Download Lecture 8 - Cambridge Centre for Climate Change Mitigation Research

Planetary Economics
Energy, Climate Change and the Three Domains of Sustainable Development
Michael Gurbb
Professor of International Energy and Climate Change Policy, UCL
Editor-in-Chief, Climate Policy journal
Senior Advisor, UK Office of Gas and Electricity Markets (Ofgem)
With
Prof Jean-Charles Hourcade
and Dr Karsten Neuhoff
Cambridge University, Land Economy
Masters course lecture, 6 March 2015
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement
• Pillar II: Markets and Pricing
• Pillar III: Strategic investment
• Policy Integration
• International and conclusions
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.
Can we solve it?
• A mega-problem of risk management under deep uncertainty
– Not the primary science but the consequences
– .. And how to value them, act, and coordinate response
• “The biggest market failure in history” (Stern)
• “The perfect moral storm”
• A “Super-Wicked” problem
And we have not been doing very well globally ...
•
•
•
•
“Current emission trends are at the high end of levels that had been projected … growing
on average at 2.2%/yr since 2000” [IPCC 2014]
Energy remains an important development challenge
Pattern of local to regional to global pollution displacement extending
Negotiations remain mired in ‘blame-and-burdens’ mentality
Laurence Tubiana’s Question
Prelude: three levels of risk conception ..
Risk
Conception
Basic Belief
Typical
Strategy
Societal
process
Time-scale of
climate
change
Indifferent
or disempowered
Not proven, or
“What you don’t
know can’t hurt
you”
“Ignorance is
bliss”
Environmental
group campaigns
vs .resistance
lobbying
First few decades
of climate change
Tangible and
attributed costs
Weigh up costs
and benefits
Act at costs up to
“social cost of
carbon”
Technocratic
valuation and
politics of pricing
As impacts rise
above the noise –
next few decades
Disruption and
securitization
Personal or
collective
security at risk,
climate change as
a “threat
multiplier”
“Containment
and defence”
Mitigate as much
as practical and
adapt to the rest
Ultimately, for all
(systemic and
global risk)
Most
vulnerable,
sooner, with
international
spillover
The energy challenge of decarbonisation
Historic average: 1.3%/yr
3
2010
1980
Global carbon intensity
2.5
1990
2
1.5
Global
emissions
reduction
below 1990
level
1
20% by
Historical Decarbonisation/Energy
Productivity
Combination needed for
percentage emissions reduction
50% by 2050
0.5
Possible future paths
0
0
2.5
5
7.5
10
Global energy efficiency
12.5
15
17.5
Last few decades, largely stable per-capita emissions in
industrialised countries, recent declines with little convergence
CO2 emissions tonnes per capita (tCO2) – World
Bank
25
USA
20
Australia
15
Russian
Federation
Canada
Germany
Korean
10
Japan
UK
Poland
France
5
China
India
0
0
5,000
Brazil
10,000
15,000
20,000
25,000
30,000
35,000
GDP per capita PPP ($bn 2000)
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)
40,000
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement
• Pillar II: Markets and Pricing
• Pillar III: Strategic investment
• Policy Integration
• Strategic implications and conclusions
Resource Use / Energy & Emissions
Three Domains – an Economic Interpretation
1st Domain
2nd Domain
3rd Domain
“Satisficing”
behaviour
“Optimising”
behaviour
“Transforming”
behaviour
1. Real-world individual
and organisational
decision-making
Economic Output / Consumption
PE Fig. 2 -3 b Resource trade-offs with the other two domains
3. Innovation &
evolution of
complex systems
Three Domains of decision-making involve different processes with
different theoretical foundations which operate at different scales
DOMAIN
S
O
C
I
A
L
S
C
A
L
E
Characteristics
Satisficing
Habits, myopia, inattention to
incidental / intangible costs;
endemic ‘contractual failures’,
principal-agent failures, risk
aversion to change or investment
Optimising
Economic optimisation based on
relative prices,
‘representative agents’
with ‘rational expectations’, stable
preferences and tech trends
Transforming
Structural, technological,
institutional and behavioural
change, typically from
strategising, innovation,
infrastructure investment
Theoretical
foundations
Behavioural
and
organisational
economics
Neoclassical
and welfare
economics
Evolutionary
and
institutional
economics
T
I
M
E
H
O
R
I
Z
O
N
Innumerable studies of mitigation options produce ‘cost curves’
pointing to corresponding three realms of abatement opportunities
100
Cost $USD/tonne of CO2e (in Millions)
80
60
40
Estimates of Global Mitigation Costs and Potential by 2030
Advanced Economies
Emerging Asia
Rest of the World
Smarter Choices
(Pillar I)
20
0
5
10
15
20
Annual abatement in 2030 GtCO2e
-20
-40
-60
-80
-100
Choosing cleaner
products and processes
(Pillar II)
Source: Planetary Economics, utilising McKinsey data from Pathways to a
Low Carbon Economy (2009)
Innovation and
Infrastructure
(Pillar III)
25
Solutions need to harness corresponding policy pillars,
based on the Three Domains, to transform energy systems
Policy pillars
1
Domain
Satisfice
H
Highest relevance
M
Medium relevance
L
Lowest relevance
2
3
Standards &
Engagement
Markets &
Prices
Strategic
Investment
H
L/M
L
Smarter
choices
To deliver
Optimise
M
H
M
Cleaner
products &
processes
Transform
L
L/M
H
Innovation &
infrastructure
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement for
Smarter Choices
• Pillar II: Markets and Pricing
• Pillar III: Strategic investment
• Policy Integration
• Strategic implications and conclusions
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.
