© 2008 Deutsches Institut für Entwicklungspolitik

Industrial policy for low carbon development

LAC-EU Economic Forum 2013

Santiago de Chile, 21 January 2013

Tilman Altenburg, DIE

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Industrial policy debate converging towards “pragmatic heterodox strategies”

Focus no longer whether IP is needed, but how it should be implemented

Growing consensus on:

developing “latent” comparative advantages (Lin);

subsidising search costs (Rodrik);

Remaining dissent on

big push policies to overcome major coordination failures.

Industrial policy debate in a nutshell

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Why low carbon industrial policy is systematically different and particularly challenging

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LCIP require stronger government intervention than “BAU industrial policy” => larger risks => additional demands on governance ... due to:

a. Mixed objectives: economic and environmental

b. Unprecedented scale and urgency of low carbon transformation

c. Additional and more severe market failure

Extra challenges of Low Carbon Industrial Policy

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LCIP pursues growth /employment AND environmental objectives

… may involve difficult trade-offs as well as win-win opportunities:

(a) Mixed objectives

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Policy trade-offs:

1. Stricter environmental regulations may reduce competitiveness … but they may also induce innovations that more than compensate for compliance costs (Porter);Mixed evidence: ++ wind turbines/Denmark, ++ flexfuel motors/Brazil: -- solar photovoltaics/Germany

Tough decisions whether to opt for early mover advantages or let others bear the costs of early experimentation

2. Local Content Requirements: useful to build local capabilities, but increase costs and reduce investment incentives

(a) Mixed objectives

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.. and win-wins, even in emerging economies:

1. Growing markets: e.g. renewable energy/storage/energy efficiency market 2010: 313 bn €, 2025: 1060 bn.

2. Huge renewable energy potentials in the “South”

3. Successful catching up in the South, e.g. Chinese solar and wind, Indian wind industry, Brazilian biofuels

(a) Mixed objectives

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Urgency to act !!! To avoid > 2° C global warming, industrialised countries need to reduce emissions by 80-95% in 2050 relative to 1990. Cost of current rate of global warming in 2050: 14% GDP (OECD 2012)

=> The first major industrial transformation that has a deadline !!

Current decoupling of growth from resource consumption far too slow, “rebound effects“ !

(b) Unprecedented scale and urgency

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10.3%

15.0%13.8%

16.3%

25.9% 26.2%

34.2%

43.7%

3.6%4.6% 5.3%

7.9%

17.3%18.3%

23.9%

30.7%

4.3%4.6%

5.0%5.4% 6.1% 6.9%

7.9%9.2%

3.5% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1%6.0%

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 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 as a % of global power capacity

Renewable power as a % of global power generation

10.3%

15.0%13.8%

16.3%

25.9% 26.2%

34.2%

43.7%

3.6%4.6% 5.3%

7.9%

17.3%18.3%

23.9%

30.7%

4.3%4.6%

5.0%5.4% 6.1% 6.9%

7.9%9.2%

3.5% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0%0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 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 as a % of global power capacityRenewable power as a % of global power generation

Note: Renewable power excludes large hydro. Renewable capacity figures based on Bloomberg New Energy Finance global totals.

Source: Moslener, based on UNEP, BNEF, FS (2012)

Time lags: Rapid expansion of renewables investments – little change of global power mix

(b) Unprecedented scale and urgency

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LCIP needs to change entire economic subsystems (energy, transport, land use …)

…. and to accelerate transformation:

– Adopt measures to phase out less sustainable incumbent technologies

– Subsidize deployment of green alternatives:

Deployment an end in itself !!

(b) Unprecedented scale and urgency

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Actual electricity costs in Germany, renewables vs. fossil electricity

Photovoltaics small 1100*Photovoltaics free 1300*Wind onshore 2000**Wind offshore 3200**Power mix (fossil, nuclear) (BMU, 2012)

**kwh / m2 / per module

* full load hours / a

Source: FH ISE (2012) p. 18

Actu

alel

ectr

icity

cost

s(€

/ kw

h)

(b) Unprecedented scale and urgency

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Differential costs of renewable energy development for electric energy

Diff

ere

nti

al co

sts

(bn €

(2

009)

/ a)

Scenario A: substantial in-crease of fossil energy costs

Scenario B: moderate

Scenario C: very low

External costs internalized

As-is state

Source: DLR/IWES/IFNE (2011). The differential costs are based upon Scenario A

(b) Unprecedented scale and urgency

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Need to mobilise upfront investments: 200-210 bn US$ until 2030 to reduce global carbon emissions 25% below 2000 level (UNFCCC 2008);

Political capture may increase the cost substantially; several examples of distorted incentive schemes (European Emissions Trading, biofuel subsidies …) (Helm 2011)

Germany loses 7 bn € /a for unnecessary exemptions from ETS that are not needed to protect industry against international competition;

Importance of smart policy designs, periodic policy revisions, political checks and balances

(b) Unprecedented scale and urgency

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Change must be radical, systemic and fast ... Against vested interests and lock-in effects:

... But today’s markets do not provide the right incentives:

– Environmental externalities

– Coordination failure

– Information failure

– Capital market failure

(c) Additional market failures

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What can be done to accelerate low carbon technological change?

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LCIP is essential. Postponing action boost costs for future generations

Internalize environmental costs: carbon price, water prices

Reduce number of exemptions

Phase out harmful subsidies (2010: 409 bn $ fossil energy subsidies. (IEA 2011)

Technology push policies (R&D, deployment subsidies, standards)

Ensure policy coherence (e.g. preferential FIT may reduce prices of emissions certificate = disincentive)

Low carbon industrial policy implications

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Mobilise finance: creation of policy rents and predictable long-term policy frameworks (guaranteed tariffs, soft loans, investment guarantees ...).

=> High demands on governments. Need to improve policy learning, minimize political capture

Low carbon industrial policy implications

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Good examples exist, including developing countries. E.g. India’s solar mission:

1. Mobilised investments: installed cap from 18 MW (2010) to 1000 MW (2012).

2. reverse bidding brought prices down from 24 to 11 cents/kWh within one year,

3. Target for retail grid parity revised down from 2022 to 2017

LCIP is necessary – and possible !

Low carbon industrial policy implications

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Thank you for your attention !