Andrea Beltramello at Innovation Forum in Reykjavik, May 2012
Green Growth andInnovationNordic Innovation Forum Seminar onGreen Growth and WelfareReykjavik, 24 May 2012Andrea BeltramelloPolicy AnalystDirectorate for Science, Technology and IndustryStructural Policy Division
The need for green 2050 World GDP (2010, PPP) USD 305 trillion Population: +2.2 billion Energy: +80% 2030 USD 164 trillion GHG emissions: +50% Biodiversity: -10% 2020 USD 115 trillion Water demand: +55%2010USD 77trillion Source: OECD (2012), Environmental Outlook to 2050
Risks in not going green: bottlenecks Energy commodity price index Food Price Index300,00 constant USD 2000 250,0250,00 200,0200,00 150,0150,00 100,0100,00 50,0 50,00 0,00 0,0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1990 1993 1996 1999 2002 2005 2008 2011 Source: World Bank Source: OECD And also: • Pressures on natural capital • Biodiversity loss • Water scarcity • Systemic risks (e.g. climate change) • Pollution and human health
OECD’s Green Growth frameworkEnabling conditions Major environmental challenges• Balanced tax structures • Water scarcity• R&D and innovation policy• Competition • Climate change• Infrastructure investment • Health impacts of pollution• Openness to trade and FDI • Biodiversity lossKey policies Promoting the transition• Pricing of pollution and resource use• Subsidy reform • Skills and labour market adjustment• Regulatory and policy predictability • Distributional and competitiveness concerns• Support to basic research and emerging • Science and technology cooperation technologies • Development assistance• Governance of natural assets • Management of global public goods Measurement • Productivity of resource use • Physical evolution of the natural asset base • Environmental quality of life • Opportunities arising from environmental considerations • Evolution of policy and social responses • Promoting efforts consistent with international standards Source: OECD (2011), Towards Green Growth
Challenges are so big that we can’t afford expensivesolutions – we are up against time and inertia so need (lots of) innovation
Green innovation is much more than technological change…
… and involves also new business models ESCO – Energy Saving CMS – Chemical Companies Management Systems Functional sales - generic model for all green business models DBFO - Design, Build, Sharing Finance and Operate7 Green Business Models in the Nordic region, www.fora.dk
What is Driving Green Innovation?• Detailed analysis at the OECD on: renewable energy, electric/hybrid vehicles, ‘clean’ coal, air and water pollution abatement• Relative prices, policy measures (e.g. standards) and public R&D drive green innovation – but differs depending upon a number of factors (i.e. maturity of technology)• General innovative capacity and market conditions are often the most important determinants – “a rising tide lifts all boats”• While environmental policy stringency matters, policy stability and flexibility are also key – give investors incentives for ‘search’ over planning horizon Source: www.oecd.org/environment/innovation
Responses to different policy instruments Relative impacts of policy on patent activity 12 R&D impact normalised to 1 Standard is US Zero Emission Vehicle standards 10 Standards 8 Fuel prices 6 Fuel prices 4 Standards 2 Public R&D Public R&D 0 Electric HybridThe histogram shows empirical estimates of elasticities, evaluated at sample means, and normalized in terms of the effect of“public R&D spending” (R&D=1.0). Bars shown without fill represent estimates that are not statistically significant at the 5%level. Source: OECD (2011), Invention and Transfer of Environmental Technologies . 9
Clear policy signals help 12Patenting activity in Annex 1 ratification countries 11 (3-year moving average, indexed on 1990=1.0) 10 Wind power 9 8 Fuel cells 7 Lighting 6 5 Solar PV 4 3 Electric cars 2 1 All tech. sectors 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1997- Kyoto Protocol Source: OECD (2011), The Invention and Transfer of Environmental Technologies