Evidence confirms potential exists across individuals and organisations and many sectors,
and endless scope to argue about how ‘big and real’ it is …
Annual abatement in 2030 GtCO2e
5
0
10
Iron & Steel - Energy
efficiency and cogeneration
Cost $USD/tonne of CO2e
-10
Chemicals - General
-20
Waste - Other
Cement -Clinker
substitution
-30
-40
Waste - Landfill
Other industry
Domestic buildings thermal
A.
ECONOMIC
SCEPTICISM
Hidden &
Implement
-ation costs
Transport - Cars and
vans (efficiency)
Commercial buildings thermal
-50
Cement - Alternative
fuels
Petroleum & Gas General
-60
Commercial buildings electric
B.
Default
BUILDINGS (inefficient)
EXPERTS
baselines &
holistic solutions
Warmer homes,
D.
more driving
REBOUND
with lower
energy costs
Health,
energy
subsidies,
environmen
tal benefits
C. COBENEFITS
-70
Domestic buildingselectric
-80
Source: Authors, with data from McKinsey Pathways to a Low Carbon Economy (2009)
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)
… valuable progress made but still big potentials
even for corporate energy use…
Only about a quarter of recommended
measures which take longer than a year to
pay back were implemented by the time of
follow-up survey, and the proportion
implemented varies little for longer
payback times.
Figure 4-4 Proportion of Carbon Trust recommendations to UK business implemented: dependence on pay-back period
Note: 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)
First Domain analysis needs to be based on underlying theory
that recognises the complexity of human decision-making, eg.
Intention
Habits
Facilitating Conditions
BUILDINGS
TRANSPORT
INDUSTRY
 Smart metering
 Passive cooling/heating
options
 Sustainable public transport
 More efficient vehicle
 Cyclist/pedestrian –friendly
urban planning
 Accessible finance
 Legal and Contractual
flexibility
 Visibility of Carbon pricing
BEHAVIOUR
Fig. 4.5 Behavioural dependence on intention, habits and facilitating conditions
Source: Author’s adaptation from DECC (2011)
Pillar 1 conclusions
• Huge underlying potential for enhanced energy
& resource efficiency
• Economic, social and health co-benefits are rife
A.
ECONOMIC
SCEPTICISM
Hidden &
Implement
-ation costs
B.
Default
BUILDINGS (inefficient)
EXPERTS
baselines &
holistic solutions
Warmer homes,
D.
more driving
REBOUND
with lower
energy costs
Health,
energy
subsidies,
environmen
tal benefits
C. COBENEFITS
• Tapping this potential is complex, entwined
with issues of institutional capacity
• Standards have been highly effective;
engagement experience is more mixed;
additional approaches complement gaps
• Experimentation, monitoring and learning are
crucial
• Large scope to broaden out from pure energy
stock to wider use/resource efficiency
• Rebound will limit effectiveness unless Pillar
1 set within a wider package
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement for
Smarter Choices
• Pillar II: Markets and Pricing for cleaner
products and processes
• Pillar III: Strategic investment
• Policy Integration
• Strategic implications and conclusions
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.
