Green innovations: The challenge of shaping
technological trajectories through policy
University of Sussex, Science and Technology Policy Research
Brighton, 1 November 2013
Tilman Altenburg, DIE
© 2008 Deutsches Institut für Entwicklungspolitik
1. Innovation for a green transformation: Why Sustainabilityoriented Innovation Systems (SOIS) require specific policy
design
2. Shaping technological trajectories through policy: The
challenge of rent management
3. Path divergence in green industries? Preliminary findings
from ongoing research
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1.
Sustainability-oriented Innovation
Systems: Specific policy requirements
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SOIS = Networks of institutions which create, import, modify
and diffuse new technologies that help to reduce
environmental impacts and resource intensity to a level
commensurate with the earth’s carrying capacity
Compared to most other IS, SOIS need to cope with
additional challenges:
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Additional challenges for SOIS :
1. Unprecedented urgency and scale of low carbon
transformation
2. Need to internalise environmental costs
3. Additional market failures related to systems
transformation
4. Balancing old and new objectives
5. Need for a New Social Contract
 Each calls for specific policy responses
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Specific SOIS requirements:
(1) Urgency and scale of reform
 To avoid > 2° C global warming, industrialised countries
need to reduce emissions by 80-95% in 2050 relative to
1990.
 Delays make it more difficult and costly. Tipping points. Cost
of current rate of global warming in 2050: 14% GDP (OECD
2012)
 Rapid replacement of carbon-intensive technologies
 The first major industrial transformation that has a
deadline !!
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Specific SOIS requirements:
(1) Urgency and scale of reform
E.g. Energy system: Ambitious decarbonisation required
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Specific SOIS requirements:
(1) Urgency and scale of reform
E.g. energy system: Radical structural change required
1200
1000
EJ
800
600
Savings
Geothermal
Solar
Wind
Hydro
Nuclear
Gas
Oil
Coal
Biomass
Renewables
Gas
Nuclear
400
Oil
Coal
200
Biomass
0
1850
1900
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1950
2000
2050
Specific SOIS requirements:
(1) Urgency and scale of reform
Markets respond – but not fast enough:
Shifting focus from fossil and nuclear to climate change mitigation technologies: Patent
data
Source: OECD
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Specific SOIS requirements:
(1) Urgency and scale of reform
50%
50%
40%
40%
25.9%
25.9%
20%
20%
0%
0%
43.7%
34.2%
34.2%
30.7%
30.7%
30%
30%
10%
10%
43.7%
Time lags: Rapid expansion of
renewables investments – little
change of global power mix
15.0%
15.0%
13.8%
13.8%
10.3%
10.3%
4.3%
3.6%
4.3%
3.6%
3.5%
3.5%
2004
2004
4.6%
4.6%
4.6%
4.6%
3.5%
3.5%
2005
2005
5.3%
5.0%
5.3%
5.0%
3.6%
3.6%
2006
2006
16.3%
16.3%
7.9%
7.9%
5.4%
5.4%
3.8%
3.8%
2007
2007
17.3%
17.3%
6.1%
6.1%
4.0%
4.0%
2008
2008
26.2%
26.2%
23.9%
23.9%
18.3%
18.3%
6.9%
6.9%
4.5%
4.5%
2009
2009
9.2%
7.9%
7.9%
9.2%
6.0%
5.1%
5.1%
6.0%
2010
2010
2011
2011
Renewable power capacity change as a % of global power capacity change (net)
Renewable power generation change as a % of global power generation change (net)
Renewable power generation change as a % of global power generation change (net)
Renewable power as a % of global power capacity
Renewable power as a % of global power capacity
Renewable power as a % of global power generation
Renewable power capacity change as a % of global power capacity change (net)
Renewable power as a % of global power generation
Note: Renewable power excludes large hydro. Renewable capacity figures based on Bloomberg New Energy Finance global totals.
© 2008 Deutsches Institut für Entwicklungspolitik
Source: Moslener, based on UNEP, BNEF,
FS (2012)
Specific SOIS requirements:
(1) Urgency and scale of reform
 Current decoupling of growth from resource consumption
far too slow, “rebound effects“ !
 „Carbon lock-in“ and time-lag effects.
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Specific SOIS requirements:
(1) Urgency and scale of reform
 Need to accelerate transformation:
– Subsidise deployment of green alternatives
– Adopt measures to phase out less sustainable
incumbent technologies (“destabilise old socio-technical
regime“)
 Deployment an end in itself !!
 Subsidies => economies of scale => earlier parity
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Specific SOIS requirements:
(1) Urgency and scale of reform
Potential of Cost Reductions for Electricity from Renewables
Source: Grubler et al., 2011
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Specific SOIS requirements:
(2) Environmental externalities
In sum: Change must be ambitious, radical, and fast ...
against vested interests and lock-in effects
... but today’s markets do not provide the right
incentives:
2. Need to internalise environmental externalities ...
– New policy instruments, from carbon cap-and-trade systems to green credit lines
and environmental labels, carbon footprinting ... need to be explored
– Markets (ETS, RPO, CDM ...) need to be socially constructed
– best-fitting policy mix for each specific situation needs to be developed.
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Specific SOIS requirements:
(3) Additional market failures
3. Other market failures also much more severe when
systems changes are pusued: Coordination,
information, capital market failure
Low carbon transformation presupposes simultaneous long-term
R&D and large-scale investments in ...

