The New Climate Economy

The Ny-Alesund Symposium 2014 26-28 May, 2014

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The New Climate Economy project aims to identify the biggest opportunities to strengthen both growth and climate performance The approach is:

Evidence-based

Decision-maker focused

Objective and Open

Disruptive

Near-term

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The global New Climate Economy Partnership

Global Commission 24 global leaders

Economic Advisory Panel 14 world leading economists, chaired by Professor

Lord Nicholas Stern

Includes:

Two Nobel prize winners: Daniel Kahneman and Michael Spence

7 Commissioning Countries

Colombia Ethiopia

Indonesia Norway Sweden

South Korea United Kingdom

8 Partner Research Institutes

Climate Policy Initiative (USA) Ethiopian Development and Research Institute

Indian Centre for Research on Economic Relations Global Green Growth Institute (South Korea)

London School of Economics (UK) Stockholm Environment Institute (Sweden)

Tsinghua University (China) World Resource Institute (USA)

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Members of the Global Commission on Economy and Climate Former Presidents and Prime Ministers

Felipe Calderón (Chair) Mexico

Luísa Diogo Mozambique

Helen Clark New Zealand

Ricardo Lagos Chile

Jens Stoltenberg Norway

International financial institutions and agencies

Nemat Shafik International Monetary Fund

Sharan Bourrow International Trade Union Confederation

Angel Gurría Organisation for Economic Co-operation and Development

Sri Mulyani Idrawati World Bank

Takehiko Nakao Asian Development Bank

Maria van der Hoeven International Energy Agency

Government

Trevor Manuel South African Planning Commission

Annis Parker Mayor of Houston

Eduardo Paes Mayor of Rio de Janiero

Chen Yuan National Commitee of Chinese People’s Political Consultative Conference

Private Sector/CEO´s

Daniel L. Doctoroff Bloomberg LP

Ingrid Bonde Vattenfall

S Gopalakrishnan Confederation of Indian industry

Michel M. Liés Swiss Re Group

Paul Polman Unilever

Zhu Levin China International Capital Corporation

Chad Holliday Bank of America

Caio Koch-weser Deutsche Bank

Academy

Nicholas Stern (Co-Chair)

London School of Economics and Political Science

New Climate Economy

Jeremy Oppenheim Programme Director

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Maximizing economic growth while tackling climate change: How do we do this?

Investing in “No Regret” Measures

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THE LOW-HAND FRUITS ‘No regret’ green measures with positive financial benefit

(There are transaction costs associated with some of the ‘no regret’ measures) SOURCE: Global GHGAbatement Cost Curve v2.1

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81 81 97

79 63

1974 Energy use** 2010 EnergyServices***

Energy Efficiency Actual 2010 EnergyUse

Energy efficiency has contributed significantly to limiting overall energy use growth so far

IEA 11* total final energy consumption and energy services, 1974 vs 2010

(Hepta Joules)

ENERGY

*Australia, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, the United States ** Energy use includes coal, electricity, gas, oil and other ***Hypothetical 2010 energy supply required absent energy efficiency improvements since 1974 SOURCE: IEA Energy efficiency market report 2013

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….however actual 2010 energy consumption was only 20% higher than in 1974 due efficiency improvements

Energy consumption would have been 100% higher in 2010

(-80%)

(+20%)

(-80%)

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High-tech companies like Nest are contributing to households energy saving

2010 – NEST - Intelligent thermostat start-up founded 2014 - Bought by Google for by $3.2 billion 1.9 billion kWh saved to date $249 - Nest thermostats retail price

$173 – Average annual savings per household

Source: Nest

INNOVATION

Designing Better Cities

11 Source: OECD 2010

1990

1 Billion

2010

2 Billion

2030

5 Billion

Explosion of the Global Middle Class: 60% living in cities Probably 1.5 more billion people will be living in big cities

250 million 1970

1 billion

2010

3 billion?

