Planetary Economics What role for global climate negotiations? - - PowerPoint PPT Presentation

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Presentation to Climate Strategies – CDKN conference

‘Less talk more agreement

• How research can unblock a global climate deal’

Overseas Development Institute London, 7-8 May 2014 Michael Grubb

[Designate – Professor of International Energy and Climate Policy, University College London] Editor-in-Chief, Climate Policy journal

What role for global climate negotiations?

Planetary Economics

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Michael Grubb

with Jean-Charles Hourcade and Karsten Neuhoff

Routledge/Taylor & Frances, Published March 2014

Energy, climate change and the Three Domains of Sustainable Development

Planetary Economics

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Climate change – context

• A mega-problem of risk management under deep

uncertainty

• “The perfect moral storm”
• A “Super-Wicked” problem
• … “The biggest market failure in history” (Stern)

If climate change is conceived as a problem of burden-sharing costs for the benefit of future global generations it is insoluble. Fortunately, that is not the real structure ..

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

• Some context
• The Three Domains and Three Pillars of Policy
• System key components
• Pillar I: Standards and Engagement
• Pillar II: Markets and Pricing
• Pillar III: Strategic investment
• Policy Integration
• Joint Benefits
• The Economics of Changing course

Three Domains and the Three Pillars of Sustainable Development An integrating approach to climate policy

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

• Fig. 2 -3 b Resource trade-offs with the other two domains

Three Domains – an Economic Interpretation

Resource Use / Energy & Emissions Economic Output / Consumption

3rd Domain

• 1. Real-world individual

and organisational decision-making

“Transforming” behaviour “Optimising” behaviour

1st Domain

“Satisficing” behaviour

2nd Domain

• 3. Innovation &

evolution of complex systems

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

The Three Domains rest on different fields of theory that apply at different scales

Neoclassical and welfare Evolutionary and institutional

T I M E H O R I Z O N S O C I A L S C A L E

Behavioural and

• rganisational

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Cost $USD/tonne of CO2e (in Millions)

• 100
• 80
• 60
• 40
• 20

20 40 60 80 100

Estimates of Global Mitigation Costs and Potential by 2030

Annual abatement in 2030 GtCO2e Source: Planetary Economics, utilising McKinsey data from Pathways to a Low Carbon Economy (2009)

Advanced Economies Emerging Asia Rest of the World

Smarter Choices (Pillar I)

5 10 15 20 25

Choosing cleaner products and processes (Pillar II) Innovation and Infrastructure (Pillar III)

Three realms of abatement opportunities

• Global estimates for 2030 highlight first two ..

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

H M L

H Highest relevance

M Medium relevance

L Lowest relevance

Satisfice Transform Optimise Domain

Standards & Engagement Markets & Prices Strategic Investment Smarter choices Cleaner products & processes Innovation & infrastructure

1 2 3

L/M H L/M L M H

To deliver Policy pillars

Solutions need to harness corresponding policy pillars based on the three domains, to transform energy systems

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

In transforming energy systems globally, all three domains are

• … approximately equally important

– Cost curve data – Difference between in-country and international elasticities – Observed policies of the most successful countries – Suggestive evidence from economic Growth Accounting & individual pillar ‘bottom up’ evidence

• .. and interdependent

– The pillars are complementary, not competing – “Any pillar on its own will fail”

But the relative importance of different measures varies across sectors and countries, and the nature of co- benefits are diverse

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Pillar II Conclusions

• Too much ‘looking under the lamppost’
• The economics of carbon pricing are as much

about design and strategic credibility than level

• The politics of carbon pricing are driven by

distributional impacts and the lack of clearly articulated positive narrative for either industry or consumers

• Links to the other two domains are central to any

‘tangible’ positive narrative, drawing on ‘Bashmakov’s Constant of Energy Expenditure’

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Global energy costs Annual global emissions

Time

‘Green’ futures

• Integrated energy system
• Biomass and electricity in transport
• Low-carbon electricity
• High capital costs….
• ……but low operating costs