New power plants (wind, solar, ... )

Second-generation biomass (=> land use changes),

Energy storage

Transmission lines

Internationalization of grids (to balance fluctuations)

Smart grid technologies

Carbon sequestration technologies ...
Huge information and coordination failures involved!
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Specific SOIS requirements:
(3) Additional market failures
Information and coordination failure even at lower technology
levels
CO2 reduction
Building sector
Air
Optimization of
combustion
engines
Transport sector
Road
Electrification of
powertrain
Energy sector
Rail
……..
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hybrid engines
NiCd
Batteries
Li-ion
Fuel cells
technologies
Li-S
……..
……..
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Specific SOIS requirements:
(3) Additional market failures
Capital market failure:
 Need to mobilise upfront investments: 200-210 bn US$ til 2030
to reduce global carbon emissions 25% below 2000 level (UNFCCC 2008);
 E.g. energy transition requires 20 years upfront investment,
afterwards huge long-term savings.
 Capital market do not provide right incentives, especially when
future gains depend on long-term policy frameworks
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Specific SOIS requirements:
(3) Additional market failures
Differential cost of electricity from renewable vs. fossil sources
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In: UBA 2012
Specific SOIS requirements:
(4) Balancing old and new objectives
Mitigation
Different policy priorities of countries
Country A
Competitiveness
Poverty / jobs
Country B
Energy security
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Specific SOIS requirements:
(4) Balancing old and new objectives
4. Balancing old and new objectives implies trade-offs
1. Stricter environmental regulations may have different effects
on competitiveness:
–
–
–
undermine due to regulatory costs
Stimulate early movers and strengthen home economy (wind turbines
Denmark)
Stimulate, but benefits captured by outsiders (German and Chinese
solar)
 Invest in ‘early mover advantages’ or wait until others have
absorbed costs of infant development ?
2. Local Content Requirements: May help building local
capabilities … but may slow deployment down
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Specific SOIS requirements:
(5) Need for a new Social Contract
5. Markets provide limited guidance, sustainability-oriented
transformation presupposes socially agreed direction of
structural change.
 Build consensus on national ‘green transformation project’
and respective reallocation of rents; help organize change
coalitions, compensate losers when necessary.
 Explore new sustainable principles of sustainable economic
development; rethink growth paradigm; change unsustainable
consumption patterns.
 explicitly normative role of innovation policy
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2.
Shaping technological trajectories
through policy:
The challenge of rent management
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 Need for policy to create (& reallocate existing) economic
rents to lure capital into socially desired activities
 Rents = “risk-adjusted payments to a resource owner above
the amount his resources would command in their next best
alternative use” (returns > opportunity returns).
.. but risks of rent creation well-known:
 Misallocation due to wrong technology or policy choices
 Many green markets are politically defined (ETS, tradable
REC, CDM, FiT.. )
 Rent-seeking, political capture – especially under enormous
uncertainty and time pressure of green transformation
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Managing ‘green rents’

