The international economics of resources and ...

Int Econ Econ Policy (2010) 7:147–151 DOI 10.1007/s10368-010-0172-x INTRODUCTION

The international economics of resources and resource policy Raimund Bleischwitz & Paul J. J. Welfens & ZhongXiang Zhang

Published online: 25 July 2010 # Springer-Verlag 2010

Resource Economics is a neglected field of International Economics despite the fact that there has been a long debate about the role of energy and economic growth as well as about the pricing of non-renewables. Both exploration of (non-renewable) natural resources and their use can generate negative national and international external effects and at the same time, the positive external effects of innovation projects may also be considered in the field of resource-saving technological progress; while process innovations, product innovations and setting ambitious standards could be major elements of green innovativeness and sustainability provided that governments and international organizations set the incentives right. However, this broader sustainability perspective has not been taken. As indicated by the current prevailing approach to controlling CO2 emissions in the international political system, little attention is paid to global green innovation dynamics despite the fact that international positive external effects are crucial here. In the Copenhagen Climate Change Conference, it has turned out that the OECD countries and China and other leading newly industrialized countries could not agree on joint strategies for fighting global warming; the US and China were unable to bridge the already existing analytical and political gap between western European countries and the The papers for this special issue were originally contributed to the 2nd International Wuppertal Colloquium on “Sustainable Growth, Resource Productivity and Sustainable Industrial Policy - Recent Findings, new Approaches for Strategies and Policies” that was held from 10 to 12 September 2009 in Wuppertal, Germany. The intensive discussion during the Colloqium and the subsequent rigorous review process have helped to facilitate this process - we wish to thank all participants and contributers, as well as Sevan Hambarsoomian and Deniz Erdem for administrative support. R. Bleischwitz (*) Wuppertal Institute, P.O. Box 100480, D-42004 Wuppertal, Germany e-mail: [email protected] P. J. J. Welfens European Institute for International Economic Relations, University of Wuppertal, Wuppertal, Germany Z. Zhang Research Program, East-West Center, 1601 East-West Road, Honolulu, HI 96848-1601, USA

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US. The Conference had called for deep emission cuts with a view to reducing global emissions and for mitigation goals from all major countries/country groups, as well as China, whose rapidly growing economy has made it a world economy leader while its partly inward-looking political elite has hardly developed broader concepts of joint international responsibility and joint international leadership. Climate change in a conventional sense has topped the international policy agenda since the Kyoto Protocol was signed by most OECD countries; the USA did not come on board, fearing, among other reasons, that its economic growth could be impaired. There is a broad sustainability debate in the world economy in which actors from both OECD countries and newly industrialized countries actively participate (Bleischwitz et al. 2009). While economic growth remains an important policy goal in all countries, the Transatlantic Financial Market Crisis has undermined the stability of the Western market economies and the shortsightedness observed in financial markets raises new issues for the broader sustainability debate. Can we achieve environmental sustainability under conditions in which financial market participants have few incentives to think long term and in which new uncertainties undermine the stability of OECD countries (Welfens 2010)? Climate change has turned out to become such an important issue that negotiating a new agreement to succeed the Kyoto Protocol is being faced with many—probably too many—expectations. As has been witnessed at the recent Copenhagen Climate Change Conference, which aimed to hammer out a post-2012 global agreement on climate change, the Europeans had hoped for a legally binding agreement with targets and timetables for the reduction of greenhouse gases, whereas other countries, notably the USA and China, have stressed the importance of international trade, growth and recovery after the turmoil of the financial crisis, and development rights. The Asia-Pacific Economic Conference Summit in Singapore in November 2009 had, to a large extent, paved the way for what is now called the “Copenhagen Accord” on climate change—a relatively toothless document without any new binding emission targets as seen by many Europeans, and a very small step forward towards solving important issues such as financing, deforestation and adaptation as seen from another angle, perhaps in an entirely new international architecture as proposed by Olmstead and Stavins (2009). As argued in Zhang (2009), international climate negotiations for an immediate post2012 global climate regime should not attempt unrealistic goals. Without all of the factors, discussed in Zhang (2009), being met for a legally binding global agreement, the Copenhagen Accord is probably the best that could be achieved. The situation could be worse because the negotiations could have completely collapsed. Looking back, it seems justified to characterize these international negotiations as “systems overload”— an attempt to address too many issues within a system that is constrained by diplomacy, passions and interests (this is the view of Thomas Kleine-Brockhoff in his “Copenhagen lessons” in the FT of December 2009). This special issue of International Economics and Economic Policy seeks to analyze the underlying issue of green growth from a slightly different angle, called “resource policy”. Our understanding of the latter is a policy that seeks to enhance the sustainability of using resources along their full life cycle from extraction to transformation into materials and production, transportation, consumption onto recycling and disposal. There are some obvious advantages in doing so, and a few other aspects that may deserve an explanation. Starting with the synergies between climate change and the use of

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natural resources, it is clear that a key abatement strategy, such as energy efficiency, is not just mirrored by attempts to use materials more efficiently. Using materials more efficiently also potentially allows for grasping more opportunities to save energy along the whole value chain, to save material purchasing costs and to enhance competitiveness (Aldersgate Group 2010; Bringezu and Bleischwitz 2009). In a broader context, fossil fuels are but one natural resource that is used in societies worldwide. All potential substitutes such as biofuels and renewable energies depend upon natural resources such as land, steel and platinum. Providing these natural resources in a most sustainable manner will thus become a key strategy for climate change mitigation as well as for green growth. How industry and economies take up these challenges will become a major issue for economic research. International commodity markets provide important signals on using natural resources to economic actors. After a relatively long period of surging commodity prices, the financial crisis marked a break in 2008. However, after a sharp decline in early 2009 the commodity prices have again started to rise and are now back at a level that is higher than in the nineties of the last century. Analyzing the dynamics of these markets, be it for oil, raw materials or for secondary materials, as well as potential leakage effects that result from low regulatory environmental standards, will deserve more attention from international economics in the coming years. Moreover, given the weak state of forecasting in that area—yet, there is no international agency with a mandate to develop a comprehensive set of scenarios on future materials markets—and acknowledging a lack of awareness for material efficiency as pointed out by Rennings and Rammer (2009), a well-spring of new research can be expected on current drivers for resource use and how actors and economies will use natural resources, energy and materials in the future. Material Flow Analysis (MFA) was created a few years ago as an attempt to analyze the use of natural resources in societies. It is associated with concepts such as ‘industrial ecology’ and ‘socio-industrial metabolisms’1—and may not yet have fully explored the economic dimension of material flows. Integrating the stages of production, consumption and recycling, it goes beyond traditional resource economics and offers a comprehensive perspective for resource policy. Since Eurostat and OECD have provided handbooks on the measurement of material flows, and do in fact promote the collection of data and applying concepts, there are many opportunities for international economics and economic policy to integrate MFA in their models and empirical analysis. Recalling the issue of green growth and innovation, this special issue seeks to explore a new category of innovation that can be characterized as “material flow innovation” (see the paper written by Bleischwitz in this issue). While the established categories of process, product and system innovation (as well as organizational and advertising innovation, see e.g. the OECD Oslo Manual on Innovation) have their merits, the claim can be made that given the pervasive use of resources across all stages of production and consumption, a new category will have to be established to capture the various new innovation activities ahead.

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See e.g. the web pages of the International Society for Industrial Ecology: www.is4ie.org and www. materialflows.net on data.

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Such a perspective for innovation and green growth is also combined with that on lead markets for material efficiency, bio-based products and resource productivity worldwide. In distinction to climate change diplomacy, where it is difficult to engage the emerging economies, our perspective sheds light on attractive lead markets in emerging economies because they can build upon advantages in natural endowments and allow for the establishment of new development pathways. The scope of this special issue follows the debate as outlined above. The international sustainability discussion has focused greatly on CO2 emission reductions but this focus is rather narrow and not really adequate when the long-run sustainability dynamics are to be assessed. The broader role of green innovativeness has to be considered as well. Aimed for a broader innovation-oriented sustainability, Welfens, Perret and Erdem have developed the Global Sustainability Indicator. The new indicator set is in line with OECD recommendations for composite indicators and uses weights from factor analysis. Reflecting environmental pressures, economic performance and capabilities for eco-technologies, the Global Sustainability Indicator shows a compact way of assessing global sustainability. Illustrating the outcomes on a global scale, their paper also addresses the relevance of the policy. Lucas Bretschger gives an overview on sustainability economics and sheds light on the nexus between using resources and economic performance from both a theoretical and an empirical perspective. Furthermore, the paper addresses a possible “Green New Deal” that would help boost investments into eco-innovation. ZhongXiang Zhang analyzes trade policy implications of the proposed carbon tariffs in the U.S., as well as China’s responses to it. Scrutinizing the emissions allowance requirements proposed in the U.S. congressional climate bills against WTO provisions and case laws, his paper recommends what is to be done on the side of the U.S. to minimize the potential conflicts with WTO provisions in designing its border carbon adjustment measures, and provides suggestions for China on how to deal with its advantage effectively while being targeted by such proposed measures. Raimund Bleischwitz analyzes why a concern about natural resources requires a sustainability perspective and compares resource productivity performances across countries. Introducing the notion of ‘material flow innovation’, he discusses the innovation dynamics and issues of competitiveness. In the paper he also makes a case for effective resource policies that should provide incentives for knowledge generation and to get prices right. Rainer Walz discusses competences for green development and leapfrogging in Newly Industrializing Countries (NICs). His empirical analysis shows diverging competences innovation patterns across NICs, though in general, the eco-innovation performance is impressive and supports the lead market hypothesis. Paul Ekins discusses concepts, policies and the political economy of system innovation for environmental sustainability. His paper supports a strong role in policy and also advocates the role of the law, in a policy mix with the undoubtable success of the economic incentives. René Kemp analyzes the innovative Dutch Energy Transition approach, which is characterized by dialogues and cooperation among actors rather than a top-down policy. Explaining how it has worked in the past and what theories support the transition approach, the paper makes an interim assessment and discusses implications for a policy mix.

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Frank Beckenbach takes a dynamic system perspective and presents findings from an agent-based, multi-level approach on innovation, growth and mitigating emission impacts. His simulation reveals the time dependency of incentives and the usefulness of target group-specific approaches. Christian Lutz also presents findings from a modeling exercise. Using the dynamic input–output model GINFORS, the paper reveals the economic impacts of reducing CO2 emissions and increasing resource productivity in the EU. The results show a positive impact on emissions and employment, though a slightly lower GDP growth compared to business in usual scenarios. Tomoo Machiba introduces the OECD’s work on green growth and the underlying analytical approach; furthermore, the paper discusses new policy crossroads after the financial crisis. From the analysis of the underlying issues, it is clear that Resource Economics, International Economics and Policy Analysis should be linked more closely in the future. For a future research agenda empirical findings should be included on green innovativeness, as well as on the progress in the field of resource efficiency. Moreover, there is also great need to get more empirical studies on the issue of external effects of production, consumption and waste disposal.

References Aldersgate Group (2010) Beyond Carbon: towards a resource efficient future, London Bleischwitz R, Welfens PJJ, Zhang ZX (eds) (2009) Sustainable growth and resource productivity: economic and global policy issues. Greenleaf Publisher, Sheffield Bringezu S (2009) Visions of a sustainable resource use. In: Bringezu S, Bleischwitz R (eds) Sustainable resource management. Trends, visions and policies for Europe and the world. Greenleaf Publisher, pp 155–215 Bringezu S, Bleischwitz R (eds) (2009) Sustainable resource management. Trends, visions and policies for Europe and the World. Greenleaf Publisher OECD (2008) Measuring material flows and resource productivity. Vol. I–III and a Synthesis report. Organisation for Economic Development and Cooperation, Paris Olmstead S, Stavins R (2009) An expanded three-part architecture for post-2012 international climate policy, The Harvard Project on International Climate Agreements, www.belfercenter.org/climate Rennings K, Rammer C (2009) Increasing energy and resource efficiency through innovation—an explorative analysis using innovation survey data. ZEW discussion paper No. 09-056 Welfens PJJ (2010) Transatlantic baking crisis: analysis, rating, policy. Int Economics and Economic Policy 7:3–48 Zhang ZX (2009) How far can developing country commitments go in an immediate post-2012 climate regime? Energy Policy 37:1753–1757

Int Econ Econ Policy (2010) 7:153–185 DOI 10.1007/s10368-010-0165-9 O R I G I N A L PA P E R

Global economic sustainability indicator: analysis and policy options for the Copenhagen process Paul J. J. Welfens & Jens K. Perret & Deniz Erdem

Published online: 2 July 2010 # Springer-Verlag 2010

Abstract The traditional discussion about CO2 emissions and greenhouse gases as a source of global warming has been rather static, namely in the sense that innovation dynamics have not been considered much. Given the global nature of the climate problem, it is natural to develop a more dynamic Schumpeterian perspective and to emphasize a broader international analysis, which takes innovation dynamics and green international competitiveness into account: We discuss key issues of developing a consistent global sustainability indicator, which should cover the crucial dimensions of sustainability in a simple and straightforward way. The basic elements presented here concern genuine savings rates—covering not only depreciations on capital, but on the natural capital as well—, the international competitiveness of the respective country in the field of environmental (“green”) goods and the share of renewable energy generation. International benchmarking can thus be encouraged and opportunities emphasized—an approach developed here. This new EIIW-vita Global Sustainability Indicator is consistent with the recent OECD requirements on composite indicators and thus, we suggest new options for policymakers. The US and Indonesia have suffered from a decline in their performance in the period 2000–07; Germany has improved its performance as judged by the new composite indicator whose weights are determined from factor analysis. The countries covered stand for roughly 91% of world GDP, 94% of global exports, 82% of global CO2 emissions and 68% of the population. We appreciate the technical support and the comments by Samir Kadiric, Peter Bartelmus, New York, Columbia University and ZhongXiang Zhang, Honolulu; editorial assistance by Michael Agner, University of Odense and Lilla Voros (EIIW) are also appreciated. This research has benefited from financial support from vita foundation, Oberursel. Prof. P.J.J. Welfens, Jean Monnet Professor for European Economic Integration; chair for Macroeconomics; president of the European Institute for International Economic Relations at the University of Wuppertal; Research Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC.

P. J. J. Welfens : J. K. Perret : D. Erdem European Institute for International Economic Relations, EIIW, University of Wuppertal, Rainer-Gruenter-Str. 21, 42119 Wuppertal, Germany P. J. J. Welfens (*) University of Wuppertal, Rainer-Gruenter-Str. 21, 42119 Wuppertal, Germany e-mail: [email protected] URL: www.eiiw.eu URL: www.econ-international.net

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Keywords Global warming . Innovation . Sustainability . International Economics . Factor analysis

1 Introduction In the post-Kyoto process, it will be very important to face the global climate challenge on a broad scale: simply focusing on the OECD countries would not only imply the restriction of attention to a group of countries, which around 2010 will be responsible for less than 50% of global greenhouse gas emissions; it would also mean to ignore the enormous economic and political potential which could be mobilized within a more global cooperation framework. The Copenhagen Summit 2009 will effectively set a new agenda for long-term climate policy, where many observers expect commitments to not only come from EU countries, Australia, Japan and Russia, but also from the USA and big countries with modest per capita income, such as China and India. The ambitious goals envisaged for long-term reduction of greenhouse gases will require new efforts in many fields, including innovation policy and energy policy. If one is to achieve these goals, major energy producers such as the US, Russia, Indonesia and the traditional OPEC countries should be part of broader cooperation efforts, which could focus on sustainability issues within a rather general framework: & &

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Sustainable development, in the sense that the national and global resource efficiency strongly increases over time, so that future generations have equal opportunities, as present generations, in striving for a high living standard, Sustainable investment dynamics in the sense that investment in the energy sector should be long term—given the nature of the complex extraction and production process in the oil and gas sector and in the renewable sector as well (not to mention atomic energy, where nuclear waste stands for very long-term challenges); investment dynamics will be rather smooth when both major supplyside disruptions and sharp price shocks can be avoided. The current high volatility of oil prices and gas prices—with both prices linked to each other through some doubtful formula and international agreements—is largely due to instabilities in financial markets: Portfolio investors consider investment in oil and gas—in the respective part of the real sector in some cases, in many cases, simply into the relevant financial assets—as one element of a broader portfolio decision process, which puts the focus on a wide range of assets, including natural resources, Sustainable financial market development: If one could not achieve more longterm decision horizons in the banking sector and the financial sector, respectively, it would be quite difficult to achieve rather stable long-term growth (minor cyclical changes are, of course, no problem for the development of the energy sector). With more and more countries facing negative spillovers from the US banking crisis, more and more countries will become more interested in more stability in global financial markets. At the same time, one may not omit the fact that emission certificate trading systems established in the EU have created a new financial market niche of their own. With more countries joining international Emission Trading Schemes (ETS approaches), the potential role of financial markets for the world’s efforts in coping with climate policy challenges

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will become more important over time. It may also be noted that stable financial markets are required for financing investment and innovation in the energy sector. From this perspective, overcoming the international banking crisis is of paramount importance, however, the progress achieved within the G20 framework is rather modest—not the least because there is still weak regulation for big banks (for which, the problem of too big to fail is relevant) and because more competition, as well as better risk management, has been hardly achieved in 2009; transparency is still lacking, not the least because the IMF has not yet published the Financial Sector Assessment Program for the US, which is now overdue for many years. Without more stability in financial markets and banks, there is considerable risk that the creation of new financial instruments associated with emission trading will simply amount to creating a new field of doubtful speculation activities with massive negative international external effects. Sustainability so far has not been a major element of economic policy in most OECD countries and in major oil exporters and gas exporters, although sustainability policy may be considered to be a key element of long-term economic and ecological modernization; sustainability implies a long-term perspective and such a perspective is typical of the oil and gas industry. The use of fossil fuels, in turn, is of key importance for climate change and sustainable development, respectively—and the use of such primary energy sources in turn causes CO2 emissions. In contrast to general discussions in the international community, which typically puts the focus on CO2 emissions per unit of GDP (or per capita), it is adequate to consider CO2 emissions per unit of GDP at purchasing power parities (PPP); otherwise, there would be a crucial bias in the comparison of CO2 emission intensities. The PPP figures look quite different from the emission intensities based on nominal $ GDP per capita data; e.g., China’s performance on a PPP basis is not much worse than that of Poland. Greenhouse gas emissions, toxic discharges in industrial production and deforestation are among the key aspects of global environmental problems. Longterm economic growth in the world economy will intensify certain problems; at the same time, growth is coupled with technological progress, which in turn could allow for a decoupling of economic growth and emissions. It is not clear to which extent countries and companies contribute to solving environmental problems, although some countries—e.g., Germany, Switzerland and Austria—claim that exports in environmental products strongly contribute to overall exports and also to the creation of new jobs (Sprenger 1999). While certain fields of environmental problems have seen some improvement over the past decades—e.g., the quality of water in many rivers within Europe improved in the last quarter of the 20th century—, other challenges have not really found a convincing solution. In the EU, the European Environmental Agency (2008) reports on various fields of economic improvement. The BP report (2009) also presents progress in a specific field, namely the reduction of CO2 emission per capita in OECD countries. The global picture is different, however. Greenhouse gases have increased over time, and while emission trading in the EU has made considerable progress, the global dynamics of CO2 and other greenhouse gases have been strong. While global political interest in sustainability issues has increased over time, the recent transatlantic financial market crisis has undermined the focus on sustainable

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development. It is also fairly obvious that financial markets shaped by relatively short-term decision horizons—and short-term oriented bonus schemes—are undermining the broader topic of sustainability. It is difficult to embark on more long-term sustainable strategies in companies and households, if both banks and fund managers mainly emphasize short- and medium-term strategies. For the first time, energy consumption and greenhouse gas emissions were larger outside the OECD than in the OECD countries in 2008. This partly reflects the dynamics of successful economic globalization, namely that countries such as China, India, Indonesia, Brazil, etc. have achieved high, long term growth, which goes along with rising emissions. Economic globalization has several other aspects, including: & &

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Enhanced locational competition which reinforces the interest in foreign direct investment and multinational companies. Higher global economic growth (disregarding here the serious short-term adverse effects of the transatlantic financial crisis and the world recession) which correspond with stronger competition and a broader international division of labor on the one hand, and with potentially fast rising emissions and growing trade in toxic waste on the other. Fast growth of transportation services and hence of transportation related emissions which particularly could add to higher CO2 emissions.

From a policy perspective, it is useful to have a comprehensive assessment of the pressure on the environment. Several indicators have been developed in the literature, which give a broader picture of the environmental situation. The EU has emphasized the need to look not only at GDP but at broader measures for measuring progress (European Commission 2009). Most sustainability indicators are mainly quantitative (e.g., material flow analysis, MFA) which to some extent is useful for assessing the ecological burden of the production of certain goods and activities. Total Material Requirement is an interesting indicator when it comes to measuring resource productivity since it considers all materials used for a certain product, including indirect material input requirements associated with intermediate imports. A very broad indicator concept— with dozens of sub-indicators—has been developed by researchers at Yale University and Columbia University (Yale/Columbia 2005) which derive very complex indicators for which equal weights are used. Very complex indicators are, however, rather doubtful in terms of consistency and the message for the general public, industry and policymakers is often also opaque. Thus one may raise the question whether a new indicator concept—following the requirements of the OECD (2008) manual and taking into account key economic aspects of green innovation dynamics—can be developed. Before presenting such a new approach a few general remarks about the System of National Accounts are useful to make clear the analytical line of reasoning developed subsequently. The most common indicator used to assess both economic performance and economic well-being is gross domestic product (GDP: in line with the UN Systems of National Accounts), which indicates the sum of all newly produced goods and services in a given year. If one wants to consider long term economic development perspectives one would not consider gross domestic product, rather one has to


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consider Net Domestic Product (Y’) which is GDP minus capital depreciations. Taking into account capital depreciations is important since an economy can maintain its production potential only if the stock of input factors—capital K, labor L and technology A—are maintained; ultimately one is only interested in per capita consumption C/L which is the difference of per capita production (y=:Y/L) and the sum of private gross investment per capita (I/L) and government consumption per capita (G/L). However, in reality natural resources R—consisting of renewable and non-renewables—also are input factors in production. Therefore, “Green Net Domestic Product” may be defined here as net national product minus depreciations on natural resources. To indeed consider such a GNDP is important for many countries which are used to heavily exploiting their respective natural resources. Exploiting nonrenewable resources comes at considerable costs for long term economic development since running down the stock of non-renewables implies that future production will decline at some point of time t. The World Bank has highlighted the role of depreciations on natural resources, namely by calculating genuine savings ratios S’/Y where S’ is standard savings S minus depreciations on capital minus depreciations on natural resources (and also minus expenditures on education which are required expenditures for maintaining the stock of human capital; and minus some other elements which are detrimental to sustained economic development—see the subsequent discussion). One should note that there is some positive correlation between gross domestic product per capita and subjective well-being as is shown in recent analysis (Stevenson and Wolfers 2008). Policymakers thus have a strong tendency to emphasize that rising GDP per capita is an important goal. At the same time, it is fairly obvious that the general public is not aware of the difference between Gross Domestic Product and Net Domestic Product (NDP)—let alone the significance of NDP and Green Net Domestic Product (Sustainable Product). The problem is that the UN has not adopted any major modernization of its System of National Accounts in the past decades although there have been broad international discussions about the greening of national accounts (see e.g. Bartelmus 2001). The UN has developed an approach labeled System of Integrated Economic Environmental Accounts (SEEA) which, however, has not replaced the standard Systems of National Accounts. SEEA basically considers depreciations on natural capital, but the system is rather incomplete as appreciations of natural resources are not taken into account—e.g. the SEEA does not adequately consider improvements of the quality of natural resources (e.g., water quality of rivers which has improved in many EU countries over time). An interesting indicator to measure the quality of life is the UN Human Development Index which aggregates per capita income, education and life expectancy. Life expectancy is related to many factors where one may argue that the quality of life is one of them. Another indicator is the Index of Sustainable Economic Welfare (ISEW), based on John Cobb (Cobb (1989)), who basically has argued that welfare should be measured on the basis of per capita consumption, value-added in the self-service economy (not covered by the System of National Accounts) and consumer durables, but expenditures which are necessary to maintain production should be deducted (e.g., expenditures on health care, expenditures for commuting to work). The elements contained in the ISEW are not fully convincing, and the policy community has not taken much notice of this.

