Green Growth and Innovation

Andrea Beltramello Policy Analyst Directorate for Science, Technology and Industry Structural Policy Division

Nordic Innovation Forum Seminar on Green Growth and Welfare Reykjavik, 24 May 2012

The need for green 2050 World GDP (2010, PPP) USD 305 trillion

2030 USD 164 trillion

2010 USD 77 trillion

Population: +2.2 billion

Source: OECD (2012), Environmental Outlook to 2050

2020 USD 115 trillion

Energy: +80%

GHG emissions: +50%

Biodiversity: -10%

Water demand: +55%

Risks in not going green: bottlenecks

0,0

50,0

100,0

150,0

200,0

250,0

1990 1993 1996 1999 2002 2005 2008 2011

Food Price Index

And also: • Pressures on natural capital • Biodiversity loss • Water scarcity • Systemic risks (e.g. climate change) • Pollution and human health

0,00

50,00

100,00

150,00

200,00

250,00

300,00

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Energy commodity price index constant USD 2000

Source: World Bank Source: OECD

OECD’s Green Growth framework

• Balanced tax structures • R&D and innovation policy • Competition • Infrastructure investment • Openness to trade and FDI

Enabling conditions

• Pricing of pollution and resource use • Subsidy reform • Regulatory and policy predictability • Support to basic research and emerging

technologies • Governance of natural assets

Key policies

• Water scarcity • Climate change • Health impacts of pollution • Biodiversity loss

Major environmental challenges

• Skills and labour market adjustment • Distributional and competitiveness concerns • Science and technology cooperation • Development assistance • Management of global public goods

Promoting the transition

• 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

Measurement

Source: OECD (2011), Towards Green Growth

Challenges are so big that we can’t afford expensive solutions – 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

7 Green Business Models in the Nordic region, www.fora.dk

Functional sales - generic model for all green business models

ESCO – Energy Saving Companies

CMS – Chemical Management Systems

DBFO - Design, Build, Finance and Operate

Sharing

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

The 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 .

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Relative impacts of policy on patent activity

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Electric Hybrid

R&D impact normalised to 1 Standard is US Zero Emission Vehicle standards

Standards

Fuel prices

Fuel prices

Standards

Public R&D Public R&D

Clear policy signals help

Source: OECD (2011), The Invention and Transfer of Environmental Technologies

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Getting prices “right” is important …

• Swedish NOx tax Patents increased; emission intensities declined; Marginal Abatement Costs fell

• Swiss VOC tax Firms were quite innovative and found many solutions involving changes in organisational and production practices that did not result in patenting of technologies

• UK Climate Change Levy Firms that agreed to a voluntary emission-reduction agreement received a 80% reduction on carbon tax = > innovated less

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Emission intensity in kg NOx per GWh1991 1992 1994 1996

Marginal Abatement Cost Curves of Taxed Emitters

NOx Tax in Sweden

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

0 50 100 150 200 250 300

Pattern of transport links and urban developments

Building stock (residential and commercial)

Power stations

Electric transmissions and distributions, telecom, …

Manufacturing equipement

Commercial heating and cooling equipement

Trucks, buses, trucks trailers, tractors

Cars

Residential space heating and cooling equipement

Residential water heating equipment

Rents embodied

in fossil fuel

reserves

Sunk capital

USD 16 trillion

USD 6.7 trillion

World GDP

Source: OECD (2012), Green Growth Studies: Energy; World Bank.

Public spending on energy and environmental R&D has not kept pace with the challenge…

Source: OECD, R&D statistics and IEA database.

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Environment R&D (Left scale)

Energy R&D (Left scale)

Renewables (1) (Right scale)

… 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

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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

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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

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Pricing: the French bonus-malus scheme

• “Carrot and stick” approach applied for personal vehicles according to CO2 emissions

• Possibility to make fiscally neutral

• Clear shifts in purchasing behaviour

31 30,4 44,7 55,5

43,4 45,3 41,3

35,6 25,6 24,2 14 8,9

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 %

100 %

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

~555M€

-95M€ -100M€

-300M€

Car value Fuel savings

CO2

avoided Accidents Net

societal cost

NOx

avoided

-50M€ -10M€

~3000M€

-305M€ -410M€

-2235M€

France “Prime à la Casse”

Germany “Umweltprämie”

-40M€ -10M€

Source: OECD/ITF (2011)

Managing distributional impacts Job reallocation will increase ~ 1pc point more inter-sectoral job

reallocation by 2030 (10pc points 1995-2005)

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01020304050

% deviation from BAU in 2030 Employment Value added

Source: OECD (2012), The job potential of a shift towards a low-carbon economy

Adjustment may not be as widespread as you’d think

“Brown jobs” are easier to identify, but also account for only a small share of total employment in OECD countries

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Cumulative share of total employment share (% of total employment)

Cumulative share of CO2 emissions from fossil fuel combustion (% of total CO2 emissions from fossil fuel combustion)

Source: EU-LFS, GTAP database, EU-KLEMS database

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 work

• Driving eco-innovation: the role of demand-side policies

• Business models for systemic eco-innovations

• Market development for green cars

From the OECD Committee on Industry, Innovation and Entrepreneurship:

Thank you!

For further information:

www.oecd.org/greengrowth

www.oecd.org/sti/innovation/green

andrea.beltramello@oecd.org