive energy system, given ‘typical’ damage & discounting assumptions

Default (reference)

trajectory

Default (reference)

trajectory

Standard (non-adaptive)


• Both First and Third pillar policies – which can be broadly characterised as regulatory and technological systems innovation – are adaptive in nature (ie. transitional cost with enduring benefit)• A significant degree of direct response to prices may also be adaptive


2010. 2025. 2040. 2055. 2070. 2085. 2100.Year0

2

4

6

8$trillion

Annual damages from climate change

‘Optimal’ effort

2010. 2025. 2040. 2055. 2070. 2085. 2100.Year0

2

4

6

8$trillion

Annual abatement cost

• For an adaptive system (characterised by transitional costs with enduring benefits) early efforts have much higher benefit than just emission reductions • eg. Optimal global investment c. $1trn/yr can cut annual costs (abatement + damage) towards end of century by at least 5 times as much

Measures which steadily adjust the pathway are optimal at much higher ‘cost of carbon’


Default (reference)

trajectoryStandard

(non-adaptive)




Key policy implication of the numerical analysis

• The value of measures which adjust the pathway is several times that of measures which just save CO2

• Useful to think of a ’base’ carbon price as that which can be implemented today to reflect the assumed damage of CO2 emissions

• Measures in the First and Third Domains may well justify a “cost of carbon” well above this base carbon price

• A rising base carbon price can also enhance in particular strategic investments & leverage long term institutional finance


Thought for discussion: ‘First among Equals?’

• A rising base carbon price is an instrument that contributes across all domains:I. Attention effect and funding for 1st Domain responses – rising steadily enables efficiency to keep pace and stop

much rise in total bills II. Price differential will steadily reduce use of coal in power generation, and help to move renewables on from transitional subsidies into mainstream marketIII. Facilitates increased investment stability and funding for innovation, infrastructure and tech transfer programmes

• Embedding in an international agreement would enhance stability and credibility


H

M

L

H Highest relevanceM Medium relevanceL Lowest relevance

Satisfice

Transform

Optimise

DomainStandards & Engagement

Markets & Prices


Smarter choices

Cleaner products & processes

Innovation & infrastructure

1 2 3

M

H

M

L

M

H

To deliver

Policy pillars

Figure 2‐5 The three pillars of policyNote: The row titles refer to the realm of opportunity, while the column headings refer to the policy pillars. The size of circles in each cell refers to the degree of relevance of the policy to each of the opportunities.

.. So that pricing spillovers get to the “M”


Some research challenges

• Better mapping the boundaries of the relevant Domains• Fleshing out the synergies between Pillars, and in

particular how different structures and linkages of carbon prices may help to form more stable and politically appealing packages

• Digging deeper into ‘co-benefits’ and how these vary between regions and economic circumstances, and for different pillar designs

• The role of international cooperation in the Three Domains and the politics of a ‘base price+’ agreement

• Exploring sensitivities and other representations of ‘the Economics of Changing Course’


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 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: Pushing further, pulling deeper• 10: Transforming systems• 11: The dark matter of economic growth

1. Introduction: Trapped?2. The Three Domains

12. Conclusions: Changing Course

Routledge/Taylor & Frances, Published March 2014


Planetary Economics Launch meetings, March – April 2014

Launch: Kings College, Cambridge: 10th March 2014, 6-7.30pm: Chair: Lord Martin Rees

Connaught Rooms London: LSE+ Student Conference on Energy Transitions: Live Cross-University Debate on 'Planetary Economics: 11th March, 2014, 16.00-17.15. http://www.lse-energy.org/event/conference_final/

Imperial College London Grantham Institute: 'Planetary Economics': The Technology and Innovation Pillar12th March, 2014, 17.00-18.00. Follow this link or register on http://app-uk-emailer.co.uk/1I0M-E90/s2.aspx

Brussels Marriot Hotel: Eurelectric Conference: Welcoming the Commission’s 2030 proposals: High road, or low road. 13th March, 2014, 2.15 pm Visit www.eurelectric.org

Geneva WTO: Advanced Course on Trade & Environment. Integrating Approaches to Energy, Environment and Trade. 25th March 2014. Contact: [email protected]

Policy Forum @ Institute of European Studies, Vrije Universiteit Brussels: Implications for European Energy and Climate Policy, Friday 4th April, 13.00-14.30

Deutches Institut für Wirtschaftsforschung (DIW Berlin): stabilizing policies for environment and economic growth 7th April, 2014: 12.00-2.00pm Contact: [email protected]

St. Catharine's College, Cambridge: Finance and the Macroeconomics of Environmental Policies 10th April, 2014, 16.00-17.15 http://www.neweconomicthinking.org/prog_10April2014.htm

OECD Auditorium, Paris: 17th of April, 2014, 12.30-14.30 Public policy launch hosted by OECD Environment Directorate. Contact [email protected]

See www.climatestrategies.org/events/2014-events/book.html for information and maintained register of related events.

As if you haven’t had enough … !

planetary economics slide pack here

Documents