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In the subsequent analysis, it will be argued that one should focus indeed on broader concepts of Global Sustainability: A broader concept should take into account the role of international competitiveness and technological progress adequately. Section 2 takes a look at traditional approaches to environmental damaging, and Section 3 presents results for the new composite indicator on global sustainability, the final section presents policy conclusions. The main results are also presented in form of a global map.

2 Traditional approaches to environmental damaging and innovation theory Standard approaches to environmental damaging emphasize much of the issue of non-renewable resources. This focus is not surprising, as some vital resources used in industry are important non-renewable inputs. However, one should not overlook the fact that innovation dynamics and technological progress typically can mitigate some of the problems in the long-run—here, the focus is on both process innovations, which economize on the use of resources, as well as product innovations, which might bring about the use of different non-renewable or of synthetic chemical inputs. At the same time, one may argue that until 2050 there will be considerable global population growth and most of the output growth will come from Asia—including China and India. In these countries, emphasis on fighting global warming is not naturally a top priority, rather economic catching-up figures prominently in the political system are; and economic analysis suggests that China and India still have a large potential for economic catching-up and long term growth, respectively (Dimaranan et al. 2009). Nevertheless, one may emphasize that economic globalization also creates new opportunities for international technology transfer and for trade with environmental (green) goods. If there is more trade with green goods and, if certain countries successfully specialize in the production and export of such goods, the global abilities in the field of environmental modernization might be sufficient to cope with global warming problems: This means the ability to fight global warming, on the one hand, and on the other hand, the ability to mitigate the effects of global warming. A potential problem of putting more emphasis on innovation dynamics is that a wave of product innovations could trigger additional emissions, which would partly or fully offset the ecological benefits associated with higher energy efficiency that would result in a generally more efficient way to use natural resources. Sustainability means the ability of future generations to achieve at least the same standard of living as the current generation has achieved. If one adopts a national sustainability perspective this puts the focus on sustainable economic development in every country of the world economy. Analytical consistency in terms of sustainability imposes certain analytical and logic requirements: &

As a matter of consistency one may expect that if there is a group of countries which represents—according to specific sustainability indicators—sustainable development other countries converging to the same structural parameters of the economy (say per capita income and per capita emissions as well as other relevant parameters) will also be classified as sustainable;


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if all countries are sustainable there is sustainability of the overall world economy. What sounds trivial at first is quite a challenge if one considers certain indicators as we shall see.

An important approach to sustainability has been presented by the World Bank which calculates genuine savings rates. The basic idea of a broadly defined savings rate is to take into account that the current per capita consumption can only be maintained if the overall capital stock—physical capital, human capital and natural capital—can be maintained. To put it differently: an economy with a negative genuine savings rate is not sustainable. The genuine savings rate concept is quite useful if one is to understand the prospect of sustainable development of individual countries. Figures on the genuine savings rate basically suggest that OECD countries are well positioned, particularly the US (World Bank (2006)). This, however, is doubtful, because it is clear that in case the South would converge to consumption patterns of the OECD countries—and would achieve economic convergence in terms of per capita income—the world could hardly survive because the amounts of emissions and waste would be too large to be absorbed by the earth. For example, the CO2 emissions would be way above any value considered compatible with sustainability as defined by the IPCC (Intergovernmental Panel on Climate Change) and the STERN report. The World Bank approach is partly flawed in the sense that it does not truly take into account the analytical challenge of open economies. To make this point clear, let us consider the concept of embedded energy which looks at input output tables in order to find out which share of the use of energy (and hence CO2 emissions) are related to exports or net exports of goods and services. For example, the US has run a large bilateral trade deficit with China—and indeed the rest of the world—for many years and this implies that the “embedded genuine savings rate” (EGSR) of the US has to be corrected in a way that the EGSR is lower than indicated by the World Bank. Conversely, China’s EGSR is higher than indicated by the World Bank. To put it differently: While the genuine savings rate indeed is useful to assess sustainability of individual countries at first glance, a second glance which takes into account the indirect international emissions and indirect running down of foreign stocks of resources (e.g., deforestation in Latin America or Asia due to net US/EU imports of goods using forest products as intermediate inputs) related to trade represents a different perspective; EGSR should not be misinterpreted to take the responsibility from certain countries, however, EGSR and the genuine savings rate concept— standing for two sides of the same coin—might become a starting point for more green technology cooperation between the US and China or the EU and China. Considering the embedded genuine savings rate helps to avoid the misperception that if all countries in the South of the world economy should become like OECD countries the overall world economy should be sustainable. According to the World Bank’s genuine savings rate, the US in 2000 has been on a rather sustainable economic growth path. However, it is clear that if all non-US countries in the world economy had the same structural parameter—including the same per capita income and the same emissions per capita—as the United States there would be no global sustainable development. If, however, one considers embedded genuine savings rates, the picture looks different. For instance, if one assumes that the embedded

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genuine savings rate for the US is lower by 1/5 than the genuine savings rate, it is clear that the US position is not as favorable as the World Bank data suggest. The ideal way to correct the World Bank genuine savings rate data is to consider input–output and trade data for the world economy so that one can calculate the embedded genuine savings rate; however, such data are available only for a few countries, but in a pragmatic way one may attribute China’s depreciations on natural resources and the CO2 emissions to the US and the EU countries as well as other countries vis-à-vis China runs a sustained bilateral trade balance surplus. A pragmatic correction thus could rely on considering the bilateral export surplus of China—e.g., if the ratio of total exports to GDP in China is 40% and if ½ of China’s export surplus of China is associated with the US then 20% of China’s CO2 emissions can effectively be attributed to the US. One might argue that considering such corrected, virtual CO2 emissions is not really adequate since global warming problems depend indeed on the global emissions of CO2, while individual country positions are of minor relevance. However, from a policy perspective it is quite important to have a clear understanding of which countries are effectively responsible for what share of CO2 emissions in the world economy. As sources of CO2 emissions are both local and national, it is indeed important to not only consider the embedded genuine savings rate but also to know which country are responsible for which amount of CO2 emissions. In the literature, one finds partial approaches to the issue of global sustainability. The concept of the ecological footprint (Wackernagel 1994; Wackernagel and Rees 1996)—as suggested by the WWF (see e.g. Wiedmann and Minx 2007)—is one important element. Ecological footprint summarizes on a per capita basis (in an internationally comparative way) the use of land, fish, water, agricultural land and the CO2 footprint in one indicator so that one can understand how strong the individual’s pressure on the capacity of the earth to deliver all required natural services really is. At the same time, one wonders to which extent one may develop new indicator approaches which emphasize the aspects of sustainability in a convincing way. The Global Footprint indicator calculated by the World Wildlife Fund and its international network indicates the quantitative use of resources for production, namely on a per capita basis GLOBAL FOOTPRINT NETWORK (2009). It thus is a rather crude indicator of the pressure on the global biosphere and the atmosphere. However, it has no truly economic dimension related to international competition and competitiveness, respectively. If, say, country I has the same global per capita footprint as country II, while the latter is strongly specialized in the production and export of green goods—which help to improve the quality of the environment and to increase the absorptive capacity of the biosphere of the importing countries, respectively—the Global Footprint approach does not differentiate between country I and country II. If the general public and the private sector as well as policymakers are to encourage global environmental problem solving it would be useful to have a broadly informative indicator which includes green international competitiveness—see the subsequent analysis. One may argue that a positive revealed comparative advantage (RCA) for certain sectors is economically and ecologically more important than in other sectors, however, we consider the broad picture across all sectors considered as relevant by the OECD. Modified RCAs (MRCA) are particularly useful indicators since they are not distorted by current account imbalances—as is the traditional RCA indicator which


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simply compares the sectoral export import ratio with the aggregate export import ratio (Comtrade data base of the United Nations and World Development Indicators/WDI are used in the subsequent calculations). As regards as adjustment dynamics, it is clear that a static view of the economy and world ecological system is not adequate; rather Schumpeterian innovation perspective is required. 2.1 Growth and exhaustible natural resources Natural resources, pollution and other environmental issues are not considered in the classical growth model of Solow. Many economists—from Malthus (1798) to Hotelling (1931) and Bretschger (2009)—have argued that the scarcity of land and natural resources, respectively, could be an obstacle in obtaining sustainable growth. Nordhaus (1974) described the impossibility of an infinite and long-term economic growth based on exhaustible energy; he has basically emphasized that nonrenewable resources are critical long-run challenges, along with three other aspects: & & &

Limitations of resources: certain key resources are non-renewable and substitution through alternative exhaustible resources is often complex; Environmental effects—the use of resources causes emissions or effluents and dealing with those is costly; There will be rising prices of the exhaustible energy resources.

With connection to this, back-stop technologies or innovations have a crucial role for the long-term economic perspective and for the optimal energy price level. The effect of a back-stop technology1 on the resources price path can be presented in a straightforward way (Fig. 1): A standard insight—on the assumption of a perfect competition and a linear demand curve—is that the price will rise in the long run due to rising extraction costs. With the use of a new technology (lower marginal costs bc1) one will have a lower price until the exhaustion of a new substitute. It would, however, be inefficient not to use up new resources completely. In this context, one should emphasize that the initial price must remain below bc1 < p. Due to the new attractive supply, the demand will increase, and the resource will be exhausted earlier (T1). With a more innovative technology, and more favorable extraction costs (bc2), one achieves an even earlier extraction time (T2) (Wacker and Blank 1999:43). In a similar way, Levy (2000) shows that a decrease of the initial average costs by one dollar leads to a decrease of the spot prices by somewhat less than a dollar. With regards to the promotion of these technologies, governments are faced with two different approaches: –

1

“Technology Push” refers to the identification of a potential technology and the support of the research and development (R&D), in order to bring a competitive product on the market. “The Technology Push”—approach basically argues that

One can mention the following back-stop technologies concerning today’s knowledge level: Solar power and hydrogen and other renewable energy technologies, possible nuclear fission systems on the basis of the breeder reactors or light-water reactors with uranium production, new nuclear fusion techniques (Hensing et al. 1998).

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pt

p Use of Back-stop Technology

bc1

bc2

p0

p01 p02 t0

T2

T1

T

t

Source: (WACKER/BLANK, 1999) Fig. 1 Use of back-stop technology

–

the primary focus should be on the development of Green House Gas reduction technologies: via public R&D programs and not via obligatory regulations, such as restrictions on emission. Obligatory restrictions may be used only if the innovations would sufficiently lower the costs of green house gas emissions. The opposite “Market Pull”-approach stresses that technological innovation must come primarily from the private sector. In this context, the economic interaction of changing needs and shifts in technologies (supply side) bring about new appropriate products. The focus of this approach lies in the fact that the obligatory restrictions could force the enterprises to innovations in search for cost reduction (Grubb 2004:9; Hierl and Palinkas 2007: 5).

The origins of environmental problems and the various solutions proposed by businesses and institutions in innovative green technologies, have been often examined since the 80s and 90s: The concepts, as well as the conditions for the emergence and diffusion of technological and institutional innovations are based on so-called nonlinear system dynamics, a theory partly introduced by J. A. Schumpeter, stating that unforeseeable innovative processes with positive externality stand in close relationship with knowledge and learning processes (Farmer and Stadler 2005: 172). For most countries, foreign sources of technology account for 90% or more of the domestic productivity growth. At present, only a handful of rich countries account for most of the world’s creation of new technology. G-7 Countries accounted for 84% of the world‘s R&D, but their world GDP share is 64%. (Keller 2004). The pattern of worldwide technical change is, thus, determined in large part by international technology diffusion. Aghion et al. (2009) argue that radical innovations are needed to bring about strong progress in CO2 emissions: Given the fact that the share of green patents in total global patents is only about 2%, one cannot expect that incremental changes in technologies will bring about strong improvements in energy efficiency and massive


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reductions of CO2 emissions per capita; while the generation of electricity is a major cause of CO2 emissions the share of R&D expenditures in the sector’s revenues was only 0.5%.

3 New indicator concept Basically, one could build indicators based on the individual, which often is a good way to motivate individuals to reconsider their respective style of living. Alternatively (or in a complementary way), one may develop indicators with a focus on individual countries so that the focus is more on political action, including opportunities for international cooperation. A consistent theoretical basis for a global sustainability indicator is useful and it is therefore argued here that one should focus on three elements for assessing global sustainability. Here an indicator set will be suggested where the main aspects are: &

&

&

&

Ability to maintain the current standard of living based on the current capital stock (broadly defined). Hence “genuine savings rates”—including the use of forests and non-renewable energy sources—are an important aspect. To the extent that countries are unable to maintain the broader capital stock (including natural resources) there is no sustainable consumption to be expected for the long run. Ability to solve environmental problems: If we had an adequate sub-indicator— related to innovation dynamics—the composite sustainability indicator would then have a true economic forward-looking dimension. If countries enjoy a positive revealed comparative advantage in the export of environmental products (“green goods”) WTO (1999), one may argue that the respective country contributes to global solving of environmental problems. As it has specialized successfully in exporting environmental products, it is contributing to improving the global environmental quality; also, countries which have specialized in exports of green goods may be expected to use green goods intensively themselves—not least because of the natural knowledge advantage in producer countries and because of the standard home bias of consumers. Countries will be ranked high if they have a high modified RCA (MRCA) in green goods: The MRCA for sector i is defined in such a way that the indicator is zero if the respective sector’s export share is the same as that of all competitors in the world market and it is normalized in a way that it falls in the range −1,1 (with positive values indicating an international competitive advantage). Pressure on the climate in the sense of global warming. Here CO2 emissions are clearly a crucial element to consider. The share of renewables could be an additional element, and a rising share over time would indicate not only an improvement of the environmental quality—read less pressure for global warming—but also reflect “green innovation dynamics”. The aggregate indicator is based on the sum of the indicator values for relative genuine savings rate (s’ of the respective country divided by the world average s’W), the relative CO2 per capita indicator (CO2 per capita divided by the average of global average CO2 per capita). In principle aggregation of sub-indicators should use a weighing scheme based on empirical analysis.

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A synthetic indicator can conveniently summarize the various dimensions to be considered, and this indeed is done subsequently. For a group of countries, the genuine savings rate and the gross domestic savings rate are shown for the year 2000. The definition of net national savings is gross national savings minus capital depreciations (consumption of fixed capital); if we additionally subtract education expenditures, energy depletion, mineral depletion, net forest depletion, PM10 damage (particulate matter) and CO2-related damage on has the genuine savings rate. Sustainability (defined in a broad sense) is weak—based on standard World Bank data—if the genuine savings rate is relatively low. Comparing data from the World Bank on this topic it can be seen that the genuine saving is generally smaller than the gross domestic saving. This is particularly the case for Azerbaijan, Kazakhstan, Iran, Saudi Arabia and Russia. While all of them report negative genuine savings rates, the latter two are in a very weak position since the genuine savings rate exceeded −10%. Moreover it is also noteworthy that for many countries there is a large gap between the standard savings rate and the genuine savings rate. This suggests that with respect to economic sustainability there is a veil of ignorance in the broader public and possibly also among policy makers. A crucial dimension of global sustainability is CO2 emissions per capita; this indicator mainly is related to the use of energy for production and consumption, respectively. The share of renewable also is a crucial element for climate policies. The energy sector, however, is subject to considerable relative price shifts over time and indeed has reacted with innovations to strong price shocks. High and rising oil prices have undermined global economic dynamics in the period from 2006 to 2008, and representatives of industry and OECD countries have raised the issue as to how, why, and how long such price increases will continue. While it seems obvious that sustained relative price changes should stimulate innovation—see the analysis of Grupp (1999) for the case of the OPEC price shocks of the 1970s—as well as substitution effects on the demand side and the supply side, it is rather unclear which mechanisms shape the price dynamics in the short-term and the long run. The following analysis takes a closer look at the issues, presents new approaches for economic modeling and also suggests new policy conclusions. In the wake of the two oil price shocks of the 1970s—each bringing with it a quadrupling of the oil price—, the economics of exhaustible resources became an important research field (e.g. Stiglitz 1974; Dasgupta and Heal 1979; Sinn 1981). Oil and gas are particular examples of non-renewable resources, and they are politically sensitive since the main deposits are concentrated regionally, in the case of oil in politically rather sensitive Arab countries as well as Iran and Russia. In addition, major oil producers have established OPEC, which became a powerful cartel in the 1970s when it controlled about 60% of the world market for oil. As transportation costs for oil are very small, the oil price is a true world market price since equilibrium is determined by world oil supply and global oil demand. There is considerable short-term oil price volatility in the short run, und there have been major shifts in oil prices over the medium term. Changes in market structure will affect the optimum rate of depletion of resources (Khalatbari 1977). The oil and gas sector has a long history of high Schumpeterian dynamics, where analysis by Enos (1962) suggests there is a time lag of about 11 years between


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invention and innovation. By implication, R&D promotion in this industry will go along with considerable time lags with respect to innovation—this is also a challenge for policy makers, who would have to apply a relatively long time horizon. As regards R&D Promotion, Furtado (1997) found that differences in the degree of appropriability between upstream and downstream of the oil industry had a great impact on effect of R&D promotion. There are regional case studies on the dynamics of innovation in the oil and gas industry—concerning Stavanger and Aberdeen (Hatakenaka et al. 2006)—which show that different approaches to R&D promotion can have similar effects. It is also noteworthy that the energy sector has been a leading early user of information technology (Walker 1986). A rising relative price of non-renewables is often considered inevitable, since there is long-term global population growth and also high aggregate output growth since the 1990s in the world economy. The use of fossil energy sources does not only have economic issues at stake, but it is also relevant in terms of global warming issues. The Stern Report (Stern et al. 2006; Nordhaus 2006; Latif 2009) has raised international attention about the dynamics of the use of energy and the associated CO2 emissions as have the policy activities and UN reports with a focus on the Kyoto Protocol. There is long term concern that high economic global growth will strongly stimulate the demand for energy and hence raise emissions. At the same time, there are also medium term concerns about the potential negative impact of oil price shocks. While higher real oil prices might be useful at encouraging a more efficient use of energy resources, there could also be inflation and unemployment problems linked to sudden rises of nominal oil prices. As regards CO2 emissions per capita we see a well known picture in which the United States was leading with a relatively poor performance up to 2000 (Fig. 2). As regards the consistent composite indicator (with adequate centering) a positive position is strictly defined as a favorable global position, a negative value reflects CO2 Emissions (per Capita), 2000 6

metric tons

5 4 3 2

0

Austria Ajzerbeijan Belgium Brazil China Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Repulic Slovenia Sweden Switzerland Turkey United Kingdom USA

1

Country

Source: WDI, 2008

Fig. 2 CO2 emissions

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ecological weakness and to some extent lack of green innovativeness or inefficiencies in the use of energy-intensive products (as mirrored in the CO2 per capita indicator); more and better innovations can improve the position of the composite indicator so that the main message is that green innovation dynamics matter—thus government should encourage green Schumpeterian dynamics, particularly if there are positive national or international external effects. Specialization in green knowledge-intensive industries and positive green RCAs could go along with national or international positive external effects, however, there are hardly empirical analyses available here. The aggregate indicator shows results which, of course, are somewhat different from the simple aggregation procedure; we clearly can see that careful standardization is required for consistent results. As already mentioned, from a methodological point the weights attached to the individual components of the indicator could be determined through empirical analysis. Factor loadings are useful starting points for a valid approach. It should be emphasized that the new indicator set proposed (even disregarding the weighing issue) puts the analytical and policy focus on the issue of global sustainability in a new way. The indicator emphasizes long term opportunities and global sustainability. While this approach is only a modest contribution to the broader discussion about globalization and sustainability, it nevertheless represents analytical progress. There is little doubt that specific issues of sustainability—e.g., global warming (see Appendix)—will attract particular interest from the media and the political systems. At the same time, one may emphasize that the new broad indicators developed are useful complements to existing sustainability indicators such as the global footprint from the WWF. The indicator presented is complementary to existing sustainability indicators. However, it has two specific advantages: & &

It emphasizes within the composite indicator a dynamic view, namely the Schumpeterian perspective on environmental product innovations. It is in line with the OECD handbook on composite indicators.

The indicator for SO2 emissions can be easily aggregated for global emissions, while the genuine savings indicator cannot easily be aggregated if one wants to get a global sustainnability information. However, as regards the genuine savings indicator one may argue that if the population weighted global savings indicator falls below a critical level there is no global sustainability. One might argue that the global genuine savings rate—a concept which obviously does not need to focus on embedded (indirect) use of materials and energy—should reach at least 5% because otherwise there is a risk that adverse economic or ecological shocks could lead to a global genuine savings rate which is close to zero; and such a situation in turn could lead to economic and political international or national conflicts which in turn could further reduce genuine savings rates in many countries so that global sustainability seems to be impaired. There are many further issues and aspects of the indicator discussion which can be explored in the future. One may want to include more subindicators and to also consider robustness tests, namely whether changing weights of individual subindicators seriously changes the ranking of countries in the composite index.