Getting prices “right” is important … NOx Tax in Sweden• Swedish NOx tax 180 Patents increased; emission intensities 160 Marginal Abatement Cost declined; Marginal Abatement Costs fell 140 Curvesof Taxed Emitters• Swiss VOC tax SEK per kg NOx 120 Firms were quite innovative and found 100 many solutions involving changes in 80 organisational and production practices 60 that did not result in patenting of technologies 40• UK Climate Change Levy 20 Firms that agreed to a voluntary 0 emission-reduction agreement received 0 100 200 300 400 500 600 700 800 900 -20 a 80% reduction on carbon tax = > innovated Emission intensity in kg NOx per GWh less 1991 1992 1994 1996 Graph based on: Hoglund-Isaksson (2005) cited in OECD (2011), Taxation, Innovation and the Environment; based on observations from 55 plants in the energy sectors over the period 1992-1996
… but is not sufficient…• Sometimes difficult to target environmental ‘bad’ directly and excessive administrative costs• Range of other market failures – e.g. knowledge externalities that limit private investment in innovation, but also information failures, split incentives, network externalities• ‘Credibility’ of policy-induced price signals over the longer term may not be sufficient for risky investments: scaling up can be highly capital intensive and risky• Inertia in the market can favour incumbent firms, technologies and systems• Evidence thus far suggests that better pricing mainly induces incremental innovation.
... in particular in overcoming inertia Lifespan of capital investments Residential water heating equipmentResidential space heating and cooling equipement USD 16 trillion Cars Rents Trucks, buses, trucks trailers, tractors World GDP embodied in fossil Commercial heating and cooling equipement fuel reserves Manufacturing equipement Electric transmissions and distributions, telecom,… USD 6.7 trillion Power stations Sunk Building stock (residential and commercial) capitalPattern of transport links and urban developments 0 50 100 150 200 250 300 Source: OECD (2012), Green Growth Studies: Energy; World Bank.
Public spending on energy and environmental R&D has not kept pace with the challenge… 0.050 30.0 % of total Energy Technology R&D% of GDP 0.045 25.0 0.040 20.0 0.035 0.030 15.0 0.025 10.0 Environment R&D (Left scale) 0.020 Energy R&D (Left scale) Renewables (1) (Right scale) 5.0 0.015 0.010 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: OECD, R&D statistics and IEA database.
… but green innovation draws on a broad range of research
Implications for research policy• Need greater investment in relevant research, which can involve reorienting R&D spending• Mission-oriented research (e.g. Apollo project) probably less important – commercial application is key.• Research should increasingly be multi- and interdisciplinary – breakthroughs emerge from competition & cooperation.• The effectiveness of funding depends on strong and effective interactions between science and industry
Tailoring policy to technology maturity Source: IEA (2010)
Implications for support policies• Since technology-neutral pricing of externality is not ‘sufficient’ = > necessity to be ‘prescriptive’ (at least to some extent) => main challenge for policy makers• Some general principles: – Support a ‘portfolio’ of technologies to diversify risk of getting it “wrong” – Benefits of chosen portfolio should be robust with respect to information uncertainty (i.e. consider ancillary benefits) – Identify “local general purpose technologies’ which complement a variety of emission-reducing strategies, e.g. battery technologies, instead of very specific applications
Demand-side policies play a role• In fostering markets, in particular in areas where price measures (e.g. carbon taxes) are ineffective or insufficient.• Involves: – Public procurement – “Smart” regulation and performance standards – Technology standards – Specific pricing measures, e.g. French bonus-malus scheme• These policies should also emphasize performance and competition, rather than supporting specific technologies.