2050

Vehicle increase

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3.3m deaths per year from air pollution

The climate Change

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Well planned, compact cities are more economically efficient and have lower emissions

SOURCE: (1) LSE Cities; (2) Newman and Kenworthy 1989

CITIES

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Urbanisation could be the answer or part of the problem

SOURCE: UNFCCC; McKinsey analysis

1 The OECD estimates that the global middle class will increase from 1.85 bn in 2009 to 4.88 bn in 2030 2 Assuming the per capita emissions from the 3 billion new middle-class population in 2030 would be same level as Sweden or US in 2010

THE NEW MIDDLE CLASS CITIES

Potential GHG emissions from the 3 billion new middle-class population in different living models in 20302

Billion tons of CO2e

44 bn tons The choice of city

infrastructure will have an enormous impact on emissions

Promoting Structural Changes in Energy

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Non-hydro renewables are growing rapidly, but still account for only ~4% of global electricity generation

Biomass+waste 2% Wind 2% Oil 4%

Nuclear 12%

Hydro

16% Natural gas

23%

Coal

41% Solar

0%

Geothermal

0%

Generation from non-hydro renewables, TWh

SOURCE: IEA Electricity database

40% 3%

27%

9%

Shares of electricity generation in 2011, TWh

CAGR, 2000-11

Note: This only refers to electricity generation and not total primary energy, hence excludes energy consumed in transport, heat, cooking etc.

ENERGY

~250

~990

~290%

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Tesla: > Electric vehicle > 400 kms. range. Reducing emissions and creating huge wealth in the process

"All the geniuses here at General Motors kept saying lithium-ion technology is 10 years away, and Toyota agreed with us – and boom, along comes Tesla. So I said, 'How come some tiny little California startup, run by guys who know nothing about the car business, can do this, and we can't?' That was the crowbar that helped break up the log jam." Robert Lutz – GM Vice Chairman

Tesla market cap: $30bn 25,000 cars sold in 2013

GM market cap: $55.8bn

9.7 million cars sold in 2013

INNOVATION

19 (WRI, 2012)

ENERGY Proposed new coal power capacity

20 (WRI, 2012)

INDIA

Proposed new coal power capacity ENERGY

21 (WRI, 2012)

INDIA

CHINA

Proposed new coal power capacity ENERGY

22 SOURCE: Wang, J., Davidsson, S., Feng, L., & Höök, M. (2013). Chinese coal supply and future production outlooks. Article accepted by

Energy journal.

Peak coal projections

2011

There is significant debate about when China’s use of coal will peak

ENERGY

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There is an opportunity to expand clean energy as its costs fall to be similar to those of conventional energy sources

SOURCE: Citi Research 2012; Bloomberg NEF (Turner 2013); IEA World Energy Outlook 2013, WEO 2012

Wind power costs over time

Note: Assuming coal price of 70 USD/tonne and gas price of 10 USD/Mmbtu. Assuming a 35% capacity factor for wind power i.e. 35% utilisation, and a 15% capacity factor for solar power

USD/MWh

ENERGY

150

100 90

160

140 130 120 110

50

70 60

80

10 0

Coal

Natural gas

Solar (photovoltaic) power costs over time USD/MWh

Coal

Natural gas

Actual Forecast Actual Forecast

2012 2012 Note: Chart represents world average. In some markets, solar is already price-competitive with other energy sources

Smart Policies for Technology

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Porter and van der Linde (1995): The innovation effect

… which can lead to increased competitiveness and profitability. (Strong Porter hypothesis)

Policy promotes innovation that reduces the cost of regulation (Weak Porter hypothesis)

Directed technical change

26 OECD 2010

Index of innovation in climate change mitigation technologies (1990 = 1)

2. Directed technical change

Making Forestry Profitable

28 Image: WRI; Source: Hansen et al.2013, WRI

Forests under Pressure

50 soccer fields lost each minute

FORESTRY

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South Korea: restoration into forest

Source: WRI

FORESTRY

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Costa Rica, 1940-1987: from 75% to 21% forest cover

Source: Ministry of Enviroment and Energy (Costa Rica)

FORESTRY

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Costa Rica 1987-2010: substantially increased its forest cover and generated jobs

2010 52.3% Forest cover

Employment generation more than

25,000 jobs/year

Source: Ministry of Enviroment and Energy (Costa Rica)

FORESTRY

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Costa Rica case: • Tourism generates 25%

of foreign exchange earnings

• Tourism contributes 7%

of GDP • 53% of tourism revenue

comes from ecotourism

The ecoturism, a green gold?