80
Carbon-related prices matter especially for decarbonising elec & industry
Estimates of Global Mitigation Potential 2030
Advanced Economies
Emerging Asia
Rest of the World
‘Pillar II’ opportunities dominated by substitution in production – mainly
low carbon power generation – ie. investment choices by large
Power – Gas
companies determined by market structure and perceived risks and
relative prices
CCSCCS
Power – biomass
50
40
30
20
10
Chemicals Cement – general
fuels
Power –alternative
shift of coal
new builds
to
increased
Power
- smallgas
Power – small
hydro
5
10
Chemicals - general
Other Industry
Other Industry
Iron & Steel – energy efficiency and co-generation
Other Industry
Chemicals - general
-20
Power - nuclear
hydro
0
-10
Power - nuclear
Power – Coal CCS
Power – Coal
and co-firing
PowerCCS
–
Power – biomass CCS
offshore wind
Power -and
solarco-firing
Iron & Steel –
process changes
Power – biomass CCS
and co-firing
Power Powernuclear
Power – solar
offshore wind
Power – Power - solar
onshore wind
60
Power – onshore wind
Cost $USD/tonne of CO2e (in Millions)
70
15
Industrial CCS
Annual abatement in 2030 GtCO2e
Figure 6.5 Abatement options in the Second Domain
Raw data Source: McKinsey data from Pathways to a Low Carbon Economy (2009)
Carbon pricing and Murphy’s law:
“If anything can go wrong, it will”
EUR/t
(a)
Evolution of the EU CO2 (spot) price
35
30
25
European CO2 price
Phase II
20
European CO2 price
Phase III
15
European CO2 price
Phase I
10
Fig.7.2 Evolution of European carbon and international offset prices
Data Source: European Climate Exchange
Apr/ 13
Dez/ 12
Aug/ 12
Apr/ 12
Dez/ 11
Aug/ 11
Apr/ 11
Dez/ 10
Aug/ 10
Apr/ 10
Dez/ 09
Aug/ 09
Apr/ 09
Dez/ 08
Aug/ 08
Apr/ 08
Dez/ 07
Aug/ 07
Apr/ 07
Dez/ 06
Aug/ 06
Apr/ 06
Dez/ 05
Aug/ 05
Apr/ 05
0
Dez/ 04
5
… and the Clean Development Mechanism (CDM) delivered
pretty much what had been asked, & paid for …!
Figure 7-10 Project volumes – from validation to issuance of Certified Emission Reductions
Source: Based on data from UNEP Risoe CDM/JI Pipeline Analysis and Database, July 1st 2012
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement for
Smarter Choices
• Pillar II: Markets and Pricing for cleaner
products and processes
• Pillar III: Strategic investment for
innovation and infrastructure
• Policy Integration
• Strategic implications and conclusions
http://www.climatestrategies.org/projects/planetary-economics/
for information and register of related events.
Technology-R&D push
– the track record is not encouraging..
• The theoretical basis
– Classic R&D market failures
– The impact of liberalisation
• Some classic energy examples:
– Nuclear fission
– Coal-based synthetic fuels
– Nuclear fusion
• Basic problems of:
– ‘picking winners’
– Cooperation vs competition
– Policy displacement
• Theoretical paradox of the ‘classical’ view
– the giant leap
– the ‘valley of death’
We are seeking radical innovation in some of the
least innovative sectors of our economies
16
14
12
10
8
6
4
2
0
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
Transformation involves not just technologies but sector
infrastructure and institutions – 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
Pillar III Conclusions
Strategic investment can be costly but the returns can be huge …
Eg. North-Sea oil
investments in the 1970s
cost UK c.£10bn/yr; full
direct costs >> $100/bbl
But benefits enormous
Value of low carbon
innovation enhanced by a
rising carbon reduction value
• We have gained extensive experience of policies to span innovation chain
• Need integration between public and private, & strategic investment and markets
• Infrastructure important as the technologies expand – need to overcome lock-in
• Regulatory structures and institutions must evolve along with technologies & systems
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement for
Smarter Choices
• Pillar II: Markets and Pricing for cleaner
products and processes
• Pillar III: Strategic investment for
innovation and infrastructure
• Policy Integration
• Strategic implications and conclusions
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.
