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

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



The transition from fossil to renewable energy demands enough capital to develop and release new solutions. This means that investors are needed. The last years, private investors in clean energy have ...

The transition from fossil to renewable energy demands enough capital to develop and release new solutions. This means that investors are needed. The last years, private investors in clean energy have experienced a rising demand in the market. This session will give the participants thoughts on how we can make sustainable investments profitable.



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

    • 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
    • www.eprg.group.cam.ac.uk 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
    • www.eprg.group.cam.ac.uk Three Broad Questions • What have we learned? • What is the role of economics? • What should we do differently?
    • www.eprg.group.cam.ac.uk 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 .. @ $5/bbl?” (2000) • Key energy issues are also about risk, volatility and security
    • www.eprg.group.cam.ac.uk Economic Outputs (production & consumption) Innovation moves the frontier Inertia increases the cost of moving along the frontier, eg. in response to changing resource prices. Current “best practice frontier” of energy & emissions in producing economic output Neoclassical / welfare economics assumes and facilitates behaviour aimed to optimise mix of resources, given technologiesInputs/Resourceuse Eg.Energy&Emissions
    • www.eprg.group.cam.ac.uk In practice there are three domains of economic processes - all are relevant “Business as usual” innovation Accelerated low carbon innovation Purely carbon-price- driven innovation 3rd Domain Sectors/ countries Innovation And System Trajectories “Pareto” improvements 1st Domain Fig. 2 -3 b Resource – output relationships across the three domains Inputs/Resourceuse Eg.Energy&Emissions Economic Outputs (production & consumption)
    • www.eprg.group.cam.ac.uk .. they rest on three fundamentally different fields of theory, relevant to different scales
    • www.eprg.group.cam.ac.uk They appear to offer three roughly equal realms of opportunity (in all regions)Cost$USD/tonneofCO2e(inMillions) -100 -80 -60 -40 -20 0 20 40 60 80 100 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)
    • www.eprg.group.cam.ac.uk 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
    • www.eprg.group.cam.ac.uk 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 & organisation al 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 Transformatio nal risks and opportunities Evolutionary & institutional Evolve the frontier Innovation and infrastructure Public-led investment (Pillar III)
    • www.eprg.group.cam.ac.uk 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
    • www.eprg.group.cam.ac.uk ‘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 0 5 10 15 20 25 30 35 40 Apr05 Jul05 Sep05 Dec05 Feb06 May06 Jul06 Oct06 Dec06 Mar07 May07 Aug07 Oct07 Dec07 Mar08 May08 Aug08 Oct08 Jan09 Mar09 Jun09 Aug09 Nov09 Jan10 Apr10 Jun10 Sep-10 Nov-10 Feb-11 May-11 Jul-11 Oct-11 Dec-11 Mar-12 May-12 Aug-12 € CER (Phase II allowances) ‘Energy forecasting was invented to make economic forecasting look good’ - Anon
    • www.eprg.group.cam.ac.uk Pillar III – Innovation in Energy 0 2 4 6 8 10 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 …
    • www.eprg.group.cam.ac.uk 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
    • www.eprg.group.cam.ac.uk Pillar III is also about infrastructure and transformation
    • www.eprg.group.cam.ac.uk Planetary Economics Some implications
    • www.eprg.group.cam.ac.uk The Future is Open and the default trajectory is neither optimal nor secure 0 5000 10000 15000 20000 25000 30000 35000 0 10000 20000 30000 40000 50000 60000 TotalGlobalCO2Emissions{MtCO2) Global GDP ($bn) Total Global CO2 Emissions 1980 1990 2007 ‘Business as usual Frontier Efficiency and innovation-led frontier Fig. 12 -1
    • www.eprg.group.cam.ac.uk 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
    • www.eprg.group.cam.ac.uk 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