‘Brown’ futures

• Extended dependence on fossil fuels
• Unconventional and synthetic oil in transport
• Low capital costs…
• …but high operating costs and a host of

environmental issues beyond carbon

Clustering of ‘low cost’ energy futures around higher and lower emissions, rather than in the middle, reflects divergent responses to depletion of ‘easy oil’

We are here

Figure 10-6: Two kinds of energy future – the carbon divide Source: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors

Cost differences between high and low carbon energy systems are minor compared to the structural differences

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Energy & related sectors are ‘complex sociotechnical systems’, with big evolutionary & lock-in characteristics

• Progress in clean energy industries impressive,

but heavily dependent on public policy

• .. and so far outweighed by ‘carbon entanglement’
• Consider response to oil price rises
• .. and study the policy implications of evolutionary

economics:

– Niche accumulation – Hybridisation strategies

• Industrial strategy is unavoidable
• … with the potential positive side being

macroeconomic version of “Porter’s kick”

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

• Nature of the challenge
• The Three Domains and Three Pillars of Policy
• System key components
• Pillar I: Standards and Engagement
• Pillar II: Markets and Pricing
• Pillar III: Strategic investment
• Macroeconomics & Policy Integration
• Joint Benefits
• The Economics of Changing course

An integrating approach to climate policy Planetary Economics

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Macro modelling : Global GDP in mid Century has little or nothing to do with global mitigation …

Figure 11.4 Gross World Product in 2050 (excluding environmental benefits) from a wide range of models Source: Energy Modelling Forum (2009). MF22 Database: Climate Change Control Scenarios. Available from: http://emf.stanford.edu/events/emf_briefing_on_climate_policy_scenarios_us_domestic_and_international_policy_architectures/

20 GtCO2 = halving of global CO2 emissions by mid Century

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

The Three Domains also link to debates about macroeconomic growth

• Neoclassical economic growth models have consistently found a

‘residual’ accounting for typically half of observed economic growth that cannot be explained by resource and capital accumulation (Ch.11 the “Dark Matter” of growth)

• Economic research points two broad explanatory areas:

– Reducing suboptimal performance of many economic actors and structures

– Education, infrastructure and innovation

• ie. First and Third domain processes are recognised as important for

macroeconomic growth. Yet these remain

– largely absent in global (or national) modelling – poorly charted in policy

• Energy is a particularly strong candidate because

– Pervasive input to numerous production sectors – Fossil fuel markets are intrinsically unstable – Exceptionally low rates of innovation particularly electricity & construction

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Experience and theoretical reasoning on each pillar shows..

• There are multiple lines of evidence that in context of

transforming the global energy system over a few decades, all three domains are of comparable importance

• Only approaches that integrate across all three domains

have potential to generate ‘Green Growth’

• The dominant neoclassical ‘Second Domain’ theories

emphasise instrument (pricing) that maximises political

• pposition unless it is nested in the complementary triad

that also offers hope of containing energy bill impacts

• First and Third pillar policies can (and have) delivered

multiple benefits, but ….

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

But no pillar on its own can credibly solve the problem – nor offers a politically stable basis for policy

• Energy efficiency policy on its own limited by:

– Scale of intervention required – Growing scale satisficing behaviour – …. Leading to large Rebound effects

• Pricing on its own limited by:

– Blunt nature of impacts First and Third Domain impacts – Rising political resistance to rising fuel bills – .. and competiveness concerns

• Innovation on its own limited by:

– Lack of demand pull incentives – Scale & risks of investment costs – Political failures in absence of rising market feedbacks

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Standards & Engagement Markets & Prices Strategic Investment

POLICY PILLARS Technology

• ptions &

competitiveness

Changing course requires a sustained package - the key is to integrate and synergise across all three domains

Manage bills, increase responsiveness Revenues, revealed costs, strategic value

Values, pull & preferences

Attention, products & finance

Education, access & control

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Figure 12-4 Potential joint benefits in energy and climate policy

Pillar

Standards & engagement for Smarter Choices

Enhance efficiency, Indoor and Local health subsidy removal ..