167

Since the global warming problem refers to CO2 emissions and other greenhouse gases from a worldwide perspective, it is not efficient to reduce emissions of greenhouse gases in particular countries through particular national subsidies. A global approach to establishing an ETS would be useful. However, one may emphasize that stabilization of financial markets should be achieved first since otherwise a very high volatility of certificate prices is to be expected; future markets for such certificates also should be developed carefully and it is not obvious such markets necessarily will be in the US; the EU has a certain advantage here as the EU has taken a lead in the trading of emission certificates. There are policy pitfalls which one should avoid in setting up ETS; e.g the German government has largely exempted the most energy-intensive sectors in the first allocation period—those sectors would normally have rather big opportunities to achieve cuts in energy intensity and CO2 emissions, respectively; Klepper and Peterson (2006) have calculated that the welfare loss of emission trading could have been 0.7% of GDP in the first German National Allocation Plan while in reality the welfare amounted to 2.5% of GDP. Government incentives on renewables could be a useful element of environmental modernization. As regards the share of renewable in the use of energy generation the following tables show that there are large differences across countries. Following the general approach presented here—with the world average set at zero (and the indicator normalized in a way that it falls in the range (−1, 1)—we can see that there are some countries which are positively specialized in renewable energy: Austria, Brazil, Finland India, Italy, Latvia, Philippines, Portugal, Sweden, Switzerland and Turkey have positive indicators. It is noteworthy, that the position of Azerbaijan, Iran, Kazakhstan, Netherlands, Russia and the UK are clearly negative. Comparing 2000 and 2007 the worsening position of China is remarkable, at the same time the UK has slightly and Germany has strongly improved its respective position. There is no doubt that countries such as Russia and China could do much better in the field of renewable provided that government encourages innovative firms and innovations in the renewable sector on a broader scale (Fig. 3). 3.1 Basic reflections on constructing a comprehensive composite indicator In the following analysis, a composite indicator measuring global sustainability in energy consumption is presented. In the first step, the influence of different partial indicators on the composite indicator is discussed by analysing sets of composite indicators with fixed identical weights. In the second step, the weights are allowed to be flexible/different and are estimated using factor analysis. Building on the insights gained in these two steps, a specific composite indicator is developed. However, to begin with, the partial indicators will be introduced and it will be argued in how far they differ from the standard approaches in the literature. Additionally, the modes in which the partial indicators are transformed into centralized and normalized versions are presented. 3.1.1 Points of departure: revealed comparative advantage There is a long history of using the revealed comparative advantage (RCA) as an indicator of international competitiveness, which can also be an indicator for

168 1

P.J.J. Welfens et al. Comparative Share of Renewable Energy, (2000); (Benchmark=World average)

0,8

CompShareRE=TANHYPLN ((RECountry/TotalEnergyCountry)/ (REworld/TotalEnergyworld))

0,6 0,4 0,2 0 -0,2 -0,4 -0,6

-1

Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Republic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United Kingdom United States

-0,8

Country

1

Comparative Share of Renewable Energy, (2007); (Benchmark=World average)

CompShareRE= TANHYPLN ((RECountry/TotalEnergyCountry)/ (REworld/TotalEnergyworld))

0,8 0,6 0,4 0,2 0 -0,2 -0,4 -0,6

-1

Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Republic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United Kingdom United States

-0,8

Country

Source: IEA Database, EIIW calculations

Fig. 3 Normalized indicator on the share of renewables in selected countries: 2000 vs. 2007

assessing the specialization in green environmental goods. The standard Balassa indicator considers the sectoral export–import ratio (x/j) of sector i relative to the total export–import ratio (X/J) and concludes that an indicator above unity stands for international competitiveness in the respective sector. It is useful to take logarithms so that one can calculate ln(x/j)/ln(X/J): If the indicator exceeds zero, there is a


169

positive successful specialization, if the indicator is negative, the country has a comparative disadvantage. Minor deviations from zero—both positive and negative— will normally be considered as a result of random shocks (to have a positively significant sectoral specialization, a critical threshold value has to be exceeded). Since this indicator takes existing goods and services into account, there is a natural bias against product innovations, particularly in new fields; innovative countries that have many export products that stand at the beginning of the product cycle, will typically only export a few goods at relatively high prices—only after a few starting years will exports grow strongly. Foreign direct investment might also somewhat distort the picture, namely to the extent that multinational companies could relocate production of green products to foreign countries. To the extent that foreign subsidiaries become major exporters over time,—a typical case in manufacturing industry in many countries—the technological strength of an economy with high cumulated foreign direct investment outflows might contribute to a relatively weak RCA position, as a considerable share of imports is from subsidiaries abroad. A slight modification of the Balassa RCA indicator is based on Borbèly (2006): The modified RCA indicator for export data (MRCA) is defined as: 0 0

1

0

11

B B x C B x CC B B c; j C B I ; j CC MRCAc; j ¼ tanhypBlnB P C lnB P CC n n A @ AA @ @ xc; j xI; j j¼1

ð1Þ

j¼1

where xc,j gives the exports in sector j of region / country c and xI,j gives the exports in sector j of the reference market I (in this case the EU 27 market). In this context, the index uses data for exports and calculates the ratio of the export share of a sector—in this case, the sector of environmental green goods—in one country to the export share of that sector in a reference market (e.g. EU27 or the world market). In most cases, it is adequate to use a reference market with a homogenous institutional set-up, such as the EU27 market; an alternative is the world market, which stands for a more heterogeneous institutional setting than the EU27. The selected countries make up most of the world market (about 80%), but not the whole world economy. Therefore, for practical purposes,—e.g. avoiding the problem of missing data—we have decided that the reference market used is the market consisting of the countries observed in the analysis. Furthermore, it is important to mention that the modified RCA indicator, as presented above, allows to be applied to a much broader range of data than just export data. While it is possible to use the indicator for the relative position of macroeconomic data, such as labor or patents, in the present case, it is also applied to the share of renewable energy production in countries instead of the export data—the idea is to consider the relative renewables position of a given country: The resulting RCA-indicator (SoRRCA) gives the relative position of one country, regarding renewable energy production in comparison with the share of renewable energy production in the reference market, which in this case is the total world market. It can be shown that for this case, the results will not be influenced much by either the world market or the market consisting of all observed countries.

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In addition to the traditional and modified RCA indicators, as introduced by Balassa (1965) and Borbèly (2006), respectively, we also test for volume-weighted RCAs. In this case, the modified RCAs (MRCAs) are calculated and multiplied by the countries’ absolute exports, resulting in the volume-weighted RCA (VolRCA). The results for the year 2000 are shown in Fig. 4. Here, the basic idea is not only to look at the relative sectoral export position for various countries, but to emphasize that a country whose green sector has a positive specialization in green export goods adds more to the global environmental problem solving, the higher the absolute volume of green exports. From this perspective, large countries with a high positive green export specialization stand for a particularly favorable performance. Figure 4 shows that the indicator modified in such a way allows for discrimination between those countries which are leading in weighted green RCAs, and those that fall behind, either in absolute volume or in green specialization. Leading countries, like Germany, Italy, Japan, Mexico or the USA, not only export a high volume of environmental goods, but also hold a significant advantage compared to the other countries. In contrast to that group of countries, the countries that show a comparative disadvantage can be divided into a group that has a green export advantage but a small export volume; and into a group that has a relatively high volume but no strong comparative advantage. The latter countries are mostly larger countries that are major international suppliers of green goods, but compared to their other industries, the environmental goods do not play a very important role. These countries have a potential to become future leaders in the area and a more detailed analysis of the countries and the dynamics would allow an insight into the way comparative advantages and growing sectoral leadership positions are established—an issue left for future research.

1.0000

0.5000

Japan Germany

USA

Italy Mexico

0.0000

-0.5000

-1.0000

Fig. 4 Volume-weighted RCAs for the year 2000


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3.1.2 Standardization All indicators, except MRCA or SoRRCA, are neither centralized around zero nor have they clearly defined finite and symmetrical boundaries, especially not in the same way as the RCA indicators, whose results lie in the interval [−1, 1]. If the intention is, therefore, to combine the partial indicators additively, as will be done in the present approach, it is necessary to ensure that the indicators are concentrated around zero and that their values do not exceed the above stated interval. Furthermore, it is necessary to ensure that the best possible result is +1 and the worst possible result is equivalent to −1. Centralization is easily achieved by calculating the mean for an indicator and subtracting it from the individual indicator value. Alternatively, a given average (like the world average) can be taken and used as an approximate mean. The resulting indicator ensures that the number of countries with a negative value is equal to the number with positive values. The problem in this context is the temporal stability of the calculated means. If the means do not stay relatively constant over time, a problem arises, where a positive or negative position does not depend so much on the values of a single country but mostly on the values of other countries. It can be shown that, while the means of the genuine savings rate and the CO2 output remain mostly on the same level, the mean of the total exports is monotonically rising. This will be a problem, especially in the construction of the volume weighted RCA indicator, VolRCA. Even if the VolRCA indicator is inherently relative in nature, this effect solely takes the absolute volume into account, neglecting the sectoral structure; nonetheless, this trade-off is necessary to combine export-volumes and sectoral advantages, and until now, no alternative approach is known that could take care of this trade-off. The second part of the standardization process is the normalization of the data. It is possible to take different approaches. The most common one is to divide the indicator values by the range given by the difference between the maximum and the minimum value. This approach is also the one that is implemented in this analysis. In the table below it is referred to as “normalized(linear)”. An alternative is the “normalized(arctan)” approach. Here, the centralized data is normalized using the function f(x)=2/π arctan(x). A useful effect of this approach is the fact that the result is not influenced by very large or very small outliers. Furthermore, the basis of the calculation stays the same and does not differ with the respective data used. Using the arctan-functional form also means to work with a functional form that is relatively steep for small values. Therefore, the results are very often nearing unity or minus 1, and it is very hard to distinguish between them. Additionally, the arctanfunction is skewed and will lead to skewed results, which means that distances between values are no longer relatively constant. The linear approach will be used in the following chapters, considering both of the alternative approaches. 3.1.3 Fixed weights vs. free weights The following table provides the partial indicators used in the following analysis. As only linearly normalized variables will be used, only those are mentioned (Fig. 5).

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Partial Indicator MRCA MRCA*Exports (centralized+normalized; Volume Weighted) : VolRCA Genuine Savings Rate (centralized+normalized(linear) CO2 Generation (centralized+normalized(linear)) Share of Renewables SoRRCA (normalized, centralized)

Abbreviation (1) (3)

(7) (9) (A) (B)

Fig. 5 Partial indicators used

The composite indicators that will be constructed and discussed below all have the form: CompositeIndicator ¼

n X

wi PartialIndicatori

ð2Þ

i¼1

It is assumed in the following section that all weights are identical. wi ¼ wj ¼

1 n

8i; j ¼ 1; . . . ; n

ð3Þ

By contrast, in a later section, where the weights are estimated, it is generally true that weights differ: wi 6¼ wj

8i 6¼ j ¼ 1; . . . ; n

ð4Þ

In this context it is discussed, whether situations arise where two or more weights are identical. 3.1.4 Fixed weights The following Fig. 6 show a composite indicator that is constructed from the partial indicators for the genuine savings rate, the SoRRCA (Share of Renewables RCA) and in the first case the MRCA and in the second case the VolRCA, for the years 2000, 2006 and 2007. The basic of the following Fig. 6 is to highlight to which extend there is a difference between our “ideal” preferred composite indicator consisting of (3), (7), (9), (A), (B) namely compared two alternative indicators. The difference between the two indicators lies in the way the comparative advantages in the field of environmental goods are introduced. The first indicator uses the traditional MRCA while the second one uses the volume weighted MRCA. It can be seen that the second indicator is in most cases more pronounced, meaning that positive advantages report higher values and negative advantages report lower values.

Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Repulic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United USA

-1.0 Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Repulic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United USA


IND (1)+(7)+(B)

IND (1)+(7)+(B)

173

1.0

2000:

0.5

0.0

-0.5

IND (3)+(7)+(B)

1.0

2006:

0.5

0.0

-0.5

-1.0

IND (3)+(7)+(B)

Fig. 6 Indicators showing the influence of the standard RCA indicator vs. the volume-weighted RCA indicator

The first insight gained from Fig. 6 is that in most cases both indicators point in the same direction, meaning that if the first one indicates a comparative advantage, the second one does so as well. Furthermore, it seems that the second one is somewhat less harshly accentuated. Additionally, in the area were the first indicator

174


2007: 1.0

0.5

0.0

-0.5


-1.0

IND (1)+(7)+(B)

IND (3)+(7)+(B)

Fig. 6 (continued)

is insignificantly close to zero, the second one gives a clear indication as to whether an advantage is present or not. The last fact that is worth mentioning is that, over time, the indicators stay mostly similar. While this does not influence the decision concerning the choice of the export RCA, it is, nonetheless, worth mentioning as it shows that not only the composite indicators both stay stable, but also that there has been rather few dynamics in the last years concerning sustainability in the majority of countries. Conclusively, it can be said that both partial indicators can be used for the creation of a composite indicator, as there is no discernable difference between the effects the two have. We decide in favor of the VolRCA since it distinguishes best between advantages and disadvantages and, as it will be shown in the following sections, using the VolRCA will result in better weights when they are allowed to deviate from each other (across subindicators). Following the same procedure as above, a composite indicator constructed from the partial indicators of the VolRCA, the genuine savings rate and the SoRRCA are compared to an indicator additionally containing the CO2 output indicator (Fig. 7). In almost all cases, the indicator without the CO2 emissions is more accentuated (positive values are higher and negative values and lower) than the indicator including them. Combined with the effect that, as shown below, inclusion of the CO2 emissions indicator leads to redundancy problems in the composite indicator, it is prudent to abstain from using the CO2 emissions indicator. Similar to Fig. 6, the two composite indicators compared here stay relatively stable over time, and in the rare occasions where the results change, at least the relations of the two indicators to each other are kept.

-1.0

Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Repulic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United USA Japan Kazakhstan Latvia Lithuania Mexico Netherlands Norway Philippines Poland Portugal Romania Russia Saudi Arabia Slovak Repulic Slovenia South Africa South Korea Spain Sweden Switzerland Turkey United USA

Italy

Ireland Israel

Iran

Argentina Australia Austria Azerbaijan Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary India Indonesia

Global economic sustainability indicator 175

1.0

2000:

0.5

0.0

-0.5

-1.0

IND (3)+(7)+(9)+(B)

IND (3)+(7)+(9)+(B) IND (3)+(7)+(B)

1.0

2006:

0.5

0.0

-0.5

IND (3)+(7)+(B)

Fig. 7 Indicators showing the influence of the CO2 indicator

Finally, in the third part of this analysis, the influence of the share of renewable energy production in the energy mix of the countries is observed. Here, the composite indicator is calculated from the VolRCA and the genuine savings rate. Additionally, the three cases of no inclusion of the share of renewable energy, the absolute share of renewable energy and the SoRRCA are considered.

176


2007: 1.0

0.5

0.0

-1.0


-0.5

IND (3)+(7)+(9)+(B)

IND (3)+(7)+(B)

Fig. 7 (continued)

3.2 Weights from factor analysis In the following part, the weights are no longer fixed to the number of partial indicators used. Instead, a factor analytical approach is used to estimate the values for the weights. Factor Analysis is a mathematical method from the field of dimension reducing algorithms. The goal is to start from a row of observations for different indicators and estimate weights for aggregation of the indicators into one or more composite indicators. The number of resulting composite indicators will be less than the number of indicators to begin with. The method also offers decision support on how many indicators will result from the process. In contrast to the traditional application of the factor analysis, the number of resulting indicators in this case is fixed, but not the number of resulting eigenvalues exceeding given bounds. Nevertheless, the eigenvalues play an essential role in constructing the composite indicator. In traditional factor analysis, the desired result would be for one eigenvalue to dominate all other eigenvalues. The sum over all eigenvalues equals the number of partial indicators; traditionally, the ideal result would be for the largest eigenvalue to be equal to this sum, whereas all other eigenvalues would be zero. This would be the case if all partial indicators were measuring exactly the same concept. In constructing the present composite indicator, it is desirable to combine different concepts around the idea of sustainability. Therefore, it would be best for every partial indicator to describe a different concept. The degree to which this goal is


177

achieved can be seen from the eigenvalues. If all eigenvalues have values near unity, it indicates that all partial indicators measure independent concepts. This is also the way in which the final decisions on the usage of partial indicators of the preceding chapter have been reached. If more than one indicator is possible, the one that has the more evenly distributed eigenvalues for all years is chosen. The second aspect that is used as a decision criterium is the sign of the resulting components, e.g. the resulting weights. It can be seen that the expected signs for the weights of all but the CO2 emissions indicator are expected to be positive. This condition is, with the exception of two cases, met by the present data, so that it does not offer a reliable means to distinguish between feasible partial indicators and non-feasible ones. So, the main decision is made using the distribution of eigenvalues. Finally, the resulting components are normalized by dividing them by their sum, thus, resulting in weights summing up to unity. An overview of the resulting eigenvalues and the components, e.g. weights, is given in the “Appendix”. Combining the insights from this and the preceding chapter, an ideal global indicator can be motivated, which is constructed from the VolRCA, the genuine savings rate and the SoRRCA. Figure 8 gives a broad overview of this composite indicator for the years 2000, 2006 and 2007. A clear finding is that Austria, Brazil, Cyprus, Finland, Germany (in 2006 and 2007, not in 2000), India, Ireland, Italy, Japan, Latvia, the Philippines, Portugal, South Africa, Sweden and Switzerland have considerable positive indicators; by contrast, Australia, Azerbaijan, Iran, Kazakhstan, Russia, Saudi Arabia, the UK and—less pronounced—the USA, the Netherlands and Mexico and some other countries—have a negative performance. The countries with relatively weak indicator values for sustainability are often rather

1.0

0.5

0.0

-1.0


-0.5

2000

Fig. 8 EIIW-vita global sustainability indicator

2006

2007

178


weak in terms of renewable energy; this weakness, however, can be corrected within one or two decades, provided that policymakers give adequate economic incentive and support promotion of best international practices. To the extent that countries have low per capita income, it will be useful for leading OECD countries to encourage relevant international technology transfer in a North–South direction. At the same time, successful newly industrialized countries or developing countries could also become more active in helping other countries in the South to achieve green progress. To the extent that international technology transfer is based on the presence of multinational companies, there are considerable problems in many poor countries: these countries are often politically unstable or have generally neglected the creation of a framework that is reliable, consistent and investment-friendly. Countries in the South, eager to achieve progress in the field of sustainability, are well advised to adjust their economic system and the general economic policy strategy in an adequate way. Joint implementation in the field of CO2-reduction could also be useful, the specific issue of raising the share of renewable energy should also be emphasized. Solar power, hydropower and wind power stand for three interesting options that are partly relevant to every country in the world economy. With more countries on the globe involved in emission certificate trading, the price of CO2 certificates should increase in the medium-term that will stimulate expansion of renewables both in the North and in the South. While some economists have raised the issue that promotion of solar power and other renewables in the EU is doubtful,—given the EU emission cap— as it will bring about a fall of CO2 certificates, and ultimately, no additional progress in climate stabilization. One may raise the counter argument that careful nurturing of technology-intensive renewables is a way to stimulate the global renewable industry, which is often characterized by static and dynamic economies of scale. With a rising share of renewables in the EU’s energy sector, there will also be a positive effect on the terms of trade for the EU, as the price of oil and gas is bound to fall in a situation in which credible commitment of European policymakers has been given to encourage expansion of renewables in the medium-term. Sustained green technological progress could contribute to both economic growth and a more stable climate. One may also point out that the global leader in innovativeness in the information and communication technology sector, offers many examples of leading firms (including Google, Deutsche Telekom, SAP and many others) whose top management has visibly emphasized the switch to higher energy efficiency and to using a higher share of renewable energy. Given the fact that the transatlantic banking crisis has started to destabilize many countries in the South in 2008/09, one should keep a close eye on adequate reforms in the international banking system—prospects for environmental sustainability are dim if stability in financial markets in OECD countries and elsewhere could not be restored. There is a host of research issues ahead. One question—that can already be answered—concerns the stability of weights over time used in the construction of the comprehensive composite indicator. While the weights for every year have been calculated independently, one could get further insights if a single set of weights


179

over all years is calculated. Considering the results shown in the table below, it is not straightforward that it is possible to calculate such a common set of weights for the available data. Making such a calculation, this results in weights with a distribution similar to those for the years 2006 and 2007. In 2000, the main weight in the construction of the indicator lies in the savings rate and the SoRRCA, whereas the VolRCA only plays a marginal role. By contrast, in 2006/2007, all three indicators show similar weights, with a slight dominance by the savings rate. In light of these findings, one might conclude,—based on exploitation of more data (as those are published)—that the empirical weights converge to a rather homogenous distribution (Fig. 9). There is quite a lot of room left for conducting further research in the future. However, the basic finding emphasized here is that the variables used are very useful in a composite indicator.

Own calculations With the weights derived from factor analysis we can present our summary findings in the form of two maps (with grey areas for countries with problems in data availability). There is a map for 2000 and another map for 2007—with countries grouped in quantiles (leader group=top 20% vs. 3× 20% in the middle of the performance distribution and lowest 20%=orange). The map (Fig. 10) shows the EIIW-vita Global Sustainability Indicator for each country covered which is composed of the following subindices: & & &

genuine savings rate (3), volume-weighted green international competitiveness (7) and relative share of renewable in energy production (B).

Indonesia has suffered a decline in its international position in the period 2000–07 while Germany and US have improved their performance; compared to 2000, Iran in 2007 has also performed better in the composite indicator in 2007. China, India and Brazil all green, which marks the second best range in the composite indicator performance. The approach presented shifts in the analytical focus away from the traditional, narrow, perspective on greenhouse gases and puts the emphasis on a broader—and more useful—Schumpeterian economic perspective. While there is no doubt that the energy sector is important, particularly the share of renewables in energy production, a broader sustainability perspective seems to be adequate (Fig. 8).

(3) (7) (B)

2000 0.01 0.50 0.50

Fig. 9 Estimated weights from factor analysis

2006 0.29 0.39 0.32

2007 0.30 0.38 0.31

180


Fig. 10 The EIIW-vita global sustainability indicator

4 Policy conclusions There is a broad international challenge for the European countries and the global community, respectively. The energy sector has two particular traits that make it important in both an economic and a political perspective: &

Investment in the energy-producing sector is characterized by a high capital intensity and long amortization periods, so adequate long-term planning in the private and the public sectors is required. Such long term planning—including financing—is not available in the whole world economy; and the Transatlantic Banking Crisis has clearly undermined the stability of the international financial system and created serious problems for long term financing. Thus, the banking


&

181

crisis is directly undermining the prospects of sustainability policies across many countries. Investments of energy users are also mostly long-term. Therefore, it takes time to switch to new, more energy-efficient consumption patterns. As energy generation and traffic account for almost half of global SO2 emissions, it would be wise to not only focus on innovation in the energy sector and in energy-intensive products, but to also reconsider the topic of spatial organization of production. As long as transportation is not fully integrated into CO2 emission certificate trading, the price of transportation is too low—negative external global warming effects are not included in market prices. This also implies that international trading patterns are often too extended. Import taxes on the weight of imported products might be a remedy to be considered by policymakers, since emissions in the transportation of goods are proportionate to the weight of the goods (actually to tonkilometers).