Effective mitigation policy needs to understand the
complementary economic roles of the different pillars
Resource Use / Energy & Emissions
Pillar I
Pillar II
Pillar III
Smarter choices Cleaner products Innovation and
infrastructure
and processes
1. Private returns
>> public returns
but not realised
=> Standards and
engagement
Economic Output / Consumption
Fig. 12.3 Public and private returns in the 3 domains
3. Public returns
(including innovation,
security & environment)
>> private returns
=> Strategic investment
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
Changing course requires a sustained package the key is to integrate and synergise across all three pillars
POLICY PILLARS
Standards &
Engagement
Markets &
Prices
Strategic
Investment
Values, pull & preferences
Manage bills,
increase
responsiveness
Attention,
products &
finance
Revenues,
revealed costs,
strategic value
Technology
options &
competitiveness
Education, access & control
.. To steer not marginal+ but structural and systemic change
Global
energy
costs
Clustering of ‘low cost’ energy futures
around higher and lower emissions,
rather than in the middle, reflects
divergent responses to depletion of
‘easy oil’
Time
‘Green’ futures
•Integrated energy system
•Biomass and electricity in transport
•Low-carbon electricity
•High capital costs….
•……but low operating costs
Annual
global
emissions
We are
here
‘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
Figure 10-6: Two kinds of energy future – the carbon divide
Source: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors
Planetary Economics
An integrating approach to climate policy
• Nature of the challenge
• Some key observations
• The Three Domains and Three Pillars of Policy
• Pillar I: Standards and Engagement for
Smarter Choices
• Pillar II: Markets and Pricing for cleaner
products and processes
• Pillar III: Strategic investment for
innovation and infrastructure
• Policy Integration
• International revisited and conclusions
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.
A key to Planetary Economics – and politics – lies in the potential to align
different levels of risk conception with the different pillars of response
Risk
conception
/ Domain
Ignore /
Satisfice
Dominant
scale
Short term /
local
Decision
framework
Indifferent or
disempowered
Field of
theory
Behavioural &
Organisational
Mitigation
economic
process
Move closer
to the ‘best
practice
frontier’’
Realm of
opportunity
‘Smarter
choices’
Pillar of
policy/
response
Standards
and
engageme
nt
(Pillar I)
Compensate/
Optimise
Secure/
Transform
Medium term
/ regional
Long term /
global
Costs / impacts
are tangible
and significant
Transformatio
nal risks and
opportunities
Figure 2-6 Alignments within each domain
Neoclassical &
welfare
economics
Evolutionary &
Institutional
Make best
trade-offs
along the
frontier
Evolve the
frontier
Substitute
cleaner
production &
products
Innovation &
infrastructure
Markets
and pricing
(Pillar II)
Strategic
investment
(Pillar III)
Clear alignment between theoretical structure of ‘Three Domains’
and the empirical basis of New Climate Economy
- And both suggest multiple routes to ‘co-benefits’
Integration
Co-Benefits
Domain & Pillar
Standards &
engagement for
Smarter Choices
Enhance efficiency,
Indoor and local
health,
Increased resilience
to resource volatility
Prices and markets
for Cleaner products
and processes
Stabilise investor
confidence, revenues,
air pollution &
energy security
Strategic investment
for Innovation &
Infrastructure
Accelerate
Innovation in weak
sectors, coordinate
supply chain &
infrastructure
Figure 12-4 Potential joint benefits in energy and climate policy
Resource
Efficiency
Motivate
Stabilise
Coordinate
Finance
Sustainable
economic
progress
Innovation
Infrastructure
Conclusion: on ‘interdisciplinary economics’
• The answer to Laurence’s question is that economics can
help when it respects the boundaries of a given theory, but
hinder when it tramples across them
– Understanding complementary roles and synthesis are key
• Fully understanding the Three Domains inevitably must
draw also on other disciplines
– Social and psychological dimensions of risk perceptions and First
Domain behaviours
– Engineering and physical determinants of Third Domain
innovations and infrastructure
– The regulatory and institutional dimensions of both
• And there is a wider analogy to be drawn ..
Planetary Economics:
Energy, Climate Change and the Three Domains of Sustainable Development
1. Introduction: Trapped?
2. The Three Domains
• Standards and engagement for smarter choice
Pillar 1
Pillar II
Pillar III
• 3: Energy and Emissions – Technologies and Systems
• 4: Why so wasteful?
• 5: Tried and Tested – Four Decades of Energy Efficiency Policy
• 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
• Investment and incentives for innovation and infrastructure
• 9: Pushing further, pulling deeper
• 10: Transforming systems
• 11: The dark matter of economic growth
12. Conclusions: Changing Course
Kindle: http://www.amazon.co.uk/Planetary-Economics-Sustainable-Development-sustainableebook/dp/B00JQFBWDO/ref=tmm_kin_swatch_0?_encoding=UTF8&sr=8-1&qid=1415625933
http://climatestrategies.org/projects/planetary-economics/
for information and register of related events.