SOURCE: Central Bank of Costa Rica and FAO

FORESTRY

Promoting Double Green Revolution

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Can food security be achieved without further deforestation?

SOURCE: FAO World Food and Agriculture to 2030/2050; FAO Expert Meeting on How to Feed the World in 2050

+55%

2050 2005 2000 1 On a per-day basis, global food consumption is ~17 trillion Kcal in 2000, ~18 trillion Kcal in 2005, and ~28 trillion Kcal in 2050 2 From ~475 to ~892 million tons of dairy, ~1 to ~1.44 billion tons of cereals, ~227 to ~464 million tons of meat, over the period of 2000 to 2050

Global annual food consumption1

Kcal consumption, quadrillions Examples of global growth2

~1.5 X more cereals

~2 X as much meat

~2 X as much dairy

Drivers ▪ Population

growth: 9.6 billion people by 2050

▪ Urbanization: 70% of 2050 population

▪ Higher calorie consumption and diet shifts: more wealth = more protein

World demand for food will grow ~70% between 2000 and 2050

AGRICULTURE AND LAND USE

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Palm Oil a Major Crop

SOURCE: WRI

400% increase in palm oil production in 20 years

FORESTRY

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New approach: Reducing deforestation

SOURCE: WRI

FORESTRY

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The business commitment is essential

SOURCE: WRI

FORESTRY

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Sustainable Palm Oil

RSPO: Roundtable on Sustainable Palm Oil SOURCE: RSPO (www.rspo.org/)

FORESTRY

Removing Distortionary Subsidies

Placing a Price on Environmental Damage.

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Currently, we are subsidizing a high-carbon operating model

Estimated Global Energy consumption subsidies for fossil fuel and renewables, 2012

Nominal. US $ billion

Note: values of subsidies are highly sensitive to energy prices so vary year by year. Most recent estimates suggest fossil fuel subsidies of ~600 million SOURCE: IEA, World Energy Outlook 2012

~520

~90

•Reducing energy subsidies, and shifting taxes from labour and capital to energy will encourage transition into a low-carbon economy •Indonesia and Mexico have successfully managed to reduce fossil fuel subsidies

FISCAL EFFICIENCY

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Worldwide Renewables

~400

Renewables public-funded

RD&D just represented 1%

of worldwide

We need a major programme of publicly-funded research

Worldwide vs renewables public-funded RD&D*, 2010 US Billion

* Research, Development and Demonstration SOURCE: The figures in the graph are for 2010 but the aggregates for 2011 are almost the same IEA 2013b

FISCAL EFFICIENCY

~4

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Why act now?

For every $1.00

$4.30

Investment in cleanertechnology avoided

today

Investment required tocompensate for

increased emissionsafter 2020

The costs of acting on climate change will keep on increasing with time… …the optimal time to act is now

SOURCE: International Energy Agency

▪ Costs of taking action now are arguably small

▪ Economic benefits of taking action are

significant ▪ Key ‘low-carbon’ technologies are at the

cusp of disrupting existing markets ▪ No guarantee that future generations will

be wealthier ▪ Otherwise, a rise in average global

temperature of 3-4 degrees or more

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Handling Climate Risk - General Principles for Decision-makers

Integrate climate into wider economic priorities

Buy options for competitive advantage in low-carbon economy

Avoid high-carbon or climate-exposed lock-ins

Focus on those policy actions which deliver economic benefits AND cut carbon emissions OR enhance climate resilience

Shift from BAU to structural transformation models

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4

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Recognise that climate risk is non-linear and potentially uninsurable 6

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List of contributing papers (1) Workstream List of Contributing Papers Lead Responsible Two sentences summary of paper

AFOLU 1 Supply – triple wins around the 4

packages Chris Delgado document and analyze pathways to “triple wins” from observed cases that simultaneously

boosted agricultural productivity, increased resilience of farmer livelihoods, and contributed meaningfully to abating GHG emissions under developing country conditions.

AFOLU 2 Demand – food waste TBD make the case that reducing the rate of food loss and waste is an important component of the new climate economy.