One key problem for the general public as well as for policymakers is the inability of simple indicators to convey a clear message about the status of the quality of environmental and economic dynamics. The traditional Systems of National Accounts does not provide a comprehensive approach which includes crucial green aspects of sustainability. The UN has considered several green satellite systems, but in reality the standard system of national accounts has effectively remained in place so that new impulses for global sustainability could almost be derived from standard macroeconomic figures. The global sustainability indicators presented are a fresh approach to move towards a better understanding of the international position of countries, and hence, for the appropriate policy options to be considered in the field of sustainability policies. International organizations, governments, the general public as well as firms could be interested in a rather simple consistent set of indicators, that convey consistent signals for achieving a higher degree of global sustainability. The proposed indicators are a modest contribution to the international debate, and they could certainly be refined in several ways. For instance, more dimensions of green economic development might be considered, and the future path of economic and ecological dynamics might be assessed by including revealed comparative advantages (or relative world patent shares) in the field of “green patenting”. The new proposed indicators could be important elements of an environmental and economic compass, that suggest optimum ways for intelligent green development. The Global Sustainability Indicator (GSI) provides broad information to firms and consumers in the respective countries and thus could encourage green innovations and new environmental friendly consumption patterns. The GSI also encourages governments in countries eager to catch up with leading countries to provide adequate innovation incentives for firms and households, respectively. This in turn could encourage international diffusion of best practice and thereby contribute to enhanced global sustainability in the world economy. The Copenhagen process will show to what extent policymakers and actors in the business community are able to find new international solutions and to set the right incentives for more innovations in the climate policy arena. There is no reason to be

182


pessimistic, on the contrary, with a world-wide common interest to control global warming there is a new field that might trigger more useful international cooperation among policymakers in general, and among environmental policies, in particular. From an innovation policy perspective there is, however, some reason for pessimism in the sense that the Old Economy industries—most of them are highly energy intense—are well established and have strong links to the political system while small and medium sized innovative firms with relevant R&D activities in global climate control typically find it very difficult to get political support. Thus one should consider to impose specific taxes on non-renewable energy producers and use the proceeds to largely stimulate green innovative firms and sectors, respectively. Competition, free trade and foreign direct investment all have their role in technology diffusion, but without a critical minimum effort by the EU, Switzerland, Norway, the US, China, India, the Asian countries and many other countries it is not realistic to assume that a radical reduction of CO2 emissions can be achieved by 2050. Emphasis should also be put on restoring stability in the financial sector and encouraging banks and other financial institutions to take a more long term view. Here it would be useful to adopt a volatility tax which would be imposed on the variance (or the coefficient of variation) of the rate of return on equity of banks (Welfens 2008, 2009). It is still to be seen whether or not the Copenhagen process can deliver meaningful results in the medium-term and in the long-run. If the financial sector in OECD countries and elsewhere remains in a shaky condition, long-term financing for investment and innovation will be difficult to obtain in the marketplace. This brings us back to the initial conjecture that we need a double sustainability—in the banking sector and in the overall economy. The challenges are tough and the waters on the way to a sustainable global economic-environmental equilibrium might be rough, but the necessary instruments are known: to achieve a critical minimum of green innovation dynamics will require careful watching of standard environmental and economic statistics, but it will also be quite useful to study the results and implications of the EIIW-vita Global Sustainability Indicator.

Appendix Eigenvalues and components Figure 11

Fig. 11 Eigenvalues and components

EV1 EV2 EV3 EV4 VolRCA SavingsRate SoRRCA CO2emissions



-0.679

0.785 0.746

without SoR 1.635 0.760 0.605

-0.733

0.782 0.743

without SoR 1.701 0.693 0.605

-0.876

0.796 0.867

without SoR 2.151 0.520 0.328

with CO2 with SoR 1.743 0.927 0.727 0.603 0.742 0.705 0.472 -0.687

with CO2 with SoR 1.791 0.942 0.677 0.590 0.738 0.715 -0.430 -0.742

with CO2 with SoR 2.252 0.969 0.451 0.328 0.746 0.869 0.412 -0.878

0.830 0.830

without SoR 1.378 0.622

with SoRRCA 1.974 0.808 0.621 0.598 0.725 0.679 0.716 -0.690 0.832 0.832


RCA normal

with SoRRCA 2.004 0.794 0.629 0.573 0.721 0.679 0.684 -0.745

0.871 0.871


RCA normal

with SoRRCA 2.427 0.796 0.449 0.328 0.731 0.863 0.628 -0.868

RCA normal

0.792 0.789 0.467

without CO2 with SoR 1.468 0.918 0.614

0.785 0.803 0.425


0.784 0.882 0.457


0.776 0.755 0.703

0.771 0.756 0.675

-0.624

0.664 0.780

without SoR 1.439 0.883 0.678

2007

with SoRRCA 1.667 0.722 0.611

0.771 0.756 0.675

-0.915

0.163 0.904

without SoR 1.682 0.996 0.323

without SoR 1.621 0.759 0.620

2006

with SoRRCA 1.621 0.759 0.620

0.754 0.869 0.681

with SoRRCA 1.786 0.792 0.422

2000

with CO2 with SoR 1.502 1.109 0.732 0.658 0.521 0.753 0.434 -0.689

with CO2 with SoR 1.519 1.112 0.708 0.662 0.434 0.757 0.454 -0.743

with CO2 with SoR 1.856 1.044 0.777 0.323 0.081 0.872 0.564 -0.878

0.786 0.786


with SoRRCA 1733.000 0.987 0.679 0.601 0.482 0.707 0.717 -0.698

0.800 0.800


MOD RCAVOL

with SoRRCA 1.730 0.998 0.682 0.590 0.407 0.704 0.708 -0.753

MOD RCAVOL

0.712 0.712


MOD RCAVOL with SoRRCA 2.033 1.008 0.636 0.323 0.097 0.867 0.719 -0.869

0.750 0.826 0.211


0.726 0.821 0.207


-0.148 0.783 0.805


0.633 0.798 0.649

with SoRRCA 1.458 0.897 0.645

0.590 0.795 0.638

with SoRRCA 1.387 0.937 0.676

0.015 0.846 0.846

with SoRRCA 1.432 1.000 0.568

Global economic sustainability indicator 183

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Int Econ Econ Policy (2010) 7:187–202 DOI 10.1007/s10368-010-0168-6 ORIGINAL PAPER

Sustainability economics, resource efficiency, and the Green New Deal Lucas Bretschger, ETH Zurich

Published online: 26 June 2010 © Springer-Verlag 2010

Abstract The paper addresses major sustainability issues within a simple general framework. It studies energy scarcity and endogenous capital formation in the long and medium run. It is shown that energy efficiency depends on the sectoral structure of the economy. Accordingly, structural change is an efficient way to promote both efficiency and sustainable development. The results for the medium run imply that the current crises offer a scope for the greening of the economy, provided that policy increases productivity through trust-building. However, there are major differences between economic recovery and sustainability so that the proposals of the Green New Deal have to be evaluated with care. Keywords Sustainability · Resource efficiency · Trust · Green New Deal JEL Classification Q43 · O47 · Q56 · O41

1 Introduction The sustainability debate suggests to aim at a long-run development which is characterized by non-decreasing living standards, a protection of crucial natural resources, and low risks of economic and ecological crises. Economic theory can provide basic insights on how such a sustainable path can be reached. It can also evaluate the usefulness of concrete proposals for a

L. Bretschger (B) CER-ETH Centre of Economic Research, ETH Zurich, ZUE F7, CH-8092 Zurich, Switzerland e-mail: [email protected]

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L. Bretschger

sustainable state, like the targets of 2 kW energy use or 1 ton CO2 emissions per capita. Currently, climate change is the most imminent threat to sustainability. The business-as-usual scenario assumes that under laisser faire greenhouse gas emissions would rise by 45% by 2030, which would cause an increase in the global average temperature of up to 6◦ C. According to the Stern Review (Stern 2007), the warming could entail losses equivalent to 5–10% of global GDP. Poor countries would suffer most with more than 10% losses of GDP. Natural resource depletion and the loss of biodiversity are other critical issues for long-run sustainability. Natural resources affect also the shorter-run development. Recently, we have experienced a triple crisis in the fields of food, fuel, and finance. Prices for food traded internationally increased by 60% in the first half of 2008, oil price peaked at 150 $/barrel, and banking failures caused huge government interventions. Trade and per capita income have contracted worldwide in 2009 which implies one of the major economic downturns of the last decades. The combination of these short-run developments with the long-term predictions lead to a variety of highly demanding research questions. Which mechanisms and activities are crucial to obtain sustainability? How can we decrease the long-term exposition to economic and environmental risks? Can expansionary governmental policy achieve two goals at the same time: stimulate recovery and improve sustainability? The transition to a sustainable state implies a decarbonization of the economy and lower natural resource use. If welfare is to be sustained or increased in the future, the accumulation of man-made inputs consisting of different forms of capital has to be strong enough. The larger the saving effort of the present generation is, the better it is possible to substitute natural resources in production and consumption. The greatest challenge consists in showing that history of economic development can be reversed in the future: while in the past, low prices for the environment have led to extensive natural resource use and rising polluting activities, increasing prices of natural resource use should be able to change this general pattern. Corresponding to the concept of the Environmental Kuznets Curve (see e.g. Egli and Steger 2007), income should rise in the future while natural resource use should decrease. Regarding the recent nexus between the crises and green policies there has been a widespread call for a “New Deal” as in the 1930s but at a global scale and embracing a broader vision, see Barbier (2009). The plan involves a sharp reduction in carbon intensity in order to revitalize the world economy on a more sustainable basis. Thus it is the aim to apply the same kind of long-run instruments for policies of a shorter time horizon. The paper addresses these issues within a simple general framework. It applies the modelling of “new” resource economics, which includes a full characterization of the inherent dynamics and a sectoral structure of the economy. The second part concentrates on the medium run and its connection with sustainability issues, which are normally regarded as purely long term. It is shown that, in the long run, energy efficiency is a crucial issue for sustainability.

Sustainability economics, resource efficiency, and the Green New Deal

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However, we also derive that efficiency is not a pure technology parameter but depends heavily on the sectoral structure of the economy, which at the same time drives long-run growth. The results for the medium run imply that only a part of the proposals for the Green New Deal are promising because there are major differences between the aims of recovery and sustainability. In particular, government investments do not necessarily have the desired effects in the medium run. The present contribution relates to the basic literature on resource economics and growth theory, in particular to Solow (1974a, b), Stiglitz (1974) and Dasgupta and Heal (1974). It relies on recent contributions of resource economics which have widened our knowledge on sustainability, see Bovenberg and Smulders (1995), Barbier (1999), Bretschger (1998, 1999), Scholz and Ziemes (1999), Smulders (2000), Grimaud and Rougé (2003), Xepapadeas (2006), and López et al. (2007), and Bretschger and Smulders (2008). The remainder of the paper is organized as follows. Section 2 presents an approach to obtain sustainability results with a focus on resource efficiency. In Section 3, specific results for the long run are derived. Section 4 introduces the elements of medium-run analysis and the Green New Deal. Section 5 shows results for the comparative dynamics of the model. Section 6 concludes.

2 Efficiency focus In the following, we develop a general framework to study major sustainability issues. The model has some specific features depending on the considered time horizon. For the long run, we allow for all possible substitution mechanisms between inputs and sectors which characterize the long-term flexibility of a market economy. For the medium run, limited substitution between inputs and the emergence of business cycles will be the focus of the study. We start by analyzing aggregate production and the implications for energy efficiency. Instead of adopting a one-sector approach with capital, labor, and energy as inputs we assume that production is characterized by a hierarchical order as follows: final output is manufactured by “produced” inputs and produced inputs are manufactured by primary inputs. This enables us to express the different substitution channels in a simple yet comprehensive manner. The distinctive feature of the model is that the impact of energy on output occurs indirectly, through the produced inputs. It does not mean that energy is unimportant for final goods. On the contrary, energy affects all production processes, including final goods, but in a more detailed way compared to the one-sector model. Assume output Y as a function of total factor productivity A and the produced inputs capital K and intermediate input Z : Y(t) = F A(t), K(t), Z (t)

(1)

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with a convenient specification reading: Y(t) = A(t)K(t)α Z (t)1−α

(2)

where t denotes the time index and 0 < α < 1. Produced inputs K and Z are manufactured in separate sectors of the economy with the primary inputs labor L and energy E, according to: ˙ = L K (t)β E K (t)1−β − δ K(t) K(t)

(3)

Z (t) = L Z (t)γ E Z (t)1−γ

(4)

where K˙ ≡ ∂ K/∂t, δ is the depreciation rate, 0 < β, γ , δ < 1, and the subscripts with inputs denote the sectors. E includes all types of energies and natural resources. Capital K is a broad measure of accumulable inputs. It can be thought of as an aggregate of physical, human, and (private) knowledge capital. Positive spillovers from capital accumulation raise A (as introduced by Arrow 1962), the general productivity of inputs; A can also be interpreted as public knowledge. Material balances define the limits to physical capital, but not to the other capital types. Total energy efficiency x affects output according to: Y≡

F(·) E= x· E E

(5)

where F is determined by (1). Importantly, x is not a single technology parameter as often referred to in applied studies, but rather depends on all the model parameters including production in every sector of the economy. In the steady state ( K˙ = 0; α + η < 1) it reads, using (2), (3), and (4): x=

A(t)δ −α L K (t)αβ L Z (t)(1−α)γ E K (t)α(1−β) E Z (t)(1−α)(1−γ ) E(t)

(6)

It becomes clear from (6), that a change of x is not necessarily due to a change of total factor productivity A. To increase x with a given A, there are options such as a decrease of δ, an increase of L (with L = L K + L Z ), or a reallocation of primary inputs L and E between the different sectors. Thus, energy efficiency is as much an economic and societal result as it is an engineering issue. The effect of a reallocation of primary inputs between the sectors depends on the technology parameters α, β, γ . For example, when reallocating labor from Z - to K-production, following (6) the impact depends on whether αβ is bigger or smaller than (1 − α) γ , which are the exponents of L K (t) and L Z (t). Three remarks concerning the demand side of the economy are in order. The first concerns the level of the steady state capital stock used to calculate (6), which depends on the savings behavior of the households. A higher savings rate enables the economy to accumulate more capital which affects energy efficiency positively as well. Second, an increasing L raises ceteris paribus energy demand of consumers which has to be considered as well. The third remark is about the impact of trade, which affects the domestic economy


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by the terms of trade. Specifically, a very productive (e.g. energy efficient) economy produces a high output which is confronted with demand conditions on world markets. In general, higher efficiency increases output which worsens the terms of trade, except the domestic economy is very small. This means that efficiency affects domestic consumption also through the terms of trade effect. In the following, we analyze long-run and medium-run development in greater detail. Specifically, the long-run sustainability view is first developed and then related to the issue of economic recovery as currently discussed in many countries. Here, the relationship between cycles and growth is the dominant topic to determine efficiency. This connects the model to the debate on the Green New Deal.

3 Long-run analysis Let us now turn to the long-run dynamic aspects of energy efficiency in the present framework. We study the effects of decreasing energy input, which may be the consequence of climate policies or limited resource supply. With hats denoting growth rates and assuming the change of energy input to be negative it follows from (5) that for output to grow: xˆ ≥ − Eˆ

for Y ≥ 0

(7)

has to hold. Equation 7 says that we can directly calculate the efficiency increase xˆ needed for constant or increasing output, as soon as we know the ˆ Evidently, for a growing output, efficiency x has change of energy input − E. to rise faster than energy use E decreases. To see the implications, we have to study the long-run impact of energy E on output. Logarithmic differentiating (2) yields: ˆ + α K(t) ˆ ˆ + (1 − α) Zˆ (t) Y(t) = A(t)

(8)

It is important to note that, with limited supply of L and E, Z is bounded from above, which follows from (4).1 That is, we have Zˆ (t) = 0 in the long run. However, K is substantially different from Z as it is a stock, which accumulates over time. Even with a bounded quantity of primary inputs we can produce an increasing stock of capital. Moreover, it is important to note that A and K are interlinked by positive spillovers, according to Arrow (1962). This means that capital accumulation has a positive impact on factor productivity through learning by doing. In order to avoid the scale effect of growth, see Jones (1995) and Peretto (2009), we can assume that spillovers are generated through an increase of the average capital stock in order to write: K(t)η A(t) = A˜ Z (t)1−α

(9)

1 E is the per-period flow of energy, which is generally limited for non-renewable resources and also limited for renewables, provided that they cannot be infinitely expanded, which we assume.

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where A˜ > 0 is a parameter, 0 < η < 1 denotes the spillover intensity, and we divide by Z 1−α to eliminate the scale of growth.2 Now, (2) becomes: α+η ˜ Y(t) = AK(t)

(10)

According to (10), the only variables which drive development in the long run are K, α and η. A convenient choice is α + η = 1 so that we arrive at the class of the so-called “AK-models” of endogenous or linear growth. Here, ˆ From (3) we capital growth directly translates into output growth, i.e. Yˆ = K. have: L K (t)β E K (t)1−β Kˆ = −δ K(t)

(11)

Equation 11 exhibits that it is not total energy E that has a direct impact on growth. Rather the sectoral input of energy in capital accumulation E K , together with sectoral labor L K ,matters for the growth rate. The lower the energy input E K is, the more important becomes labor used in capital production L K to sustain the growth process. ˆ we have to Equation 11 says that, to determine the impact of Eˆ on Y, ˆ There are two study the effect of Eˆ on L K and E K which determine K. different mechanisms to consider. On the one hand, there is a demand effect, which exhibits how demand for capital affects input use in capital production. Observing the general production relation (1), Eˆ < 0 affects the demand for capital by Y-producers through a change in the output share of capital. Provided that the elasticity of substitution between K and Z is high (i.e. above unity), the income share of capital increases and the demand for capital rises which fosters growth. With the same argument, a low input elasticity between K and Z depresses the reward for capital which decreases growth prospects. This is the well-known result of resource economics in the 1970s, see Dasgupta and Heal (1974). With the Cobb Douglas specification (2), of course, these shares remain exactly constant and the effect does not materialize. In this case, a change of energy input has no impact on capital accumulation through the demand effect. While for the demand effect we aim at a high substitution elasticity for sustainability, the same does not necessarily hold true for the supply effect which deals with the cost of capital accumulation. To see the cost effect observe that E is an input both in (3) and (4). With the given Cobb Douglas specification it is again that shares remain constant and labor cost remain unaffected by energy prices and quantities. To see the supply effect, assume for a moment that the shares β and γ are not constant but depend on relative input prices. This means that the Cobb Douglas specifications in (3) and (4) are replaced by more general CES functions where the elasticity of substitution between L and E is unequal one. Then, Eˆ < 0 causes input substitution and

2 The

division by the intermediate input is convenient but not necessary for the argument.


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an induced change of output in both activities. Specifically, labor moves to the sector where wages become (relatively) more attractive which is the sector with the higher elasticity of substitution. Provided that substitution possibilities are better in capital accumulation than in the production of Z , increasing energy scarcity causes L to move from the Z -sector to the capital sector which enhances capital accumulation and the growth of energy efficiency and output. Therefore, xˆ does not depend on the absolute values of the elasticities of input substitution but on their relative values. Poor input substitution elasticities are not necessarily detrimental for growth. For sustainability, the elasticity of substitution has to be higher in the capital accumulation sector compared to the competing sector, which is the Z -sector, see Bretschger and Smulders (2008) for a more detailed analysis. Hence, sustainability depends not only on input substitution but also on sectoral change, which promotes growth, when primary inputs are reallocated towards capital accumulation. The model can be extended to more types of capital. Specifically, K can be disaggregated into physical, human, and (private) knowledge capital. For these different capital types, the described demand and supply effects can be studied separately.3 The interesting feature of this approach is that it has neither to assume high elasticities of input substitution or an ever increasing use of material input to predict sustainable development, which were the assumptions of earlier models criticized by ecologists, see Cleveland and Ruth (1997).

4 Medium-run analysis For the analysis of the medium run, we introduce business cycles and consider the effects of zero input substitution. As an additional model element, we introduce a variable for the trust level in the economy. We then focus on cycles emerging from trust building through capital accumulation. Accordingly, the capital build-up is associated with social learning which entails trust and confidence. We assume that, besides the long-run positive learning effects of capital accumulation, there is also cyclical learning in the economy. Trust and confidence gradually build up during a cycle. They reflect broad areas such as trust in rules and institutions, the emergence of implicit contracts, and the efficiency of additional markets (like the interbank market). These issues affect people’s willingness to cooperate and thus the productivities of the inputs. We can model the emergence and disappearance of trust as an externality, like the positive spillovers. Specifically, we assume that the start of a cycle is triggered by an exogenous event, e.g. a new technology or a specific policy; examples are the appearance of the internet or the home-owning initiative of the US government. But then, after a certain time, trust building fades

3 Empirical

evidence suggests that a decrease in energy use fosters investments in physical and knowledge capital and is neutral with regard to human capital, see Bretschger (2009).

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Fig. 1 Trust and cycle

Learning-by doing spillovers Trust

1

Capital

so that the additional productivity deteriorates. Thus while the economic upswing is achieved through an increasing trust in the new paradigm, the economic downturn is due to learning about problems and misjudgements of the paradigm. Possibly, new cycles emerge during or after this process. Figure 1 shows the relationship between capital and learning graphically, during one cycle. In the following, B j denotes the size of trust in the j th cycle; it is determined by positive spillovers from capital accumulation. We have B j = 0 until a technology or policy shock occurs (which happens at K = K j). The development of B j is determined by the “trust dissemination rate” ¯κ and the “maximum obtainable” trust B¯ j. κ reflects communication within the business community and the political sector (e.g. electronic media are assumed to increase κ). B¯ j depends on the perceived potential of the new paradigm, i.e. the productivity enhancing effect of the new cycle. κ and B¯ j together determine when the cycle ends (which happens at K = K¯ j). For simplicity, we assume B ≥ 1 below.4 Adopting a logistic form for trust building through capital accumulation we get: B j(t) = max{κ · K(t) 1 − K (t) / K¯ j (t) , 0} + 1 (12) so that

K¯ j (t) = 4 B¯ j − 1 /κ + K j(t) (13) ¯ which determines the end point of cycle j and its length, see the Appendix for the derivation. In the medium run, energy and capital are assumed to be pure complements. However, energy-saving investments are now feasible. We define K˜ as: ˜ = min {B(t) · K(t), D(t) · E(t)} K(t)

(14)

where B is given by (12) and j is omitted from now on because there is no ambiguity. D is a partial energy efficiency parameter (note that in general D = x). With given technology (fixed D), E and B(t)K(t) are pure complements. However, substitution between D and E is possible, the substitution elasticity is unity, as usual. K˜ increases with K when E and/or D rise(s). D(t) can be increased by research investments.

4 To

take B positive but smaller than unity would be feasible as well.


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Moreover, we assume for simplicity in the medium-run analysis that the production technologies of Y and K are symmetric and of the Cobb-Douglas form. In this way, (3) can be simplified and K accumulates according to: ˙ = s · Y(t) − δ K(t) K(t)

(15)

where s is the savings rate. A(t) now reads: ¨ η K(t) A(t) = A˜ Z (t)1−α

(16)

where K¨ is actually used capital ( K¨ < K when BK < DE) and we again divide by Z 1−α to eliminate the scale effect. During a cycle, maximum output is obtained with B(t) · K(t) = D(t) · E(t), which applies when energy supply is fully elastic. Then, the model predicts cyclical energy use. Regarding the supply of energy we argue along two possible scenarios. In regime 1 (“affluent energy”), energy supply is fully elastic at given energy prices p¯ E : p E = p¯ E

(17)

Growth in regime 1 is then determined by BK = DE, K˜ = BK, and K¨ = K so that we obtain: ˜ α Kα+η Y = AB

(18)

˜ α Kα+η−1 − δ Kˆ = s AB

(19)

In regime 2 (“limiting energy”), energy supply is restricted according to: E = E¯ < B · K/D

(20)

¯ Growth in regime 2 is thus bounded by energy supply E. Figure 2 exhibits the different possible developments paths for the economy. ˜ α Kα+η in The geometrical loci labelled with Y denote output with Y = AB regime 1 and Y depending on E in regime 2. The case for regime 1 with α + η < 1 is depicted with the solid curved line. Long-term learning spillovers ˜ α Kα+η > Y = A˜ (BK)α . The (η > 0) shift development upward, i.e. Y = AB cyclical impact of trust is added by the dotted semicircles above the curve. If positive learning effects are strong we may have α + η = 1 and get constant returns to capital, which leads to the solid straight line for Ys .5 If energy is the limiting factor as in regime 2, output becomes lower (an example is given with the dashed line for Yd ), with fading energy input and constant D it even approaches zero in the long run. When, in addition, temporary energy shocks in form of intensified shortages hit the economy (like in the 1970s), output

5 Trust

is not added in this case but used in the following figures.