Prices and markets for Cleaner products and processes

Stabilise investor confidence, revenues, air pollution & energy security

Strategic investment for Innovation & Infrastructure

Accelerate Innovation in weak sectors, coordinate supply chain & infrastructure

Co-Benefits Integration

Climate Policy potential to Motivate Stabilise Coordinate Finance for long-run security efficiency growth innovation

Whilst the underpinning evidence and theory of Planetary Economics suggests several routes to ‘co-benefits’

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

What implications for global deal (1)?

• ‘Three pillars’ could provide a useful framework for

designing and implementing NAMAs, and evaluating their potential effectiveness as a transformative package

• [See CS project ‘International Support for Domestic

Action,’ Climate Policy Vol.9 Issue 5]

• Clear relationship between Pillar III and TEC / Network /

Innovation centres

• Attitudinal: move focus from global burden-sharing to

cooperative opportunities under each Pillar

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

What implications for global deal?

• Pillar 1 cooperation: primarily around capacity building and technical

cooperation, intrinsically compatible with national development goals

• Pillar 2 cooperation:

– establishing markets and subsidy removal has much in common with Pillar 1. – Carbon pricing deeply political, generally need to build from ‘bottom up’, as part of integrated package; – international coordination can spread the efficiency, but has to address carbon leakage etc in the ‘dirty dozen’ sectors’ – a sectoral not a macro challenge

• Pillar 3 cooperation:

– Leading innovation cannot be globally agreed but policy coordination between leading actors valuable (cf EU-China dispute on solar subsidies) – Close link between Pillars 1 & 3 to accelerate diffusion of leading edge technologies;

• International finance crucial in particular on the interface of Pillars

1 and 3 – a directional steer to the process of accelerating local absorptive capacity and diffusion of low carbon technologies

• C pricing a growing part of package?

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

• Fig. 12.3 Public and private returns in the 3 domains

Resource Use / Energy & Emissions Economic Output / Consumption

Pillar III

• 1. Substantial

economic benefits impeded by institutional and technical impediments => Capacity building for Standards and engagement

Innovation and infrastructure Cleaner products and processes

Pillar I

Smarter choices

Pillar II

• 3. Public returns

(including innovation, security & environment) >> private returns => Finance for Strategic investment

Different pillars have different structures of returns -

good design of markets & pricing pillar can expand its reach

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Thought for discussion: ‘First among Equals?’

• A rising base carbon price is an instrument that

contributes across all domains:

• I. Attention effect and funding for 1st Domain responses

– rising steadily enables efficiency to keep pace and stop much rise in total bills

• II. Price differential will steadily reduce use of coal in power

generation, and help to move renewables on from transitional subsidies into mainstream market

• III. Facilitates increased investment stability and funding for

innovation, infrastructure and tech transfer programmes

• Embedding in an international agreement would

enhance stability and credibility

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Some research challenges

• Better mapping the boundaries of the relevant Domains
• Fleshing out the synergies between Pillars, and in

particular how different structures and linkages of carbon prices may help to form more stable and politically appealing packages

• Digging deeper into ‘co-benefits’ and how these vary

between regions and economic circumstances, and for different pillar designs

• The role of international cooperation in the Three Domains

and the politics of a ‘base price+’ agreement

• Exploring sensitivities and other representations of ‘the

Economics of Changing Course’

Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge

Planetary Economics:

Energy, Climate Change & the Three Domains of Sustainable Development

Pillar 1

• Standards and engagement for smarter choice
• 3: Energy and Emissions – Technologies and Systems
• 4: Why so wasteful?
• 5: Tried and Tested – Four 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: Pushing further, pulling deeper
• 10: Transforming systems
• 11: The dark matter of economic growth

1. Introduction: Trapped? 2. The Three Domains

• 12. Conclusions: Changing Course

See www.climatestrategies.org/events/2014-events/book.html for information and pdf of principal book presentation materials. ‘Early bird’ discount available till 5 June 2014.