China 3 Consolidated China Paper Teng Fei

Cities 4 Cities and Low Carbon Growth Graham Floater & Philipp Rode

The paper assesses the relationship between economic development and carbon emissions in cities drawing on new data of 750 cities from Oxford Economics, including new top down

estimates of BAU emissions out to 2030

Cities 5 Urban enablers: Planning, Finance and

Governance Graham Floater &

Philipp Rode The paper assesses the importance of strategic planning, municipal financing models, and

different models of governance for supporting low carbon urban development

Cities 6 Urban Form and Transport Philipp Rode & Graham Floater

The paper assesses the interface between urban form and mass transit for catalysing low carbon urban transitions, including the role of innovation in the transport sector

Cities 7 GHG implications of city growth

strategies Pete Erickson and

Carrie Lee The paper assesses the most important economic development strategies in cities and their

impacts on carbon emissions

Cities 8 City-level assessments of low-carbon

opportunities Andrew Gouldson,

Johan Kuylenstierna

The paper summarises the results of mini-Stern reviews which estimate the economic costs and benefits of low carbon options for a range of UK cities, Lima, Johor Baru, Palembang, and

Kolkata

Cities 9 Other city papers - Third Party

Contributions Nick Godfrey Range of short supporting papers from third party contributions to be provided that are not co-branded but will inform Cities workstream e.g. Allianz, Atkins, AEA, Siemens, NASA/Goddard,

ICLEI, DFID, WBCSD

Country Transitions 10 Historical Patterns of Growth vs

Emissions Milan Brahmbett

Country Transitions 11 Co-Benefits Kirk Hamilton Examine the broader co-benefits associated with actions that reduce GHG emissions and will consider what impact they have on economic growth and welfare.

Country Transitions 12 US Case Study (is this a paper?) Nicholas Bianco Economic Pathways 13 Modelling Limitations Dimitri Zhengelis The paper summarizes shortcomings of modelling efforts

Economic Pathways 14 Structural Change Ben Combes and John Lewellyn

The paper will demonstrate how sustaining economic growth while also reducing climate risk will involve continual structural adjustment.

Economic Pathways 15 Theory Review on Tipping Points Cameron Hepburn and Dimitri Zhengelis

Meta-analysis on path dependencies and multiple pathways theoretical literature

Economic Pathways 16 Literature Review on Path Dependency Philip Aghion and Dimitiri Zhengelis

Paper that will summarize the principles of endogenous growth applied to climate policy, industrial strategy and directed technical innovation.

Economic Pathways 17 IMF Papers Ian Parry The paper will summarize ancillary benefits of carbon pricing

Economic Pathways 18 Infrastructure Investment Ben Combes and John Lewellyn

The paper will analyse the role of infrastructure investment in sustaining economic growth and reducing climate risks

Economic Pathways 19 Global Cooperation Models Ben Combes and John Lewellyn The paper will summarize modes of global cooperation to coordinate climate efforts

Economic Pathways 20 Distributional Impacts Kevin Watkins (ODI)

The working paper will focus on strategies for increasing agricultural productivity by reducing levels of uninsured risk, the potential role of social protection in strengthening growth and productivity will also be considered. Financing options – including transfers from energy

subsidies will be reviewed.

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List of contributing papers (2)

Economic Pathways 21 Short-Run Modelling

IMF modelling team to run our assumptions through their long-term structural change model. OE modelling team to run our assumptions through their econometric model showing the short- to

medium-term impacts of climate action (5-10 years). Economic Pathways 22

Production vs Consumption of Emissions Elena Watkins, SEI Paper on the difference between production and consumption emissions across 126 countries,

including implications of this for climate change analysis/policy and growth/development models. Economic Pathways 23 Competitiveness (Grantham) The paper will discuss the impact of carbon pricing on competitiveness.

Economic Pathways 24 Carbon Pricing Frank Jotzo

The paper summarises what has been learned from carbon pricing models and approaches to date (e.g: Australia, China, EU and California) and how this can inform policy design going

forward.

Economic Pathways 25 Meta-Analysis PIK

The aim of the meta-analysis is to provide a non-technical summary of existing modelling efforts using model inter-comparison exercises, e.g. RoSE, LIMITS,

ADAM, RECIPE, AMPERE, etc..