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Y

YS

δ

s

K

Y

Yd

K

deviates downward (see the dotted downward deviations). As the steady state assuming α + η < 1 is defined by K˙ = 0, the intersection of the Y-loci with the δ K/s-locus yields the long-run equilibrium. In the following, we use these scenarios for the discussion of the different policies.

5 Comparative dynamics In this section, we present several policies associated to the Green New Deal and their effects on output according to the assumptions of the mediumrun model. The results for the two energy regimes are presented. It is most instructive to present the results graphically with a short verbal description; the summary discussion is given in the last subsection.

g

s AB s A δ

K Fig. 3 Growth in regime 1


a

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b s AB

s AB

s AB

K

g

g sA

s A

δ

δ

K

K

Fig. 4 Impact of subsidies and trust building

5.1 Regime 1 (affluent energy) When energy supply is fully elastic, we have BK = DE which entails K˜ = BK and K¨ = K. Assuming that α + η = 1 we get for capital growth: ˜ α −δ Kˆ ≡ g = s AB

(21)

Figure 3 shows the cyclical growth rate of capital graphically. Possible policies in the spirit of the Green New Deal are to subsidize savings s, to affect trust building κ, to affect depreciation δ or to launch a new cycle B. Let us consider the effects in turn. We first show graphical representations of the results for the two energy regimes and then discuss the impact of policy in a summary at the end of the section. When the government decides to subsidize savings s, the direct effect on growth is positive but overall growth might still decrease because of shrinking B, see Fig. 4a. When the government decides to support trust building in the present paradigm (by e.g. reinforcing a paradigm-specific policy) it increases growth in the short run but cannot prevent growth from decreasing at the end of the cycle, see Fig. 4b. Provided that investments are reallocated to more sustainable sectors or processes (minergy housing, hybrid cars) it is conceivable to assume that depreciation increases in the medium run which harms growth, see Fig. 5a.6 Only in the case in which the government is able to start a new trust cycle (a new paradigm), growth increases in the short and medium term, see Fig. 5b.

6 In

parallel, employment might get hit because the reallocation of workers can cause adjustment costs, but this is not included in the model.

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a

b

Fig. 5 Impact of depreciation and new trust cycle

5.2 Regime 2 (limiting energy) Assuming that BK > DE we get K˜ = DE and K¨ = DE/B < K so that: Y = A˜ · B−η · (DE)α+η ˆ + Eˆ Yˆ = −η Bˆ + (α + η) D

(22)

Increasing trust B now involves a countercyclical effect, i.e. it has a negative ¨ not on K, see (16)). impact on income and growth (because A depends on K, α+η −η ˜ ˆ − δ but only investments Capital increases according to K = s · AB (DE) in energy-savings are relevant for output according to: ˙ = sDY D ˜ −η (DE)α+η = s D · AB Assuming α + η = 1, output growth is given by: ˆ + Eˆ Yˆ = −η Bˆ + D which is represented in Fig. 6, still assuming Eˆ < 0.

Fig. 6 Growth in regime 2

(23)


a

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b

Fig. 7 Impact of energy and savings

Possible policies in the wave of the Green New Deal concern instruments to change energy use, to subsidize savings s, and to subsidize energy-saving technology through raising s D . To decrease energy use has a negative effect on growth in the medium run, see Fig. 7a.7 Remarkably, rising capital investments by increasing s has a negative effect on growth in this case, because capital becomes more productive through an increase in trust ( Bˆ > 0), so that less capital is used and spillovers are reduced, see (23) and Fig. 7b. The best policy concerns an improvement of energy saving technologies, because it leads to a relaxation of the energy supply constraint and unambiguously raises growth, see Fig. 8. In regime 2, energy E affects output Y according to ¨ η [D(t) · E(t)]α L(t)1−α Y(t) = K(t) ˜ D, and where K¨ denotes capital in use ( K¨ = DE/B < K). Thus with given K, L, output Y directly depends on E. Moreover, decreasing energy input limits long-run development prospects (see Fig. 2), provided that improvements in energy efficiency B cannot compensate for fading energies. 5.3 Policy assessment From the above results of comparative dynamics we derive that, in a mediumrun downturn, increasing the savings rate s and associated capital investments through governmental policy shortens the downturn time of the cycle but does not necessarily increase (medium-run) income because trust B is decreasing. This holds true unless policy is able to increase new trust, i.e. to start a new paradigm, where income increases with a new cycle. We have thus to ask how likely it is that a new paradigm can arise through the implementation of green policies.

7 This

result is not necessarily identical to the long run, see Section 3.

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Fig. 8 Impact of higher energy efficency

Increasing capital investments by governmental policy possibly involves two further problems. First, it has no impact on long-run income, provided that energy is scarce (regime 2). Second, if we are in regime 1, increasing capital investments raise energy demand thereby raising exposure to risk of future energy supply shortages. Increasing energy efficiency by governmental policy supports the development of long-run income in regime 2. At the same time, it decreases long-run energy demand and reduces the risk in the case of energy shortages as with low energy input, the term B(t) · E(t) is dominated by efficiency B(t). When energy is abundant (regime 1), increasing energy efficiency by governmental policy reduces energy use but does not foster income and growth.

6 Conclusions The model used in this paper provides results for sustainability policies in the long and medium run. For the long run, substitution between inputs and, above all, between sectors is necessary to move the economy towards higher resource efficiency and to enable ongoing growth. Medium-run policies may aim at escaping an economic downturn with several measures summarized under the title “Green New Deal”. We conclude that, in principle, it is a valid point to direct government expenditure toward a greening of the economy, if these expenditures are carried out anyway. But it has to be noted that mediumrun recovery is not the primary target of sustainability policies. For example, with regard to future living standards and risk exposure, sustainability calls for policies increasing energy efficiency rather than raising capital investments. Assuming that sustainability policies create new trust brings the goals of recovery and sustainability in line, as claimed by the Green New Deal. But is it realistic? Further problems of large green programmes with huge government spending are the lack of mature energy projects (causing low efficiency) and possibly high administrative costs. In addition, these policies might carry a green label but in fact only help existing industries to survive (like the German “scrap premium”). Finally, taxes and permit markets can have similar or better effects, without causing a high burden for public budgets.


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Except the explanations on the terms of trade effect we did not treat the international dimension in this paper. Of course, the state of the environment and economic growth are both largely influenced by the economic relations between economies and world regions. Thus the combination of dynamics, trade and environment is a promising field for further economic research. Looking at the existing literature indicates that more interesting results can be expected in the future. Many results of growth theory are only valid for closed economies; by opening the economies, one should try to confirm, reject or refine these model outcomes.

Appendix Calculation of B B j(t) = κ · K j(t) − κ · K j (t)2 / K¯ j (t) + 1 ∂ B j(t) =0 B¯ j : ∂ K j(t) ⇔ κ = 2 · κ · K j (t) / K¯ j (t) ⇔ K¯ j (t) = 2 · K j (t) ⇔ K j (t) = K¯ j (t) /2 Inserting in the logistic function gives B¯ j(t) = κ · K¯ j (t) /2 1 − K¯ j (t) /2 K¯ j (t) + 1 = κ · K¯ j (t) /2 · 1/2 + 1 = κ · K¯ j (t) /4 + 1 so that K¯ j (t) = 4( B¯ j − 1)/κ if K j(t) = 0 and K¯ j (t) −K j(t) = 4( B¯ j − 1)/κ if ¯ ¯ K j(t) > 0 as used in the main text. ¯ References Arrow KJ (1962) The economic implications of learning by doing. Rev Econ Stud 29:155–173 Barbier EB (1999) Endogenous growth and natural resource scarcity. Environ Resour Econ 14(1):51–74 Barbier EB (2009) A global Green New Deal. Report prepared for the Green Economy Initiative and the Division of Technology, Industry and Economics of the UN Environment Programme Bovenberg AL, Smulders S (1995) Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model. J Public Econ 57:369–391 Bretschger L (1998) How to substitute in order to sustain: knowledge driven growth under environmental restrictions. Environ Dev Econ 3:425–442 Bretschger L (1999) Growth theory and sustainable development. Edward Elgar, Cheltenham UK Bretschger L (2009) Energy prices, growth, and the channels in between: theory and evidence. CER-ETH Economics Working Paper Series 06/47, ETH Zurich

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Bretschger L, Smulders S (2008) Sustainability and substitution of exhaustible natural resources; how resource prices affect long-Term R&D-Investments. CER-ETH Economics Working Paper Series 03/26, ETH Zurich Cleveland C, Ruth M (1997) When, where and by how much do biophysical limits constrain the economic process; a survey of Nicolas Georgescu-Roegen’s contribution to ecological economics. Ecol Econ 22:203–223 Dasgupta PS, Heal GM (1974) The optimal depletion of exhaustible resources. Rev Econ Stud 41:3–28 Egli H, Steger T (2007) A dynamic model of the environmental Kuznets curve: turning point and public policy. Environ Resour Econ 36(1):15–34 Grimaud A, Rougé L (2003) Non-renewable resources and growth with vertical innovations: optimum, equilibrium and economic policies. J Environ Econ Manage 45:433–453 Jones C (1995) R&D-based models of economic growth. J Polit Econ 103:759–784 López R, Anriquez G, Gulati S (2007) Structural change and sustainable development. J Environ Econ Manage 53:307–322 Peretto P (2009) Energy taxes and endogenous technological change. J Environ Econ Manage 57/3:269–283 Scholz CM, Ziemes G (1999) Exhaustible resources, monopolistic competition, and endogenous growth. Environ Resour Econ 13:169–185 Smulders S (2000) Economic growth and environmental quality. In: Folmer H, Gabel L (eds) Principles of environmental economics. Edward Elgar, Cheltenham UK, chapter 20 Solow RM (1974a) Intergenerational equity and exhaustible resources. Rev Econ Stud 41:29–45 Solow RM (1974b) The economics of resources or the resources of economics. Am Econ Rev 64:1–14 Stern N (2007) The economics of climate change. Cambridge University Press, Cambridge Stiglitz JE (1974) Growth with exhaustible natural resources: efficient and optimal growth paths. Rev Econ Stud 41:123–137 Xepapadeas A (2006) Economic growth and the environment. In: Mäler K-G, Vincent J (eds) Handbook of environmental economics. Elsevier Science, Amsterdam


The U.S. proposed carbon tariffs, WTO scrutiny and China’s responses ZhongXiang Zhang

Published online: 28 May 2010 # Springer-Verlag 2010

Abstract With governments from around the world trying to hammer out a post2012 climate change agreement, no one would disagree that a U.S. commitment to cut greenhouse gas emissions is essential to such a global pact. However, despite U.S. president Obama’s announcement to push for a commitment to cut U.S. greenhouse gas emissions by 17% by 2020, in reality it is questionable whether U.S. This paper is built on the keynote address on Encouraging Developing Country Involvement in a Post2012 Climate Change Regime: Carrots, Sticks or Both? at the Conference on Designing International Climate Change Mitigation Policies through RD&D Strategic Cooperation, Catholic University Leuven, Belgium, 12 October 2009; the invited presentation on Multilateral Trade Measures in a Post-2012 Climate Change Regime?: What Can Be Taken from the Montreal Protocol and the WTO? both at the International Workshop on Post-2012 Climate and Trade Policies, the United Nations Environment Programme, Geneva, 8–9 September 2008 and at Shanghai Forum 2009: Crisis, Cooperation and Development, Shanghai, 11–12 May 2009; the invited presentation on Climate Change Meets Trade in Promoting Green Growth: Potential Conflicts and Synergies at the East-West Center/Korea Development Institute International Conference on Climate Change and Green Growth: Korea’s National Growth Strategy, Honolulu, Hawaii, 23–24 July 2009; the invited presentation on NAMAs, Unilateral Actions, Registry, Carbon Credits, MRV and Long-term Low-carbon Strategy at International Workshop on Envisaging a New Climate Change Agreement in Copenhagen, Seoul, 13 November 2009; and the invited panel discussion on Green Growth, Climate Change and WTO at the Korea International Trade Association/Peterson Institute for International Economics International Conference on the New Global Trading System in the Post-Crisis Era, Seoul, 7 December 2009. It has benefited from useful discussions with the participants in these meetings. That said, the views expressed here are those of the author. The author bears sole responsibility for any errors and omissions that may remain. Z. Zhang Research Program, East-West Center, 1601 East-West Road, Honolulu, HI 96848-1601, USA Z. Zhang Center for Energy Economics and Strategy Studies, Fudan University, Shanghai, China Z. Zhang Institute of Policy and Management, Chinese Academy of Sciences, Beijing, China Z. Zhang China Centre for Urban and Regional Development Research, Peking University, Beijing, China Z. Zhang (*) Center for Environment and Development, Chinese Academy of Social Sciences, Beijing, China e-mail: [email protected]

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Congress will agree to specific emissions cuts, although they are not ambitious at all from the perspectives of both the EU and developing countries, without the imposition of carbon tariffs on Chinese products to the U.S. market, even given China’s own announcement to voluntarily seek to reduce its carbon intensity by 40– 45% over the same period. This dilemma is partly attributed to flaws in current international climate negotiations, which have been focused on commitments on the two targeted dates of 2020 and 2050. However, if the international climate change negotiations continue on their current course without extending the commitment period to 2030, which would really open the possibility for the U.S. and China to make the commitments that each wants from the other, the inclusion of border carbon adjustment measures seems essential to secure passage of any U.S. legislation capping its own greenhouse gas emissions. Moreover, the joint WTO-UNEP report indicates that border carbon adjustment measures might be allowed under the existing WTO rules, depending on their specific design features and the specific conditions for implementing them. Against this background, this paper argues that, on the U.S. side, there is a need to minimize the potential conflicts with WTO provisions in designing such border carbon adjustment measures. The U.S. also needs to explore, with its trading partners, ccooperative sectoral approaches to advancing low-carbon technologies and/or concerted mitigation efforts in a given sector at the international level. Moreover, to increase the prospects for a successful WTO defence of the Waxman-Markey type of border adjustment provision, there should be: 1) a period of good faith efforts to reach agreements among the countries concerned before imposing such trade measures; 2) consideration of alternatives to trade provisions that could reasonably be expected to fulfill the same function but are not inconsistent or less inconsistent with the relevant WTO provisions; and 3) trade provisions that should allow importers to submit equivalent emission reduction units that are recognized by international treaties to cover the carbon contents of imported products. Meanwhile, being targeted by such border carbon adjustment measures, China needs to, at the right time, indicate a serious commitment to address climate change issues to challenge the legitimacy of the U.S. imposing carbon tariffs by signaling well ahead that it will take on binding absolute emission caps around the year 2030, and needs the three transitional periods of increasing climate obligations before taking on absolute emissions caps. This paper argues that there is a clear need within a climate regime to define comparable efforts towards climate mitigation and adaptation to discipline the use of unilateral trade measures at the international level. As exemplified by export tariffs that China applied on its own during 2006–08, the paper shows that defining the comparability of climate efforts can be to China’s advantage. Furthermore, given the fact that, in volume terms, energy-intensive manufacturing in China values 7 to 8 times that of India, and thus carbon tariffs have a greater impact on China than on India, the paper questions whether China should hold the same stance on this issue as India as it does now, although the two largest developing countries should continue to take a common position on other key issues in international climate change negotiations. Keywords Post-2012 climate negotiations . Border carbon adjustments . Carbon tariffs . Emissions allowance requirements . Cap-and-trade regime . Lieberman-Warner bill . Waxman-Markey bill . World trade organization . Kyoto protocol . China . United States

The U.S. proposed carbon tariffs, WTO scrutiny and China’s responses

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JEL classification F18 . Q48 . Q54 . Q56 . Q58

1 Introduction There is a growing consensus that climate change has the potential to seriously damage our natural environment and affect the global economy, thus representing the world’s most pressing long-term threat to future prosperity and security. With greenhouse gas emissions embodied in virtually all products produced and traded in every conceivable economic sector, effectively addressing climate change will require a fundamental transformation of our economy and the ways that energy is produced and used. This will certainly have a bearing on world trade as it will affect the cost of production of traded products and therefore their competitive positions in the world market. This climate-trade nexus has become the focus of an academic debate (e.g., Bhagwati and Mavroidis 2007; Charnovitz 2003; Ismer and Neuhoff 2007; Swedish National Board of Trade 2004; The World Bank 2007; Zhang 1998, 2004, 2007a; Zhang and Assunção 2004), and gains increasing attention as governments are taking great efforts to implement the Kyoto Protocol and forge a post-2012 climate change regime to succeed it. The Intergovernmental Panel on Climate Change (IPCC) calls for developed countries to cut their greenhouse gas emissions by 25–40% by 2020 and by 80% by 2050 relative to their 1990 levels, in order to avoid dangerous climate change impacts. In the meantime, under the United Nations Framework Convention on Climate Change (UNFCCC) principle of “common but differentiated responsibilities,” developing countries are allowed to move at different speeds relative to their developed counterparts. This principle is clearly reflected in the Bali roadmap, which requires developing countries to take “nationally appropriate mitigation actions … in the context of sustainable development, supported and enabled by technology, financing and capacity-building, in a measurable, reportable and verifiable manner.” Understandably, the U.S. and other industrialized countries would like to see developing countries, in particular large developing economies, go beyond that because of concerns about their own competitiveness and growing greenhouse gas emissions in developing countries. They are considering unilateral trade measures to “induce” developing countries to do so. This has been the case in the course of debating and voting on the U.S. congressional climate bills capping U.S. greenhouse gas emissions. U.S. legislators have pushed for major emerging economies, such as China and India, to take climate actions comparable to that of U.S. If they do not, products sold on the U.S. market from these major developing countries will have to purchase and surrender emissions allowances to cover their carbon contents. These kinds of border carbon adjustment measures have raised great concerns about whether they are WTO-consistent and garnered heavy criticism from developing countries. To date, border adjustment measures in the form of emissions allowance requirements (EAR) under the U.S. proposed cap-and-trade regime are the most concrete unilateral trade measure put forward to level the carbon playing field. If improperly implemented, such measures could disturb the world trade order and trigger a trade war. Because of these potentially far-reaching impacts, this paper will focus on this type of unilateral border adjustment. It requires importers to acquire

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and surrender emissions allowances corresponding to the embedded carbon contents in their goods from countries that have not taken climate actions comparable to that of the importing country. My discussion is mainly on the legality of unilateral EAR under the WTO rules.1 Section 2 briefly describes the border carbon adjustment measures proposed in the U.S. legislations. Section 3 deals with the WTO scrutiny of EAR proposed in the U.S. congressional climate bills and methodological challenges in implementing EAR. With current international climate negotiations flawed with a focus on commitments on the two targeted dates of 2020 and 2050, the inclusion of border carbon adjustment measures seems essential to secure passage of any U.S. climate legislation. Given this, Section 4 discuses how China should respond to the U.S. proposed carbon tariffs. The paper ends with some concluding remarks on the needs, on the U.S. side, to minimize the potential conflicts with WTO provisions in designing such border carbon adjustment measures, and with suggestion for China, as the target of such border measures to effectively deal with the proposed border adjustment measures to its advantage.

2 Proposed border adjustment measures in the U.S. climate legislations The notion of border carbon adjustments (BCA) is not an American invention. The idea of using BCA to address the competitiveness concerns as a result of differing climate policy was first floated in the EU, in response to the U.S. withdrawal from the Kyoto Protocol. Dominique de Villepin, the then French prime minister, proposed in November 2006 for carbon tariffs on goods from countries that had not ratified the Kyoto Protocol. He clearly had the U.S. in mind when contemplating such proposals aimed to bring the U.S. back to the table for climate negotiations. However, Peter Mandelson, the then EU trade commissioner, dismissed the French proposal as not only a probable breach of trade rules but also “not good politics” (Bounds 2006). As a balanced reflection of the divergent views on this issue, the European Commission has suggested that it could implement a “carbon equalization system … with a view to putting EU and non-EU producers on a comparable footing.” “Such a system could apply to importers of goods requirements similar to those applicable to installations within the European Union, by requiring the surrender of allowances” (European Commission 2008). In light of this, various proposals about carbon equalization systems at the border have been put forward, the most recent linked to French president Nicolas Sarkozy’s proposal for “a carbon tax at the borders of Europe.” President Sarkozy renewed such a call for a European carbon tax on imports when unveiling the details of France’s controversial national carbon tax of €17 per ton of CO2 emissions. He defended his position by citing comments from the WTO that such a tax could be compatible with its rules and referring to a similar border carbon adjustment provision under the Waxman-Markey bill in the U.S. House to be discussed in the next two sections, arguing that “I don’t see why the US can do it and Europe cannot” (Hollinger 2009). So far, while the EU has considered the possibility of imposing a border allowance adjustment should serious leakage issues arise in the future, it has put this option on hold at least until 1

See Reinaud (2008) for a review of practical issues involved in implementing unilateral EAR.


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2012. The European Commission has proposed using temporary free allocations to address competitiveness concerns in the interim. Its aim is to facilitate a post-2012 climate negotiation while keeping that option in the background as a last resort. Interestingly, the U.S. legislators have not only embraced such BCA measures that they opposed in the past, but have also focused on their design issues in more details. In the U.S. Senate, the Boxer Substitute of the Lieberman-Warner Climate Security Act (S. 3036) mandates that starting from 2014 importers of products covered by the cap-and-trade scheme would have to purchase emissions allowances from an International Reserve Allowance Programme if no comparable climate action were taken in the exporting country. Least developed countries and countries that emit less than 0.5% of global greenhouse gas emissions (i.e., those not considered significant emitters) would be excluded from the scheme. Given that most carbon-intensive industries in the U.S. run a substantial trade deficit (Houser et al. 2008), this proposed EAR clearly aims to level the carbon playing field for domestic producers and importers. In the U.S. House of Representatives, the American Clean Energy and Security Act of 2009 (H.R. 2998),2 sponsored by Reps. Henry Waxman (D-CA) and Edward Markey (D-MA), was narrowly passed on 26 June 2009. The so-called Waxman-Markey bill sets up an “International Reserve Allowance Program” whereby U.S. importers of primary emission-intensive products from countries having not taken “greenhouse gas compliance obligations commensurate with those that would apply in the United States” would be required to acquire and surrender carbon emissions allowances. The EU by any definition would pass this comparability test, because it has taken under the Kyoto Protocol and is going to take in its follow-up regime much more ambitious climate targets than U.S. Because all other remaining Annex 1 countries but the U.S. have accepted mandatory emissions targets under the Kyoto Protocol, these countries would likely pass the comparability test as well, which exempts them from EAR under the U.S. cap-and-trade regime. While France targeted the American goods, the U.S. EAR clearly targets major emerging economies, such as China and India.