Public procurement• Significant potential for fostering eco-innovations• Design is crucial, e.g.UK Forward Commitment Process: advanced information to market on future needs; early engagement with potential suppliers; incentives of a forward commitment 20
Performance-based regulations and standards• Provide flexibility and stimulate firms to try out new ideas, technologies, business practices• E.g. design of Top Runner Programme: target setting for average-fleet performance; continuous review of targets and performance testing methods; wide consultations with industry and other stakeholders 21
Technology-based standards• Deployment of eco-innovations in the presence of information asymmetries and uncertainty• Government as facilitator and co-ordinator of industry efforts• Examples of governments acting as facilitators: standardisation of the smart grid in the United States; standardisation of fuel-efficient tyres in Japan 22
Pricing: the French bonus-malus scheme• “Carrot and stick” 100 % 14 8,9 approach applied for 90 % 25,6 24,2 personal vehicles 80 % according to CO2 70 % 35,6 41,3 emissions 60 % 50 % 43,4 45,3• Possibility to make 40 % fiscally neutral 30 % 55,5• Clear shifts in 20 % 44,7 purchasing behaviour 31 30,4 10 % 0% 2006 2007 2008 2009 <60-130 131-160 161-250< Source: FCA-Calculs CGDD.
Policy is not always cost-effective: the case of car scrapping -50M€ -95M€ -10M€France -100M€“Prime à la Casse” ~555M€ -300M€ Car value Fuel CO2 NOx Accidents Net savings avoided avoided societal cost -40M€ -305M€ -10M€ -410M€Germany ~3000M“Umweltprämie” € -2235M€ Source: OECD/ITF (2011)
Managing distributional impacts Job reallocation will increase ~ 1pc point more inter-sectoral job reallocation by 2030 (10pc points 1995-2005)% deviation from BAU in 2030 Employment Value added 50 40 30 20 10 0 -10 -20 -30 -40 -50 Source: OECD (2012), The job potential of a shift towards a low-carbon economy
80 40 60 90 100 20 0 30 10 50 70 Air transport Water transport Electricity, gas and water supply Coke, petroleum and nuclear fuel Land transport Basic metals Other non-metallic mineral products Chemicals rubber and plastic products Mining and quarrying Food products and tobacco Printing and publishing Textiles Leather products and footwear Wearing apparel and dressing Other transport equipment Social, private and sportal activities Wood and products of wood and cork Fabricated metal products Motor vehicles, trailers and semi-… Real estate, renting and business…Source: EU-LFS, GTAP database, EU-KLEMS database Construction Machinery and equipment, n.e.c. Public admin., health and education Wholesale and reatil trade Manufacturing n.e.c. and recycling Office, accounting and computing… total employment in OECD countries Financial intermediation Post and telecommunications industries (% of total CO2 Most polluating fuel combustion) Adjustment may not be as widespread as you’d think Cumulative share of Cumulative share of CO2 emissions from “Brown jobs” are easier to identify, but also account for only a small share of emissions from fossil fossil fuel combustion total employment share (% of total employment)
The welfare implications of CCM policies Cost of GHG mitigation: GDP and GDP+ (Impact in 2050 of a 50% cut compared to 2005)Source: de Serrres and Murtin (2011), A Welfare Analysis of Climate Change Mitigation Policies.
The policy mix for green innovation• No silver bullet, range of policies needed• Stable long-term policy signals, better pricing.• Supply and demand: Strengthening incentives and markets, and development of new alternatives• Competition between technologies is key; and,• Guard against lock-in – support broad range of options, including general-purpose technologies such as ICT. Source: OECD (2011), OECD Green Growth Studies: Fostering Innovation for Green Growth.
Policy Challenges• Providing policy predictability in conditions of imperfect and changing information• Providing a mix of incentives that induce solutions from ‘close-to-market’ up to ‘breakthrough’• Directing technological change onto a green trajectory without being “unduly” prescriptive• Building international cooperative solutions for environmental problems which stretch widely across space and time
Forthcoming green innovation workFrom the OECD Committee on Industry, Innovation andEntrepreneurship:• Driving eco-innovation: the role of demand-side policies• Business models for systemic eco-innovations• Market development for green cars
Thank you! For further information: www.oecd.org/greengrowthwww.oecd.org/sti/innovation/green firstname.lastname@example.org