Energy 26 Coal and lock-in Per Klevnas and Jan Ivar Korsbakken

Ongoing lock-in of future emissions and capital through high-emissions infrastructure, in the power sector and beyond; The scale and growth of coal, the importance of tackling coal in any

meaningful abatement scenario, and the challenges of reducing emissions lock-in from new coal-fired power plants; Important but limited opportunities for lower emissions through increased coal

plant efficiency; Possible roles for CCS and obstacles to overcome; Importance of exploring multiple options to avoid lock-in.

Energy 27 Natural gas as a "climate

bridge" in Asia Michael Lazarus, Per Klevnas

What would it take for natural gas to prevent significant amounts of emissions lock-in from new coal-fired power plants; Geographical focus area for new coal (Asia) and what it would take to

increase gas supply there; Possible sources for new gas and costs of supplying it to Asia; Ultimate net climate benefits and avoided lock-in from a big push for natural gas (possibly small

to none), and how to get off the "climate bridge" in time.

Energy 28 Prospects and actions for

wind and solar in the power sector

Per Klevnas and Jan Ivar Korsbakken

The role and current scale of renewables in the power sector; Recent growth and a revolution in "business as usual" expectations for wind and solar; The economic, strategic, and environmental benefits of wind and solar; What actions, decisions and changes of mindset will it take to sustain and accelerate growth and cost reductions for renewables; Challenges and recommendations for

integrating variable renewables into the electricity grid.

Energy 29 Energy Efficiency and

Productivity Per Klevnas, Claudia Strambo

Role of energy efficiency in expanding energy services, energy efficiency potential, demand and lock-in implications of different efficiency pathways; Challenge of capturing the efficiency

potential, climate implications of rebound effects, risks of policy intervention, and lessons from existing policy experience.

Energy 30 Efficiency performance standards, sustainable

cities, green marshall plan Jiang Lin (EF)

Energy 31 Coal Envelope in China Wang Jianliang (CUP), Karl Hallding (SEI)

Near term energy supply and demand scenarios for China and energy security implications of adverse scenarios; pressures from poor air quality; policy initiatives to reduce or cap coal use;

regional scenario for how a transition away from coal could be implemented.

Energy 32 Outlook for global coal and

nonconventional hydrocarbons

Wang Jianliang (CUP), Karl Hallding (SEI)

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List of contributing papers (3)

Energy 33 Air quality control plans in the

JingJinJi region of China Chen Bin (BNU), Karl Hallding,

Claudia Strambo

Energy 34 Energy Access TBD

Energy 35 Air Quality Johan Kuylenstierna, Mike Holland, others

Magnitude and categories of adverse air pollution impacts; resulting ‘true cost’ of key energy supply options (transport, power); extent of climate co-benefit from efforts to

improve air quality; methodologies for assessing the economic and social impacts of air pollution; decision maker heuristics for incorporating air quality effects in key

infrastructure and energy supply policy decisions.

Ethiopia 36 Ethiopia Green Growth Development

consolidated paper Firew Woldeyes and Russell Bishop analysis of the Ethiopian development experience and provide expert input on the issues faced by a developing country in future low-carbon transitions.

Ethiopia 37 Ethiopia Urbanisation Firew Woldeyes and Russell Bishop

Finance 38 Capital Needs and Gaps with the Policy

Effectiveness – Investment Barbara Buchner Provides an overview and discussion of existing estimates for low-carbon investment needs. Identifies the most effective policy instruments for delivering finance to low-

carbon energy assets by geography, technology, and financing source.

Finance 39 Stranded Assets – Divestment Barbara Buchner and David Nelson Investigate which resources will be stranded under different scenarios, ownership structures, geographical location, ownership, strategic options for asset-holders.

India 40 Consolidated India Paper Rajat Kathuri

Innovation 41 Consolidated Innovation Paper Kim Henderson to coordinate

analysis of technology cost curves for various climate-relevant technologies; generate historical case studies on the impact of government innovation policy in specific

applications in different sectors and different countries/regions. The case studies will shed light on the importance of applying policy tools with the particular market

opportunities, sources of differentiation and strength to build on, and constraints in mind.

Innovation 42 Carbon Capture Usage and Storage Kim Henderson Innovation 43 Circular Economy paper TBD

The New Climate Economy

The Ny-Alesund Symposium 2014 26-28 May, 2014