3 WTO scrutiny of U.S. congressional climate bills The import emissions allowance requirement was a key part of the LiebermanWarner Climate Security Act of 2008, and will re-appear again as the U.S. Senate debates and votes its own version of a climate change bill in 2010 after the U.S. House of Representatives narrowly passed the Waxman-Markey bill in June 2009. Moreover, concerns raised in the Lieberman-Warner bill seem to have provided references to writing relevant provisions in the Waxman-Markey bill to deal with the competitiveness concerns. For these reasons, I start with the Lieberman-Warner bill. A proposal first introduced by the International Brotherhood of Electrical Workers (IBEW) and American Electric Power (AEP) in early 2007 would require importers to acquire emission allowances to cover the carbon content of certain products from countries that do not take climate actions comparable to that of the U.S. (Morris and 2 H.R. 2998, available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2998ih.txt.pdf.

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Hill 2007). The original version of the Lieberman-Warner bill incorporated this mechanism, threatening to punish energy-intensive imports from developing countries by requiring importers to obtain emission allowance, but only if they had not taken comparable actions by 2020, eight years after the effective start date of a U.S. cap-and-trade regime begins. It was argued that the inclusion of trade provisions would give the U.S. additional diplomatic leverage to negotiate multilaterally and bilaterally with other countries on comparable climate actions. Should such negotiations not succeed, trade provisions would provide a means of leveling the carbon playing field between American energy-intensive manufacturers and their competitors in countries not taking comparable climate actions. Not only would the bill have imposed an import allowance purchase requirement too quickly, it would have also dramatically expanded the scope of punishment: almost any manufactured product would potentially have qualified. If strictly implemented, such a provision would pose an insurmountable hurdle for developing countries (The Economist 2008). It should be emphasized that the aim of including trade provisions is to facilitate negotiations while keeping open the possibility of invoking trade measures as a last resort. The latest version of the Lieberman-Warner bill has brought the deadline forward to 2014 to gain business and union backing.3 The inclusion of trade provisions might be considered the “price” of passage for any U.S. legislation capping its greenhouse gas emissions. Put another way, it is likely that no climate legislation can move through U.S. Congress without including some sort of trade provisions. An important issue on the table is the length of the grace period to be granted to developing countries. While many factors need to be taken into consideration (Haverkamp 2008), further bringing forward the imposition of allowance requirements to imports is rather unrealistic, given the already very short grace period ending 2019 in the original version of the bill. It should be noted that the Montreal Protocol on Substances that Deplete the Ozone Layer grants developing countries a grace period of 10 years (Zhang 2000). Given that the scope of economic activities affected by a climate regime is several orders of magnitude larger than those covered by the Montreal Protocol, if legislation incorporates border adjustment measures (put the issue of their WTO consistency aside), in my view, they should not be invoked for at least 10 years after mandatory U.S. emission targets take effect. Moreover, unrealistically shortening the grace period granted before resorting to the trade provisions would increase the uncertainty of whether the measure would withstand a challenge by U.S. trading partners before the WTO. As the ruling in the Shrimp-Turtle dispute indicates (see Box 2), for a trade measure to be considered WTO-consistent, a period of good-faith efforts to reach agreements among the countries concerned is needed before imposing such trade measures. Put another way, trade provisions should be preceded by major efforts to negotiate with partners within a reasonable timeframe. Furthermore, developing countries need a reasonable length of time to develop and operate national climate policies and measures. Take 3

This is in line with the IBEW/AEP proposal, which requires U.S. importers to submit allowances to cover the emissions produced during the manufacturing of those goods two years after U.S. starts its capand-trade program (McBroom 2008).


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the establishment of an emissions trading scheme as a case in point. Even for the U.S. SO2 Allowance Trading Program, the entire process from the U.S. Environmental Protection Agency beginning to compile the data for its allocation database in 1989 to publishing its final allowance allocations in March 1993 took almost four years. For the first phase of the EU Emissions Trading Scheme, the entire process took almost 2 years from the EU publishing the Directive establishing a scheme for greenhouse gas emission allowance trading on 23 July 2003 to it approving the last national allocation plan for Greece on 20 June 2005. For developing countries with very weak environmental institutions and that do not have dependable data on emissions, fuel uses and outputs for installations, this allocation process is expected to take much longer than what experienced in the U.S. and the EU (Zhang 2007b).

Box 1 Core WTO principles GATT Article 1 (‘most favored nation’ treatment): WTO members not allowed to discriminate against like imported products from other WTO members GATT Article III (‘national treatment’): Domestic and like imported products treated identically, including any internal taxes and regulations GATT Article XI (‘elimination of quantitative restrictions’): Forbids any restrictions (on other WTO members) in the form of bans, quotas or licenses GATT Article XX “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be constructed to prevent the adoption or enforcement by any contracting party of measures… (b) necessary to protect human, animal or plant life or health; … (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; ...” The threshold for (b) is higher than for (g), because, in order to fall under (b), the measure must be “necessary”, rather than merely “relating to” under (g).

Box 2 Implications of the findings of WTO the shrimp-turtle dispute To address the decline of sea turtles around the world, in 1989 the U.S. Congress enacted Section 609 of Public Law 101-162 to authorize embargoes on shrimp harvested with commercial fishing technology harmful to sea turtles. The U.S. was challenged in the WTO by India, Malaysia, Pakistan and Thailand in October 1996, after embargoes were leveled against them. The four governments challenged this measure, asserting that the U.S. could not apply its laws to foreign process and production methods. A WTO Dispute Settlement Panel was established in April 1997 to hear the case. The Panel found that the U.S. failed to approach the complainant nations in serious multilateral negotiations before enforcing the U.S. law against those nations. The Panel held that the U.S. shrimp embargo was a class of measures of processes-and-production-methods type and had a serious threat to the multilateral trading system because it conditioned market access on the conservation policies of foreign countries. Thus, it cannot be justified under GATT Article XX. However, the WTO Appellate Body overruled the Panel’s reasoning. The Appellate Body held that a WTO member requires from exporting countries compliance, or adoption of, certain policies prescribed by the importing country does not render the measure inconsistent with the WTO obligation. Although the Appellate Body still found that the U.S. shrimp embargo was not justified under GATT Article XX, the decision was not on ground that the U.S. sea turtle law itself was not inconsistent with GATT. Rather, the ruling was on ground that the application of the law constituted “arbitrary and unjustifiable discrimination” between WTO members (WTO 1998). The WTO Appellate Body pointed to a 1996 regional agreement reached at the U.S. initiation, namely the Inter-American

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Convention on Protection and Conservation of Sea Turtles, as evidence of the feasibility of such an approach (WTO 1998; Berger 1999). Here, the Appellate Body again advanced the standing of multilateral environmental treaties (Zhang 2004; Zhang and Assunção 2004). Thus, it follows that this trade dispute under the WTO may have been interpreted as a clear preference for actions taken pursuant to multilateral agreements and/or negotiated through international cooperative arrangements, such as the Kyoto Protocol and its successor. However, this interpretation should be with great caution, because there is no doctrine of stare decisis (namely, “to stand by things decided”) in the WTO; the GATT/WTO panels are not bound by previous panel decisions (Zhang and Assunção 2004). Moreover, the WTO Shrimp-Turtle dispute settlement has a bearing on the ongoing discussion on the “comparability” of climate actions in a post-2012 climate change regime. The Appellate Body found that when the U.S. shifted its standard from requiring measures essentially the same as the U.S. measures to “the adoption of a program comparable in effectiveness”, this new standard would comply with the WTO disciplines (WTO 2001, paragraph 144). Some may view that this case opens the door for U.S. climate legislation that bases trade measures on an evaluation of the comparability of climate actions taken by other trading countries. Comparable action can be interpreted as meaning action comparable in effect as the “comparable in effectiveness” in the Shrimp-Turtle dispute. It can also be interpreted as meaning “the comparability of efforts”. The Bali Action Plan adopts the latter interpretation, using the terms comparable as a means of ensuring that developed countries undertake commitments comparable to each other (Zhang 2009a).

In the case of a WTO dispute, the question will arise whether there are any alternatives to trade provisions that could be reasonably expected to fulfill the same function but are not inconsistent or less inconsistent with the relevant WTO provisions. Take the GATT Thai cigarette dispute as a case in point. Under Section 27 of the Tobacco Act of 1966, Thailand restricted imports of cigarettes and imposed a higher tax rate on imported cigarettes when they were allowed on the three occasions since 1966, namely in 1968–70, 1976 and 1980. After consultations with Thailand failed to lead to a solution, the U.S. requested in 1990 the Dispute Settlement Panel to rule on the Thai action on the grounds that it was inconsistent with Article XI:1 of the General Agreement; was not justified by the exception under Article XI:2(c), because cigarettes were not an agricultural or fisheries product in the meaning of Article XI:1; and was not justified under Article XX(b) because the restrictions were not necessary to protect human health, i.e. controlling the consumption of cigarettes did not require an import ban. The Dispute Settlement Panel ruled against Thailand. The Panel found that Thailand had acted inconsistently with Article XI:1 for having not granted import licenses over a long period of time. Recognizing that XI:2(c) allows exceptions for fisheries and agricultural products if the restrictions are necessary to enable governments to protect farmers and fishermen who, because of the perishability of their produce, often could not withhold excess supplies of the fresh product from the market, the Panel found that cigarettes were not “like” the fresh product as leaf tobacco and thus were not among the products eligible for import restrictions under Article XI:2(c). Moreover, the Panel acknowledged that Article XX(b) allowed contracting parties to give priority to human health over trade liberalization. The Panel held the view that the import restrictions imposed by Thailand could be considered to be “necessary” in terms of Article XX(b) only if there were no alternative measure consistent with the General Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives. However, the Panel found the Thai import restriction measure not necessary because Thailand could reasonably be expected to take strict, non-discriminatory labelling and ingredient disclosure


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regulations and to ban all the direct and indirect advertising, promotion and sponsorship of cigarettes to ensure the quality and reduce the quantity of cigarettes sold in Thailand. These alternative measures are considered WTO-consistent to achieve the same health policy objectives as Thailand now pursues through an import ban on all cigarettes whatever their ingredients (GATT 1990). Simply put, in the GATT Thai cigarette dispute, the Dispute Settlement Panel concluded that Thailand had legitimate concerns with health but it had measures available to it other than a trade ban that would be consistent with the General Agreement on Tariffs and Trade (e.g. bans on advertising) (GATT 1990). Indeed, there are alternatives to resorting to trade provisions to protect the U.S. trade-sensitive, energy-intensive industries during a period when the U.S. is taking good-faith efforts to negotiate with trading partners on comparable actions. One way to address competitiveness concerns is to initially allocate free emission allowances to those sectors vulnerable to global competition, either totally or partially.4 Bovenberg and Goulder (2002) found that giving out about 13% of the allowances to fossil fuel suppliers freely instead of auctioning in an emissions trading scheme in the U.S. would be sufficient to prevent their profits with the emissions constraints from falling in comparison with those without the emissions constraints. There is no disagreement that the allocation of permits to emissions sources is a politically contentious issue. Grandfathering, or at least partially grandfathering, helps these well-organized, politically highly-mobilized industries or sectors to save considerable expenditures and thus increases the political acceptability of an emissions trading scheme, although it leads to a higher economic cost than a policy where the allowances are fully auctioned.5 This explains why the sponsors of the American Clean Energy and Security Act of 2009 had to make a compromise amending the Act to auction only 15% of the emission permits instead of the initial proposal for auctioning all the emission permits in a proposed cap-and-trade regime. This change allowed the Act to pass the U.S. House of Representatives Energy and Commerce Committee in May 2009. However, it should be pointed out that although grandfathering is thought of as giving implicit subsidies to these sectors, grandfathering is less trade-distorted than the exemptions from carbon taxes (Zhang 1998, 1999), which means that partially grandfathering is even less trade-distorted than the exemptions from carbon taxes. To understand their difference, it is important to bear in mind that grandfathering itself also implies an opportunity cost for firms receiving permits: what matters here is not how firms get your permits, but what firms can sell 4

To be consistent with the WTO provisions, foreign producers could arguably demand the same proportion of free allowances as U.S. domestic producers in case they are subject to border carbon adjustments. 5 In a second-best setting with pre-existing distortionary taxes, if allowances are auctioned, the revenues generated can then be used to reduce pre-existing distortionary taxes, thus generating overall efficiency gains. Parry et al. (1999), for example, show that the costs of reducing U.S. carbon emissions by 10% in a second-best setting with pre-existing labor taxes are five times more costly under a grandfathered carbon permits case than under an auctioned case. This is because the policy where the permits are auctioned raises revenues for the government that can be used to reduce pre-existing distortionary taxes. By contrast, in the former case, no revenue-recycling effect occurs, since no revenues are raised for the government. However, the policy produces the same tax-interaction effect as under the latter case, which tends to reduce employment and investment and thus exacerbates the distortionary effects of pre-existing taxes (Zhang 1999).

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them for—that is what determines opportunity cost. Thus, even if permits are awarded gratis, firms will value them at their market price. Accordingly, the prices of energy will adjust to reflect the increased scarcity of fossil fuels. This means that regardless of whether emissions permits are given out freely or are auctioned by the government, the effects on energy prices are expected to be the same, although the initial ownership of emissions permits differs among different allocation methods. As a result, relative prices of products will not be distorted relative to their preexisting levels and switching of demand towards products of those firms whose permits are awarded gratis (the so-called substitution effect) will not be induced by grandfathering. This makes grandfathering different from the exemptions from carbon taxes. In the latter case, there exist substitution effects (Zhang 1998, 1999). For example, the Commission of the European Communities (CEC) proposal for a mixed carbon and energy tax6 provides for exemptions for the six energy-intensive industries (i.e., iron and steel, non-ferrous metals, chemicals, cement, glass, and pulp and paper) from coverage of the CEC tax on grounds of competitiveness. This not only reduces the effectiveness of the CEC tax in achieving its objective of reducing CO2 emissions, but also makes the industries, which are exempt from paying the CEC tax, improve their competitive position in relation to those industries which are not. Therefore, there will be some switching of demand towards the products of these energy-intensive industries, which is precisely the reaction that such a tax should avoid (Zhang 1997). The import allowance requirement approach would distinguish between two otherwise physically identical products on the basis of climate actions in place in the country of origin. This discrimination of like products among trading nations would constitute a prima facie violation of WTO rules. To pass WTO scrutiny of trade provisions, the U.S. is likely to make reference to the health and environmental exceptions provided under GATT Article XX (see Box 1). This Article itself is the exception that authorizes governments to employ otherwise GATT-illegal measures when such measures are necessary to deal with certain enumerated public policy problems. The GATT panel in Tuna/Dolphin II concluded that Article XX does not preclude governments from pursuing environmental concerns outside their national territory, but such extra-jurisdictional application of domestic laws would be permitted only if aimed primarily (emphasis added) at having a conservation or protection effect (GATT 1994; Zhang 1998). The capacity of the planet’s atmosphere to absorb greenhouse gas emissions without adverse impacts is an ‘exhaustible natural resource.’ Thus, if countries take measures on their own including extrajurisdictional application primarily to prevent the depletion of this ‘exhaustible natural resource,’ such measures will have a good justification under GATT Article XX. Along this reasoning, if the main objective of trade provisions is to protect the environment by requiring other countries to take actions comparable to that of the U. S., then mandating importers to purchase allowances from the designated special 6 As part of its comprehensive strategy to control CO2 emissions and increase energy efficiency, a carbon/ energy tax has been proposed by the CEC. The CEC proposal is that member states introduce a carbon/ energy tax of US$ 3 per barrel oil equivalent in 1993, rising in real terms by US$ 1 a year to US$ 10 per barrel in 2000. After the year 2000 the tax rate will remain at US$ 10 per barrel at 1993 prices. The tax rates are allocated across fuels, with 50% based on carbon content and 50% on energy content (Zhang 1997).


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international reserve allowance pool to cover the carbon emissions associated with the manufacture of that product is debatable. To increase the prospects for a successful WTO defense, I think that trade provisions can refer to the designated special international reserve allowance pool, but may not do without adding “or equivalent.” This will allow importers to submit equivalent emission reduction units that are not necessarily allowances but are recognized by international treaties to cover the carbon contents of imported products. Clearly, these concerns raised in the Lieberman-Warner bill have shaped relevant provisions in the Waxman-Markey bill to deal with the competitiveness and leakage concerns. Accordingly, the Waxman-Markey bill has avoided all the aforementioned controversies raised in the Lieberman-Warner bill. Unlike the EAR in the Lieberman-Warner bill which focuses exclusively on imports into the U.S., but does nothing to address the competitiveness of U.S. exports in foreign markets, the Waxman-Markey bill included both rebates for few energy-intensive, trade-sensitive sectors7 and free emission allowances to help not to put U.S. manufacturers at a disadvantage relative to overseas competitors. Unlike the Lieberman-Warner bill in the U.S. Senate, the Waxman-Markey bill also gives China, India and other major developing nations time to enact their climate-friendly measures. Under the Waxman-Markey bill, the International Reserve Allowance Program may not begin before January 1, 2025. The U.S. president may only implement an International Reserve Allowance Program for sectors producing primary products. While the bill called for a “carbon tariff” on imports, it very much framed that measures as a last resort that a U.S. president could impose at his or her discretion regarding border adjustments or tariffs. However, in the middle of the night before the vote on June 26, 2009, a provision was inserted in this House bill that requires the President, starting in 2020, to impose a border adjustment—or tariffs—on certain goods from countries that do not act to limit their greenhouse gas emissions. The President can waive the tariffs only if he receives explicit permission from U.S. Congress (Broder 2009). The last-minute changes in the bill changed a Presidential long-term back-up option to a requirement that the President put such tariffs in place under the specified conditions. Such changes significantly changed the spirit of the bill, moving it considerably closer to risky protectionism. While praising the passage of the House bill as an “extraordinary first step,” president Obama opposed a trade provision in that bill.8 The carbon tariff proposals have also drawn fierce criticism from China and India. Without specific reference to the U.S. or the Waxman-Markey bill, China’s Ministry of Commerce said in a statement posted on its website that proposals to impose “carbon tariffs” on imported products will violate the rules of the World Trade Organization. That would enable developed countries to “resort to trade in the name of protecting the environment.” The carbon tariff proposal runs against the principle of “common but differentiated responsibilities,” the spirit of the Kyoto Protocol. This will neither help strengthen confidence that the international 7 See Genasci (2008) for discussion on complicating issues related to how to rebate exports under a capand-trade regime. 8 President Obama was quoted as saying that “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there. I think there may be other ways of doing it than with a tariff approach.” (Broder 2009).

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community can cooperate to handle the (economic) crisis, nor help any country’s endeavors during the climate change negotiations. Thus China is strongly opposed to it (MOC of China 2009). On 30 September 2009, Senators John Kerry (D-MA) and Barbara Boxer (D-CA) introduced the Clean Energy Jobs and American Power Act (S. 1733), the Senate version of the Waxman-Markey bill in the House. Unlike in the House where a simple majority is needed to pass a legislation, the Senate needs 60 votes from its 100 members to ensure passage. With two senators per state no matter how small, coal-producing, industrial and agricultural states are more heavily represented in the Senate than in the House. Thus the Kerry-Boxer bill faces an uphill battle in the Senate. As would be expected, senators from those states will push for even tougher border carbon adjustment provisions that would potentially tax foreign goods at a higher rate if they come from countries that are not taking steps comparable to that of the U.S., which will most likely add to the cost of goods. At this stage the bill proposes to include some form of BCAs, but details still need to be worked out. While Senator Kerry indicates that the proposed provision would comply with the WTO rules, it remains to be seen how the bill, which is put off until Spring 2010 (Talley 2009), is going to reconcile potential conflicts between demands for tough border carbon adjustment provisions from coal-producing, industrial and agricultural states and the U.S. international obligations under WTO. Besides the issue of WTO consistency, there will be methodological challenges in implementing an EAR under a cap-and-trade regime, although such practical implementation issues are secondary concerns. Identifying the appropriate carbon contents embodied in traded products will present formidable technical difficulties, given the wide range of technologies in use around the world and very different energy resource endowments and consumption patterns among countries. In the absence of any information regarding the carbon content of the products from exporting countries, importing countries, the U.S. in this case, could adopt either of the two approaches to overcoming information challenges in practical implementation. One is to prescribe the tax rates for the imported product based on U.S. domestically predominant method of production for a like product, which sets the average embedded carbon content of a particular product (Zhang 1998; Zhang and Assunção 2004). This practice is by no means without foundation. For example, the U.S. Secretary of the Treasury has adopted the approach in the tax on imported toxic chemicals under the Superfund Tax (GATT 1987; Zhang 1998). An alternative is to set the best available technology (BAT) as the reference technology level and then use the average embedded carbon content of a particular product produced with the BAT in applying border carbon adjustments (Ismer and Neuhoff 2007). Generally speaking, developing countries will bear a lower cost based on either of the approaches than using the nation-wide average carbon content of imported products for the country of origin, given that less energy-efficient technologies in developing countries produce products of higher embedded carbon contends than those like products produced by more energy-efficient technologies in the U.S. However, to be more defensible, either of the approaches should allow foreign producers to challenge the carbon contents applied to their products to ensure that they will not pay for more than they have actually emitted.