May increase the transformation cost substantially; several
examples of distorted incentive schemes (European Emissions
Trading, biofuel subsidies …)

Germany loses 7 bn € /a for unnecessary exemptions from ETS
that are not needed to protect industry against international
competition !!!
 But greatest risk is NOT to act !
 Smart policy design matters !
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Example of India’s National Solar Mission:
 ramp up capacity of grid-connected solar power
generation to 20GW , plus 2 GW off-grid, by 2022
 reach retail grid parity by 2022
 Build up domestic solar manufacturing capability
 Main policies:
 Preferential tariffs
 Purchase obligations and tradable certificates
 Local content requirements
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Looking at NSM policies through rent management lens:
1. How to ensure that preferential tariffs are neither too low
(no investment) nor too high (unnecessary rent transfer)?
Finding: Smartly designed reverse bidding triggered
substantial investments while keeping rents low
2. How are purchase obligations allocated across Indian
States? If state governments set low targets, they create
more tradable certificates for “their” local companies.
Finding: Strategic behaviour by States, e.g. setting less
ambitious targets to increase rents
3. How to define local content requirements in a way that
creates the necessary rents for a nascent national industry?
Finding: LCR distorted technology choice, failed o have
infant industry effects
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3.
Path divergence in green industries?
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Path divergence in green industries
 NIS and technological trajectories always diverge !
(evolutionary economics! Path-dependency, co-evolution ...)
 ... but there are also “dominant designs”
 Sustainability-oriented innovations likely to diverge more
because objectives depend on societal consensus – and
national preferences diverge strongly:
 ... whether nuclear, CCS, agro-based fuel are acceptaböle
options or not,
 ... how different objectives are balanced ..
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Path divergence in green industries
Mitigation
Different priorities => different
policies => different pathways
Country A
Competitiveness
Poverty / jobs
Country B
Energy security
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Path divergence in green industries
Regulatory standards (here: admissible fleet emissions) drive technology choice
McKinsey 2011: Boost. Transforming the powertrain. p. 7
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Path divergence in green industries
Stylised differences in market conditions, Germany &China + hypothesis reg. technological trajectories
Specific
elements
of the
policy
environment for
EV
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Hypothesis
about EV
technological
trajectories
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Source: own
Germany
Demand conditions
High average income, demanding customers
Stagnating home market
Mobility culture, high regards for range => improved ICE and
hybrid technology
Innovation system performance
Globally leading carmakers, particularly in up-market segments
Long- established research centres
Strong R&D performance along entire supply chain
Collaborative R&D well established
Political/policy environment
Market-based experimentation
Democratic system less likely to provide regulatory big pushes
Policy priority for climate mitigation => electricity from
renewables
Small 2-wheeler market high-end, leisure & sports
hi-tech / high cost solutions, friction-free
combination of electric +combustion engine, break
energy recuperation, high demands on power
electronics
Geographic conditions favour high-range vehicles
Battery Management Systems a branddifferentiating factor => batteries high cost and
specific => no battery swapping
Smart grid solutions to cope with renewables
Young urban consumers =>new mobility concepts
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China
Demand conditions
Low average income, many first use customers
Huge auto market expansion
Megacity development with urban air pollution and space restrictions
Innovation system performance
Domestic carmakers lagging internationally behind; strong presence of MNC/
JV
Rapid catching up in research centres
Few R&D performing domestic SMEs
Lack of collaborative research tradition
Political/policy environment
Top-down planning, with experimentation feeding back into political-making
Autocratic system more likely to provide regulatory big pushes, e.g. inner-city
restrictions for ICE, purchase subsidies, SOE fleet demand
Policy priority for reducing urban air pollution, not overall emissions
reduction, => electricity from convention power plants acceptable
Huge market for e-two-wheelers
Demand for very simple low-cost cars; "frugal" RREV (small
motorbike motor only charges battery) promising for massive
deployment
Megacity conditions (space, air pollution) => demand for BEV
Battery as commodity, exchangeable => battery swapping viable
Smart grid solutions less important if constant fuel-based power
supply
Individual car ownership highly prestigious
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Thank you for your attention !
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