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4 How should China respond to the U.S. proposed carbon tariffs? So far, the discussion has been focused on the U.S. which is considering unilateral trade measures. Now that the inclusion of border carbon adjustment measures is widely considered essential to secure passage of any U.S. climate legislation, the question is then how China should respond to the U.S. proposed carbon tariffs. 4.1 A serious commitment to find a global solution to the threat of climate change First of all, China needs to creditably indicate a serious commitment to address climate change issues to challenge the legitimacy of the U.S. imposing carbon tariffs. Indeed, if China’s energy use and the resulting carbon emissions had followed their trends between 1980 and 2000, during which China achieved a quadrupling of its GDP with only a doubling of energy consumption (Zhang 2003), rather than surged since 2002, then the position of China in the international climate debate would be very different from what it is today. On the trends of the 1980s and 1990s, the U.S. Energy Information Administration (EIA 2004) estimated that China’s CO2 emissions were not expected to catch up with the world’s largest carbon emitter by 2030. However, China’s energy use has surged since the turn of this century, almost doubling between 2000 and 2007. Despite similar rates of economic growth, the rate of growth in China’s energy use during this period (9.74% per year) has been more than twice that of the last two decades in the past century (4.25% per year) (National Bureau of Statistics of China 2008). As a result, China was already the world’s largest carbon emitter in 2007, instead of “until 2030” as estimated as late as 2004. It is conceivable that China will argue that its high absolute emission levels are the combined effects of a large population and coal-fueled economy and the workshop of the world, the latter of which leads to a hefty chunk of China’s emissions embedded in goods that are exported to industrialized countries (Zhang 2009c). China’s arguments are legitimate. The country has every right to do that. Anyhow, China’s share of the world’s cumulative energy-related CO2 emissions was only 8% from 1900 to 2005, far less than 30% for the U.S., and is still projected to be lower than those for the U.S. in 2030. On a per capita basis, China’s CO2 emissions are currently only one-fifth of that of the U.S., and are still anticipated to be less than half of that of the U.S. in 2030 (IEA 2007). However, the number one position, in absolute terms, has put China in the spotlight just at a time when the world’s community starts negotiating a post-Kyoto climate regime under the Bali Roadmap. There are renewed interests in and debates on China’s role in combating global climate change. Given the fact that China is already the world’s largest carbon emitter and its emissions continue to rise rapidly in line with its industrialization and urbanization, China is seen to have greater capacity, capability and responsibility. The country is facing great pressure both inside and outside international climate negotiations to exhibit greater ambition. As long as China does not signal well ahead the time when it will take on the emissions caps, it will always be confronted with the threats of trade measures. In response to these concerns and to put China in a positive position, I propose that at current international climate talks China should negotiate a requirement that greenhouse gas emissions in industrialized countries be cut at least

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by 80% by 2050 relative to their 1990 levels and that per capita emissions for all major countries by 2050 should be no more than the world’s average at that time. Moreover, it would be in China’s own best interest if, at the right time (e.g., at a time when the U.S. Senate is going to debate and ratify any global deal that would emerge from Copenhagen or later), China signals well ahead that it will take on binding absolute emission caps around the year 2030. 4.1.1 Why around 2030 for timing China’s absolute emissions caps? Many factors need to be taken into consideration in determining the timing for China to take on absolute emissions caps. Taking the commitment period of 5 years as the Kyoto Protocol has adopted, I think the fifth commitment period (2028–2032), or around 2030 is not an unreasonably expected date on which China needs to take on absolute emissions caps for the following reasons. While this date is later than the time frame that the U.S. and other industrialized countries would like to see, it would probably still be too soon from China’s perspective. First, the fourth assessment report of the IPCC recommends that global greenhouse gas emissions should peak by 2020 at the latest and then turn downward, to avoid dangerous climate change consequences. With China already the world’s largest carbon emitter, the earlier China takes on emissions caps, the more likely that goal can be achieved. However, given China’s relatively low development stage and its rapidly growing economy fueled by coal, its carbon emissions are still on the climbing trajectories beyond 2030, even if some energy saving policies and measures have been factored into such projections. Second, before legally binding commitments become applicable to Annex I (industrialized) countries, they have a grace period of 16 years starting from the Earth Summit in June 1992 when Annex I countries promised to individually or jointly stabilize greenhouse gases emissions at their 1990 levels by the end of the past century to the beginning of the first commitment period in 2008. This precedent points to a first binding commitment period for China starting around 2026. Third, with China still dependent on coal to meet the bulk of its energy needs for the next several decades, the commercialization and widespread deployment of carbon capture and storage (CCS) is a crucial option for reducing both China’s and global CO2 emissions. Thus far, CCS has not been commercialized anywhere in the world, and it is unlikely, given current trends, that this technology will find largescale application either in China or elsewhere before 2030. Until CCS projects are developed to the point of achieving economies of scale and bringing down the costs, China will not feel confident about committing to absolute emissions caps. Fourth, developing countries need reasonable time to develop and operate national climate policies and measures. This is understood by knowledgeable U.S. politicians, such as Reps. Henry Waxman (D-CA) and Edward Markey (D-MA), the sponsors of the American Clean Energy and Security Act of 2009. Indeed, the Waxman-Markey bill gives China, India and other major developing nations time to enact climate-friendly measures. While the bill called for a “carbon tariff” on imports, it very much framed that measures as a last resort that a U.S. president could impose at his or her discretion not until 1 January 2025 regarding border adjustments or tariffs, although in the middle of the night before the vote on 26 June


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2009, a compromise was made to further bring forward the imposition of carbon tariffs. Fifth, another timing indicator is a lag between the date that a treaty is signed and the starting date of the budget period. With the Kyoto Protocol signing in December 1997 and the first budget period staring 2008, the earliest date to expect China to introduce binding commitments would not be before 2020. Even without this precedent for Annex I countries, China’s demand is by no means without foundation. For example, the Montreal Protocol on Substances that Deplete the Ozone Layer grants developing countries a grace period of 10 years (Zhang 2000). Given that the scope of economic activities affected by a climate regime is several orders of magnitude larger than those covered by the Montreal Protocol, it is arguable that developing countries should have a grace period much longer than 10 years, after mandatory emission targets for Annex I countries took effect in 2008. Sixth, while it is not unreasonable to grant China a grace period before taking on emissions caps, it would hardly be acceptable to delay the timing beyond 2030. China is already the world’s largest carbon emitter and, in 2010 it will overtake Japan as the world’s second largest economy, although its per capita income and emissions are still very low. After another 20 years of rapid development, China’s economy will approach that of the world’s second-largest emitter (the U.S.) in size, whereas China’s absolute emissions are well above those of number two. Its baseline carbon emissions in 2030 are projected to reach 11.6 billion tons of carbon dioxide, relative to 5.5 billion tons for the U.S. and 3.4 billion tons for India (IEA 2009), the world’s most populous country at that time (UNDESA 2009).9 This gap with the U. S. could be even bigger, provided that the U.S. would cut its emissions to the levels proposed by the Obama administration and under the American Clean Energy and Security Act of 2009. By then, China’s per capita income will reach a very reasonable level, whereas its per capita emissions of 8.0 tons of carbon dioxide are projected to be well above the world’s average of 4.9 tons of carbon dioxide and about 3.4 times that of India (IEA 2009). While the country is still on the climbing trajectory of carbon emissions under the business as usual scenario, China will have lost ground by not taking on emissions caps when the world is facing ever alarming climate change threats and developed countries will have achieved significant emissions reductions by then. 4.1.2 Three transitional periods of increasing climate obligations It is hard to imagine how China could apply the brakes so sharply as to switch from rapid emissions growth to immediate emissions cuts, without passing through several intermediate phases. After all, China is still a developing country right now, no matter how rapidly it is expected to grow in the future. Taking the commitment period of five years as the Kyoto Protocol has adopted, I envision that China needs the following three transitional periods of increasing climate obligations, before taking on absolute emissions caps. 9

UNDESA (2009) projects that China’s population would peak at 1,462.5 millions around 2030, while India’s population would be projected to be at 1,484.6 millions in 2030 and further grow to 1,613.8 millions in 2050.

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First, further credible energy-conservation commitments starting 2013 China has already committed itself to quantified targets on energy conservation and the use of clean energy. It needs to extend its level of ambition, further making credible quantified domestic commitments in these areas for the second commitment period. Such commitments would include but are not limited to continuing to set energysaving and pollutant control goals in the subsequent national five-year economic blueprints as challenging as the current 11th 5-year blueprint does, increasing investment in energy conservation and improving energy efficiency, significantly scaling up the use of renewable energies and other low-carbon technologies, in particular wind power and nuclear power, and doubling or even quadrupling the current unit capacity below which thousands of small, inefficient coal-fired plants need to be decommissioned (Zhang 2009c). Second, voluntary “no lose” emissions targets starting 2018 During this transition period, China could commit to adopting voluntary emission reduction targets. Emissions reductions achieved beyond these “no lose” targets would then be eligible for sale through carbon trading at the same world market price as those of developed countries whose emissions are capped, relative to the lower prices that China currently receives for carbon credits generated from clean development mechanism projects, meaning that China would suffer no net economic loss by adhering to the targets. Third, binding carbon intensity targets starting 2023, leading to emissions caps around 2030 While China is expected to adopt the carbon intensity target as a domestic commitment in 2011, China adopting binding carbon intensity targets in 2023 as its international commitment would be a significant step towards committing to absolute emissions caps during the subsequent commitment period. At that juncture, having been granted three transition periods, China could then be expected to take on binding emissions caps, starting around 2030 and to aim for the global convergence of per capita emissions by 2050. 4.2 A clear need within a climate regime to define comparable efforts towards climate mitigation and adaptation While indicating, well in advance, that it will take on absolute emissions caps around the year 2030, being targeted by such border carbon adjustment measures, China should make the best use of the forums provided under the UNFCCC and its KP to effectively deal with the proposed measures to its advantage (Zhang 2009b). However, China and other leading developing countries appear to be comfortable with WTO rules and institutions defending their interests in any dispute that may arise over unilateral trade measures. Top Chinese official in charge of climate issues and the Brazilian climate ambassador consider the WTO as the proper forum when developing countries are required to purchase emission allowances in the U.S. proposed cap-and-trade regime (Samuelsohn 2007). This is reinforced in the Political Declaration of the Leaders of Brazil, China, India, Mexico and South Africa (the socalled G5) in Sapporo, Japan, July 8, 2008 that “in the negotiations under the Bali Road Map, we urge the international community to focus on the core climate change


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issues rather than inappropriate issues like competitiveness and trade protection measures which are being dealt with in other forums.” China may fear that the discussion on these no core issues will overshadow those core issues mandated under the Bali Action Plan (BAP). However, in my view, defining comparable efforts towards climate mitigation and adaptation within a climate regime is critical to addressing carbon tariffs of far-reaching implications. The BAP calls for “comparability of efforts” towards climate mitigation actions only among industrialized countries. However, lack of the clearly defined notion of what is comparable has led to diverse interpretations of the concept of comparability. Moreover, there is no equivalent language in the BAP to ensure that developing country actions, whatever might be agreed to at Copenhagen or later, are comparable to those of developed countries. So, some industrialized countries, if not all, have extended the scope of its application beyond industrialized countries themselves, and are considering the term “comparable” as the standard by which to assess the efforts made by all their trading partners in order to decide on whether to impose unilateral trade measures to address their own competitiveness concerns. Such lack of the common understanding will lead each country to define whether other countries have made comparative efforts to its own. This can hardly be objective, and in turn may lead one country to misuse unilateral trade measures against other trading partners to address its own competitiveness concerns. This is not hypothetical. Rather, it is very real as the Lieberman-Warner bill in the U.S. Senate and the Waxman-Markey bill in the U.S. House demonstrated. If such measures became law and were implemented, trading partners might choose to challenge U.S. before WTO. If a case like this is brought before a WTO panel, that panel would likely look to the UNFCCC for guidance on an appropriate standard for the comparability of climate efforts to assess whether the accused country has followed the international standard when determining comparability, as preceded in the Shrimp-Turtle dispute where the WTO Appellate Body considered the Rio Declaration on Environment and Development (WTO 1998). Otherwise, that WTO panel will have no choice but to fall back on the aforementioned Shrimp-Turtle jurisprudence (see Box 2), and would be influenced by the fear of the political fall out from overturning U.S. unilateral trade measures in its domestic climate legislation. If the U.S. measures were allowed to stand, not only China would suffer, but it would also undermine the UNFCCC’s legitimacy in setting and distributing climate commitments between its parties (Werksman and Houser 2008). Therefore, as strongly emphasized in my interview in the New York Times (Reuters 2009), rather than reliance solely on WTO, there is a clear need within a climate regime to define comparable efforts towards climate mitigation and adaptation to discipline the use of unilateral trade measures at the international level, taking into account differences in their national circumstances, such as current level of development, per capita GDP, current and historical emissions, emission intensity, and per capita emissions. If well defined, that will provide some reference to WTO panels in examining cases related to comparability issues. Indeed, defining the comparability of climate efforts can be to China’s advantage. China has repeatedly emphasized that it has taken many climate mitigation efforts. No country denies that, but at most China has received limited appreciation of its

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abatement efforts. Being praised for such efforts, China is urged to do “a lot more” (Doyle 2009). However, if the comparability of climate efforts is defined, then the many abatement efforts that China has been taking can be converted into the corresponding equivalent carbon allowance prices under the European Union and U.S. proposed emissions trading schemes. If such an equivalent is higher than prevailing U.S. allowance price, there is no rationale for the U.S. to impose carbon tariffs on Chinese products. If it is lower, then the level of carbon tariffs is only a differential between the equivalent and prevailing U.S. allowance price. Take export tariffs that China applied on its own as a case in point. During 2006– 08, the Chinese government levied, on its own, export taxes on a variety of energy and resource intensive products to discourage exports of those products that rely heavily on energy and resources and to save scarce energy and resources (Zhang 2008). Given the fact that China is a price setter in world aluminum, cement, iron and steel markets, its export policies have a significant effect on world prices and thus on EU competitiveness (Dröge et al. 2009). From the point of view of leveling the carbon cost playing field, such export taxes increase the price at which energyintensive products made in China, such as steel and aluminum, are traded in world markets. For the EU and U.S. producers, such export taxes imposed by their major trading partner on these products take out at least part, if not all, of the competitive pressure that is at the heart of the carbon leakage debates. Being converted into the implicit carbon costs, the average export tariffs of 10–15% applied in China on its own during 2006–08 are estimated to be equivalent to a EU allowance price of 30– 43 €/tCO2 for steel and of 18–26 €/tCO2 for aluminium (Wang and Voituriez 2009). The estimated levels of CO2 price embedded in the Chinese export taxes on steel and aluminium are very much in the same range as the average price of the EU allowances over the same period. Moreover, carbon tariffs impact disproportionally on energy-intensive manufacturing. Manufacturing contributes to 33% of China’s GDP relative to the corresponding 16% for India, and China’s GDP is 3.5–4.0 times that of India. This suggests that, in volume terms, energy-intensive manufacturing in China values 7–8 times that of India. Clearly, carbon tariffs have a greater impact on China than on India. This raises the issue of whether China should hold the same stance on this issue as India as it does now, although the two largest developing countries in international climate change negotiations have taken and should continue to hold to a common position on developed country obligations on ambitious emissions reductions, adequate technology transfer and financing.

5 Concluding remarks With governments from around the world trying to hammer out a post-2012 climate change agreement, no one would disagree that a U.S. commitment to cut greenhouse gas emissions is essential to such a global pact. However, despite U.S. president Obama’s announcement to push for a commitment to cut U.S. greenhouse gas emissions by 17% by 2020, in reality it is questionable whether U.S. Congress will agree to specific emissions cuts, although they are not ambitious at all from the perspectives of both the EU and developing countries, without imposing carbon tariffs on Chinese products to the U.S. market, even given China’s own


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announcement to voluntarily seek to reduce its carbon intensity by 40–45% over the same period.10 This dilemma is partly attributed to flaws in current international climate negotiations, which have been focused on commitments on the two targeted dates: 2020 and 2050. However, with the commitment period only up to 2020, there is a very little room left for the U.S. and China, although for reasons very different from each other. Meanwhile, taking on something for 2050 seems too far away for politicians. In my view, if the commitment period is extended to 2030, it would really open the possibility for the U.S. and China to make the commitments that each wants from the other in the same form, although the scale of reductions would differ from each other. By 2030, the U.S. will be able to commit to much deeper emission cuts that China and developing countries have demanded, while, as argued in this paper, China would have approached the threshold to take on the absolute emission cap that the U.S. and other industrialized countries have long asked for. Being aware of his proposed provisional target in 2020 well below what is internationally expected from the U.S., president Obama announced a provisional target of a 42% reduction below 2005 levels in 2030 to demonstrate the U.S. continuing commitments and leadership to find a global solution to the threat of climate change. While the U.S. proposed level of emission reductions for 2030 is still not ambitious enough, president Obama inadvertently points out the right direction of international climate negotiations. They need to look at the targeted date of 2030. If international negotiations could lead to much deeper emission cuts for developed countries as well as the absolute emission caps for major developing countries in 2030, that would significantly reduce the legitimacy of the U.S. proposed carbon tariffs and, if implemented, their prospect for withstanding a challenge before WTO. However, if the international climate change negotiations continue on their current course, the inclusion of border carbon adjustment measures then seems essential to secure passage of any U.S. legislation capping its own greenhouse gas emissions. Moreover, the joint WTO-UNEP report indicates that border carbon adjustment measures might be allowed under the existing WTO rules, depending on how such measures are designed and the specific conditions for implementing them (WTO and UNEP 2009). Thus, on the U.S. side, in designing such trade measures, WTO rules need to be carefully scrutinised, and efforts need to be made early on to ensure that the proposed measures comply with them. After all, a conflict between the trade and climate regimes, if it breaks out, helps neither trade nor the global climate. The U.S. needs to explore, with its trading partners, cooperative sectoral approaches to advancing low-carbon technologies and/or concerted mitigation efforts in a given sector at the international level. Moreover, to increase the prospects for a successful WTO defence of the Waxman-Markey type of border adjustment provision, there should be: 1) a period of good faith efforts to reach agreements among the countries concerned before imposing such trade measures; 2) consideration of alternatives to trade provisions that could reasonably be expected to 10

As long as China’s pledges are in the form of carbon intensity, the reliability of both emissions and GDP data matters. See Zhang (2010) for discussions on the reliability and revisions of China’s statistical data on energy and GDP, and their implications for meeting China’s existing energy-saving goal in 2010 and its proposed carbon intensity target in 2020.

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fulfill the same function but are not inconsistent or less inconsistent with the relevant WTO provisions; and 3) trade provisions that can refer to the designated special international reserve allowance pool, but should allow importers to submit equivalent emission reduction units that are recognized by international treaties to cover the carbon contents of imported products. Being targeted by such border carbon adjustment measures, China needs to creditably indicate a serious commitment to address climate change issues to challenge the legitimacy of the U.S. imposing carbon tariffs. Being seen with greater capacity, capability and responsibility, China is facing great pressure both inside and outside international climate negotiations to exhibit greater ambition. As long as China does not signal well ahead that it will take on the emissions caps, it will always face the threats of trade measures. In response to these concerns and to put China in a positive position, the paper proposes that at current international climate talks China should negotiate a requirement that greenhouse gas emissions in industrialized countries be cut at least by 80% by 2050 relative to their 1990 levels and that per capita emissions for all major countries by 2050 should be no more than the world’s average at that time. Moreover, it would be in China’s own best interest if, at a right time (e.g., at a time when the U.S. Senate is going to debate and ratify any global deal that would emerge from Copenhagen or later), China signals well ahead that it will take on binding absolute emission caps around the year 2030. However, it is hard to imagine how China could apply the brakes so sharply as to switch from rapid emissions growth to immediate emissions cuts, without passing through several intermediate phases. Taking the commitment period of five years as the Kyoto Protocol has adopted, the paper envisions that China needs the following three transitional periods of increasing climate obligations before taking on absolute emissions caps starting 2028 that will lead to the global convergence of per capita emissions by 2050: First, further credible energy-conservation commitments starting 2013; second, voluntary “no lose” emission targets starting 2018; and third, binding carbon intensity targets as its international commitment starting 2023. Overall, this proposal is a balanced reflection of respecting China’s rights to grow and recognizing China’s growing responsibility for increasing greenhouse gas emissions as the standards of living increase over time. Meanwhile, China should make the best use of the forums provided under the UNFCCC and its KP to effectively deal with the proposed measures. I have argued that there is a clear need within a climate regime to define comparable efforts towards climate mitigation and adaptation to discipline the use of unilateral trade measures at the international level. As exemplified by export tariffs that China applied on its own during 2006–08, the paper shows that defining the comparability of climate efforts can be to China’s advantage. Furthermore, carbon tariffs impact disproportionally on energy-intensive manufacturing. Given the fact that, in volume terms, energy-intensive manufacturing in China values 7–8 times that of India, carbon tariffs clearly impact much more on China than on India. This raises the issue of whether China should hold the same stance on this issue as India as it does now. Finally, it should be emphasized that the Waxman-Markey type of border adjustment provision holds out more sticks than carrots to developing countries. If the U.S. and other industrialized countries really want to persuade developing countries to do more to combat climate change, they should first reflect on why


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developing countries are unwilling to and cannot afford to go beyond the aforementioned third option in the first place. That will require industrialized countries to seriously consider developing countries’ legitimate demand that industrialized countries need to demonstrate that they have taken the lead in reducing their own greenhouse gas emissions, provide significant funding to support developing country’s climate change mitigation and adaptation efforts and to transfer low- or zero-carbon emission technologies at an affordable price to developing countries. Industrialized countries need to provide positive incentives to encourage developing countries to do more. Carrots should serve as the main means. Sticks can be incorporated, but only if they are credible and realistic and serve as a useful supplement to push developing countries to take actions or adopt policies and measures earlier than would otherwise have been the case. At a time when the world community is negotiating a post-2012 climate regime, unrealistic border carbon adjustment measures as exemplified in the Waxman-Markey bill are counterproductive to help to reach such an agreement on comparable climate actions in the negotiations.

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Haverkamp J (2008) International aspects of a climate change cap and trade program. Testimony before the Committee on Finance, U.S. Senate, February 14, Available at: http://finance.senate.gov/hearings/ testimony/2008test/021408jhtest.pdf Hollinger P (2009) Sarkozy renews carbon tax call. Financial Times, September 11, p. 5 Houser T, Bradley R, Childs B, Werksman J, Heilmayr R (2008) Leveling the carbon playing field: international competition and U.S. climate policy design. Peterson Institute For International Economics and World Resources Institute, Washington, DC. IEA (2007) World Energy Outlook 2007. International Energy Agency (IEA), Paris IEA (2009) World Energy Outlook 2009. International Energy Agency (IEA), Paris Ismer R, Neuhoff K (2007) Border tax adjustment: a feasible way to support stringent emission trading. Eur J Law Econ 24(2):137–164 McBroom M (2008) How the IBEW-UWM-Boilermakers-AEP International Proposal Operates within Climate Legislation, June 17, Available at: http://www.wita.org/index.php?tg=fileman&idx= viewfile&idf=189&id=4&gr=Y&path=&file=WITA-+Climate+Change+-+Overview+of+IBEWAEP+Proposal+(June+17%2C+2008).pdf Ministry of Commerce of China (MOC of China) (2009) A statement on “Carbon Tariffs”. July 3, Beijing, Available at: http://www.mofcom.gov.cn/aarticle/ae/ag/200907/20090706375686.html, (in Chinese) Morris MG, Hill ED (2007) Trade is the key to climate change. Energy Dly 35(33), February 20, Available at: http://www.theenergydaily.com/articles/ed/2007/ed02200703.html National Bureau of Statistics of China (2008) China Statistical Yearbook 2008. China Statistics Press, Beijing Parry IWH, Williams RC III, Goulder LH (1999) When can carbon abatement policies increase welfare? The fundamental role of distorted factor markets. J Environ Econ Manage 37(1):52–84 Reinaud J (2008) Issues behind competitiveness and carbon leakage: focus on heavy industry. IEA Information Paper, IEA/OECD, October, Paris Reuters (2009) China says “Carbon Tariffs” proposals breach WTO rules. New York Times, July 3, Available at: http://www.nytimes.com/reuters/2009/07/03/world/international-uk-china-climate.html? ref=global-home Samuelsohn D (2007) Trade plan opposed by China, Brazil and Mexico. Greenwire, September 26, Available at: http://www.earthportal.org/news/?p=507 Swedish National Board of Trade (2004) Climate and trade rule—harmony or conflict? Stockholm Talley I (2009) Senate to put off climate bill until spring. Wall Street Journal, November 18, Available at: http://online.wsj.com/article/SB125850693443052993.html The Economist (2008) Pollution law: trading dirt, June 7, pp. 42–44 The World Bank (2007) International trade and climate change: economic, legal and institutional perspectives. Washington DC Wang X, Voituriez T (2009) Can unilateral trade measures significantly reduce leakage and competitiveness pressures on EU-ETS-constrained industries? The Case of China Export Taxes and VAT Rebates, Working Paper, Climate Strategies, Cambridge, United Kingdom Werksman J, Houser T (2008) Competitiveness, leakage and comparability: disciplining the use of trade measures under a post-2012 climate agreement. Discussion Paper, World Resources Institute, December, Washington, DC World Trade Organization (WTO) (1998) United States—import prohibition of certain shrimp and shrimp products. Report of the Appellate Body, WT/DS58/AB/R, Geneva World Trade Organization (WTO) (2001) United States—import prohibition of certain shrimp and shrimp products. Recourse to Article 21.5 of the DSU by Malaysia, Panel Report, WT/DS58/RW, Adopted on November 21,Geneva World Trade Organization (WTO) and United Nations Environment Programme (UNEP) (2009) Trade and climate change: WTO-UNEP Report. Geneva Zhang ZX (1997) The economics of energy policy in China: implications for global climate change. New Horizons in Environmental Economics Series, Edward Elgar Zhang ZX (1998) Greenhouse gas emissions trading and the world trading system. J World Trade 32 (5):219–239 Zhang ZX (1999) Should the rules of allocating emissions permits be harmonised? Ecol Econ 31(1):11–18 Zhang ZX (2000) Can China afford to commit itself an emissions cap? An economic and political analysis. Energy Econ 22(6):587–614 Zhang ZX (2003) Why did the energy intensity fall in China’s industrial sector in the 1990s? The relative importance of structural change and intensity change. Energy Econ 25(6):625–638


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Int Econ Econ Policy (2010) 7:227–244 DOI 10.1007/s10368-010-0170-z O R I G I N A L PA P E R

International economics of resource productivity – Relevance, measurement, empirical trends, innovation, resource policies Raimund Bleischwitz

Published online: 29 June 2010 # Springer-Verlag 2010

Abstract This paper undertakes a step to explaining the international economics of resource productivity. It argues that natural resources are back on the agenda for four reasons: the demand on world markets continues to increase, the environmental constraints to using resources are relevant throughout their whole life cycle, the access to critical metals could become a barrier to the low carbon economy, and uneven patterns of use will probably become a source of resource conflicts. Thus, the issue is also of relevance for the transition to a low carbon economy. ‚Material Flow Analysis’ is introduced as a tool to measure the use of natural resources within economies and internationally; such measurement methodology now is being harmonized under OECD auspices. For these reasons, the paper argues that resource productivity—that is the efficiency of using natural resources to produce goods and services in the economy—will become one of the key determinants of economic success and human well-being. An empirical chapter gives evidence on time series of resource productivity increases across a number of economies. Introducing the notion of ‘material flow innovation’, the paper also discusses the innovation dynamics and issues of competitiveness. However, as the paper concludes, market barriers make a case for effective resource policies that should provide incentives for knowledge generation and get the prices right.

1 Introduction Besides the major concern with climate change, it is increasingly evident that the natural resource base is one of the major issues of international environmental A previous version has been presented at the ‚Shanghai Forum 2010’, Subforum on the “Emerging Energy & Low Carbon Economy: the Engine for Asia Economic Transformation”, May 29 – 31, 2010. I wish to thank the participants as well as Meghan O’Brian for useful comments. R. Bleischwitz (*) Wuppertal Institute Co-Director, Research Group “Material Flows and Resource Management”, P.O. Box 100 480, 42004 Wuppertal, Germany e-mail: [email protected]

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economics and policy. This paper argues that resource productivity – that is the efficiency of using natural resources to produce goods and services in the economy – will be one of the key determinants of economic success and human well-being in the upcoming years and decades. Deviating from ongoing political struggle about burden sharing and abatement costs, our paper underlines that international economic policy shall promote resource productivity as a source of future competitive advantage as well as a pillar for the transition to a low carbon economy. Using materials more efficiently will allow for grasping more opportunities to save energy along the whole value chain, to save material purchasing costs and to enhance competitiveness. Thus it is clear that a key abatement strategy such as energy efficiency will be enhanced by attempts to use materials more efficiently. In a broader context, moreover, fossil fuels are but one natural resource that is used in societies worldwide. All potential substitutes such as biofuels and renewable energies depend upon natural resources such as land, steel and platinum. Providing these natural resources in the most sustainable manner will thus become a key strategy for climate change abatement as well as for green growth. How industry and economies take up these challenges will become a major issue for economic research. Our paper starts with an overview of why caring for natural resources is relevant from a sustainability point of view that addresses the whole lifecycle-wide use of resources and thus goes beyond just the supply side. The methodology of material flows is introduced in chapter three. Chapter four compares the resource productivity rates and levels of different economies worldwide. Chapter five analyses the relationship between innovation and competitiveness, and chapter six outlines pillars for a sustainable resource policy.

2 Why caring about resources is relevant Caring about natural resources usually starts with addressing the scarcity of supply. Following findings of geological surveys, however, the Earth’s crust contains a resource base that is considered to be sufficient. Many basic materials such as iron ore, bauxite (used for aluminium production), magnesium, sand and gravel (essential for construction minerals) are almost abundantly available. From such a perspective, a general absolute scarcity can hardly be concluded. On the other hand there are strong reasons to analyse natural resources in a more comprehensive manner (MacLean et al. 2010), which in the end leads to fundamental concerns about their use due to: 1. 2. 3. 4.

Increasing demand on world markets Environmental constraints Resource constraints to the low carbon economy Misallocation and uneven patterns of use.

This paper will shortly discuss these issues before it moves on to analysing sustainable resource management. Our perspective follows the fundamental issues of substitutability, technological progress and long-term prosperity that have been the

International economics of resource productivity...

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core of resource economics1 and develops an agenda that moves the issue closer to material flow analysis and international economic policy. 2.1 Increasing demand on world markets Global extraction of natural resource is steadily increasing. Since 1980, global extraction of abiotic (fossil fuels, minerals) and biotic (agriculture, forestry, fishing) resources has augmented from 40 to 58 billion tonnes in 2005. The rapidly increasing demand for resources has led to an unprecedented boost in resource prices, especially during the five years prior to the breakout of the financial crisis in mid-2008. In nominal terms the general commodity prices increased by 300 per cent between 2002 and mid-2008 with prices of crude petroleum and minerals and metals escalating by 400 – 600 per cent. Even in real prices new historical peaks were reached in mid-2008 compared to development since 1960 (UNCTAD 2010: 8). The financial crisis has marked a short break to this trend, however extraction and prices have started to soar again. A recent study reveals that extraction in Asia has doubled over the last 25 years, and extraction growth has been much faster than the global average (Giljum et al. 2010). Increasing demand cannot only be witnessed for fossil fuels and other energy sources but also for all other categories of natural resources (e.g. metals, construction minerals, biomass). The expected increase in global population and high economic growth rates will strongly raise extraction and the consumption of materials. Though not many global scenarios address the issue yet, those available anticipate further increases and a total resource extraction of around 80 billion tonnes in 2020 and over 100 billion tonnes in 2030, i.e. almost a doubling between 2000 and 2030. Agriculture and construction are expected to be the most important extractors until 2030 with an expected annual average growth of around 2,6 %. Basic assumptions behind this scenario were that resource consumption in industrialised countries would not decline significantly compared to today, and that the scarcity of resources would not come into effect (Lutz and Giljum 2009: 38) Fig. 1. This expected growth triggers exploration into new sources and efforts of turning ‚resources’ into ‚reserves’. Despite increasing expenditures however, the discoveries of major deposits and world-class discoveries have been decreasing since the mid 1990s (Ericsson 2009: 27). Structural reasons for the mismatch between increasing exploration costs and decreasing new discoveries are of geographical nature: new deposits are found in more remote and challenging regions, and ore grades are continuously declining. The bulk of the Earth’s crust is almost out of reach, be it because of environmental constraints, the energy intensity that would be necessary for extraction or because of other associated risks. International competition for access to resources (e.g., water, land, food) can result in tensions or open conflicts. Furthermore, prospecting for resources in new, far away and fragile environments, such as the Arctic, tropical forests or the ocean floor will also lead to conflicts over property rights. Ongoing efforts to replace some of See e.g. the seminal paper written by Solow (1974) and the reflections in ‘Journal of Natural Resources Policy’ 1/2009.

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Fig. 1 Global resource extraction 1980 – 2030

non-renewable resources with renewables (e.g., crop-based biofuels) will add to pressures on productive land and, hence, increase conflict potential. In short, meeting the challenges of future demand for natural resources will certainly continue to be accompanied by increasing costs and is associated with risks for industries downstream. 2.2 Environmental constraints The ecological impacts of increasing global resource use are becoming obvious. The limited abilities of ecosystems to absorb the different outputs of economic activities have been addressed e.g. by Stern (2008) and by the UN’s Millennium Ecosystem Assessment. This will put further pressure on producing agricultural commodities on arable land. The ability to extract and produce materials in a sustainable manner has become a concern. The opening of new mines pose opportunity costs for land use and often causes conflicts with agriculture over water issues. Many countries now have started desalinisation programmes for extraction purposes. Urban sprawl, the determining factor for construction minerals, often covers major fertile soils and reduces production capacities for biomass. The expansion of agriculture for the production of non-food biomass, for instance for biofuels, transforms forests and savannahs into cropland with negative consequences for biodiversity and ecosystems. In that perspective, the supply of energy and minerals needs to be put into a systems perspective of material flows and ecosystem services. The European Commission (Commission of the European Communities 2005) has suggested pursuing a ‘double decoupling’, firstly between economic growth and the use of natural resources and, secondly, between the use of natural resources and environmental pressure. Intuitively, this is an appealing concept. Such a distinction also follows the argument that has been put forward by Stern and Cleveland (2004): thermodynamic theory explains that a complete decoupling may not be feasible and that energy is required to produce and recycle materials. Thus, availability is essential for enabling economic growth. On the other hand, given the manifold environmental impacts, such analytical distinction between availability and growth may lead to narrow conclusions for


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pursuing pollution-oriented policies for extractive industries only while the real challenge is to arrive at comprehensive concepts for resource-using industries. Evidence from research with combinations of Life Cycle Assessment and other tools such as Material Flow Analysis (see below) suggest that in fact variables of the two angles ‘materials’ and ‘environmental pressure’ are highly correlated when product groups, industries or economies are analysed (Bringezu and Bleischwitz 2009: 37f, 141). In a systems perspective one also ought to take into account that the Earth is a closed system for materials and land, whereas the sun constantly provides energy. To counterargue further against prioritising energy and pollution: producing useful forms of energy always requires materials. It thus makes sense to look at resources and their environmental impacts in a comprehensive manner. Environmental constraints arise across the whole life-cycle of using materials. Thus, while sustainable mining should certainly be an element for comprehensive strategies. It is essential to put this into the perspective of analysing the processes downstream across the material value chains of goods, i.e. transforming resources into materials, production, consumption, recycling activities and any final disposal. From the life-cycle perspective, all stages of the life-cycle chain offer opportunities to improve material efficiency, reduce waste generation and close the material loops of the economy. In that sense, concepts such as ‘material flow analysis’ and ‘industrial ecology’ reveal particular strengths. 2.3 Resource constraints to the low carbon economy The interdependency between energy and materials can be highlighted for the case of resource constraints to the low carbon economy. Most renewable energies2 demand metals for their production, which are – at least partly – critical. Possible constraints comprise the following metals. Infrastructure for renewable energies requires non-renewable mineral resources for equipment and process installations. Telecommunication and other information technologies, which may contribute to reductions in global travel and transport, depend increasingly on microelectronic devices, which require speciality metals. Taking into account the ambitious climate change policies of many countries, a number of minerals may come under increasing constraints. Lithium-ion batteries, currently used in electronic devices are expected to play a growing role in future demand for electric cars. Though forecasts in that area are extremely sensitive to public policy programmes on clean cars, a Credit Suisse estimation of annual growth rates in the order of 10 % (McNulty and Khay 2009) seems conservative but robust. This will likely lead to increased extraction activities at a globally limited number of salt lakes, such as those in Bolivia, Argentina and Chile. Photovoltaic cells for solar arrays and LED energy-efficient lighting3 both rely on gallium, a by-product of aluminium. Gallium for such green-tech 2

Biomass might be an exception; however biomass gasification and other related technologies also demand metals for the production of useful energy. 3 LED stands for light-emitting dioxide.

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demand is estimated to exceed current total world production by a factor of six by the year 2030 (Angerer et al. 2009). Future market development for gallium might contribute to enhanced bauxite mining where countries such as Guinea, China, Russia and Kazakhstan are among the top ten reserve holders. Tantalum, used for capacitors in microelectronics such as mobile phones, pagers, PCs and automotive electronics, is mined mainly in Australia and Brazil. Due to a breakdown of production in Australia in early 2009, the Democratic Republic of Congo has become a major world supplier of tantalum. Militarisation of mining in this country is well documented (Global Witness 2008) and the country is already subject to UN investigations because of illegal trade revenues financing civil war activities. Precious metals like gold, silver and platinum are increasingly used in microelectronics. Platinum group metals (PGM) also play an important role as chemical catalysts, used for pollution control, such as in exhaust catalysts in cars, or in energy conversion technologies like fuel cells. Fuel cells are a very promising low carbon technology that can also be used in combination with hydrogen as a substitute for oil in the transportation sector.4 PGM mining and refining is concentrated in only a few regions in the world. Platinum is mined in South Africa, and PGM are produced as a by-product of nickel and copper in Norilsk, Russia, and Ontario, Canada. The former is associated with extreme amounts of mining waste, the latter with considerable emissions of sulphur dioxide. The world’s platinum resources would not suffice to supply one third of the global car fleet in 2050 based on current fuel cell technologies (Saurat and Bringezu 2009). This shortlist is not exhaustive; further critical metals are e.g. copper and chrome, the latter being important for high-tech steel. In addition, phosphorus is a critical substance because it cannot be substituted at today’s knowledge and is essential for all nutritional processes on Earth (Cordell et al. 2009) – which is again a constraint on producing agricultural goods in the future and biomass strategies. As a result of this growing demand and concerns related to scarcity, a material leakage will have to be minimized and strategies of reuse will have to play a larger role. Any such strategies will have to include collection systems for consumer goods that are currently internationally traded and thus open loop systems. 2.4 Misallocation and uneven patterns of use Because environmental constraints have only been incorporated into prices to a very limited extent, this non-internalization of negative externalities leads to distortions and misallocation. Globally, two thirds of the world population use on average between 5 and 6 tons of resources per capita; industrialised countries use twice or more the amount of resources per capita than developing and emerging economies.

4

See e.g. the European Fuel Cell and Hydrogen Joint Undertaking at: http://ec.europa.eu/research/fch/ index_en.cfm and the World Hydrogen Conference at: http://www.whec2010.com


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An average European uses about four times more resources per capita than inhabitants of Africa and three times more than in Asia. The level and patterns of resource use differ across countries. With an average of roughly 15 tons per capita according to the most commonly used indicator ‚Direct Material Input’, residents of the EU-27 use about half the resources compared to citizens of Australia, Canada and the United States, but about 25 % more than Japan and Switzerland. Within the EU-15 per capita consumption varies between 45t per capita (Finland) and 14t per capita (Italy) – a significant difference. Highly uneven patterns are also to be found in Asia. While a Bangladeshi consumes around 1,2 t of materials every year, resource use is at the order of 45 t per capita in small and rich oil-exporting countries such as Bahrain. China is currently estimated to consume materials in the order of 6,5 t per capita. In many medium and high-income countries such as South Korea, Israel, or Saudi Arabia, annual consumption is in the order of 15 t / per capita, only slightly lower than the OECD average (Giljum et al. 2010: 3). It is interesting to note that some large economies experienced a modest decrease in the direct use of resources between 1992 and 2005. These include Germany, France, the United Kingdom, the Czech Republic and Sweden. It is also worth noting that Japan experienced the highest (22%) reduction in resource use per capita. Norway, Canada and Switzerland also reduced their figures from 1992 to 2005.

3 Measurement of resources: Material Flow Analysis Material Flow Analysis (MFA) was created a few years ago to analyse the use of natural resources in societies (Fig. 2). It measures and analyses the flow of materials, energy and water across the system boundaries between the natural environment and the human sphere. It is associated with concepts such as ‘industrial ecology’ and

Fig. 2 Economy-wide material balance scheme

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the ‘socio-industrial metabolisms’. Integrating the stages of production, consumption and recycling, it goes beyond traditional resource economics and offers a comprehensive perspective for resource policy. Since Eurostat (2004) and OECD (2008) (Fig. 2) have provided handbooks on the measurement of material flows, and do in fact promote the collection of data and use of MFA concepts, there are many opportunities for international economics and economic policy to integrate MFA into their models and empirical analysis. Direct Material Input (DMI) measures the input of materials that are used in the economy, that is, domestic extraction used (DEU) plus physical imports. Direct material consumption (DMC) accounts for all materials used by a country and is defined as all materials entering the national economy (used domestic extraction plus imports=DMI) minus the materials that are exported. In economic terms, DMC reflects consumption by the residents of a national economy. In contrast, the Total Material Requirements (TMR) and Total Material Consumption (TMC) also account for the indirect resource use that is associated with producing goods for a certain economy including their ‘ecological rucksacks’ that account for the unused earth masses moved during extraction and production processes. Both the European Commission and OECD aim at integrating the more inclusive indicator TMR/TMC in their accounting schemes and headline indicators. Sustainability research has revealed that measuring the material flows can also account for main environmental pressures, in particular for generic pressures stemming from the system turnover related to the input side of economies.5

4 General trends of resource productivity As a general trend, resource productivity6 (GDP generated per ton of DMC) in Europe has improved – economies have been creating more value per ton of resources used. Material productivity in the EU-27 was highest in the United Kingdom, France, Malta, Italy, Belgium and Luxemburg, Germany and Sweden (in 2005). It was the lowest in countries such as Bulgaria, Romania, Estonia, Czech Republic and others. In total, the difference in performance across European economies mounts up to a factor of 17 between top performers and low performers Fig. 3 (Schepelmann et al. 2009). The large economies in this group have also experienced a fairly high increase in material productivity. All the remaining European countries were either around (the Netherlands and Austria) or below the EU-27 average of 1,700 USD/ton DMC. To put this into an international perspective: material productivity in Switzerland was 3000 USD/ton, in Japan 2600 USD/ton, and in Norway 2000 USD/ton (in the year 2005). The United States, Canada, Australia and New Zealand had lower material productivity than the EU-27 average - although higher than the average for the EU-12 group. The growth in material productivity was fastest in the new EU member states, ranging from more than 50% for Latvia, Poland and the Czech Republic to 122% for 5

Evidence from EU projects such as INDI-LINK, CALCAS, Sustainability A-Test, MATISSE, FORESCENE; see also Bringezu/Bleischwitz 2009, chapter 2. 6 We use the term material productivity if the denominator is DMC or DMI and resource productivity for the more inclusive measurement approaches with TMR/TMC and for general purposes.


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Fig. 3 Material productivity performance across European economies

Estonia from 1992 to 2005. A growth of material productivity between 30% and 50% occurred in the United Kingdom, Slovakia, Germany, France, Sweden, Ireland and Belgium with Luxemburg. It is interesting to note that the gap in material productivity between the EU’s new member states and old member states has not changed significantly since the early 1990ies. In 2005 material productivity in the EU-12 was only 43% of the average for the EU-15, while in 1992 the same ratio was 41%. With the exception of Malta, material productivity in the new member states was well below EU-27 average. Despite continuous improvements, growth in the productivity of material resources in the EU has been significantly slower than growth in the productivity of labour and, to a lower degree, energy productivity. Over the period 1970-2005, productivity of labour increased by 140% in the EU-15, while productivity of materials grew by 90% and productivity of energy increased by 55%. In the EU-12, where a much shorter time series is available, productivity of materials increased by less than 30% between 1992 and 2005, whereas productivity of energy and labour grew hand in hand increasing by 65%. This surely reflects also a shift in using energy fuels as well as shifts in imports Fig. 4. Probably, a main driving force has been the relative pricing of these three inputs and the prevailing tax regimes, which make labour costs more expensive and has led to a focus on labour costs. Despite the high potential for improving material and energy productivity, most macro-economic restructuring and fiscal reform programmes in recent years tended to focus on reducing labour costs. Notwithstanding the pros and cons of this approach, improving material efficiency deserves more attention as a key to reducing costs and increasing competitiveness. During the period 1980-2005, material productivity in the EU as a bloc was markedly and consistently lower than in Switzerland and Japan (and to some degree behind Norway although the gap has been closing in recent years). There was also a notable gap between the EU 15 and the EU-12, with the material productivity in the latter group lagging behind Australia, Canada and the United States. However, it was a very wide spread within the EU itself, with an order of magnitude difference in resource efficiency between the United Kingdom (ahead of Japan) and Bulgaria and Romania (Fig. 5).

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Fig. 4 Productivity of labour, materials, and energy across countries

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Fig. 5 Changes in material productivity 1980 – 2004 across countries

Driving forces for such uneven patterns of use and slow productivity dynamics certainly deserve more attention by research. Some general explanatory factors behind such development are the stages of development – in particular the intensity of use during early industrialisation stages – and income. However, major differences also occur across countries with similar levels of industrialization and income. Driving forces for resource productivity thus have to be analysed from a perspective that takes into account relevant socio-economic variables of economies and their innovation systems such as & & &

7

Construction activities such as new dwellings completed, road construction, share of construction in GDP, Structure of the energy system (a high share of coal and lignite correlates with higher TMR and DMC, efforts to increase energy efficiency correlate with resource productivity), Imports and international trade: tentative evidence suggests a positive correlation between high imports and material intensity for industrialized countries. The reason probably lies in global production chains, where raw materials and intermediate goods are imported, transformed into finished products domestically and also traded globally, i.e. most industrialized countries utilize the international division of labour as net importers of natural resources.7 By contrast, there is a positive correlation between high imports and material productivity for many less industrialized countries, which is probably due to the competitive pressure on inefficient and resource-intensive domestic industries in those countries.

Test statistic for EU-15, 1980-2000: an increase in the import share by 1% would raise the DMC per capita by 0.225%. Research done by Soeren Steger, see Bleischwitz et al. 2009; see also: Dittrich 2009.

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5 Resource productivity, competitiveness and innovation Our approach challenges traditional economic analysis that has determined natural resources as a factor of production and, hence, assumes that negative impacts on growth could occur if the supply of natural resources is constrained. In contrast we propose that regions – and in particular resource-poor regions – may benefit from increasing resource productivity, at least with regard to their import dependencies and costs to purchase commodities and probably also with regard to innovation. In line with our approach, research has demonstrated that resource-rich Developing Countries may experience their abundance of natural resources as a curse that hinders economic diversification, investments in human capital and democracy and, thus, lead to lower growth rates compared to other countries (Gylfason 2009). In line with the chapters above our approach enables research to looking at development across economies and industrial sectors in connection to social, institutional and ecological factors, in particular to emerging markets for eco-innovation. Our thesis is close to what is called the Porter hypothesis on first mover advantages for countries with an active environmental policy, but focuses stronger on market development and resources. In line with Porter, we also underline the assumption of eco-innovation effects to compensate for related investments. But global analysis of resources and material flows goes beyond Porter’s scope because & &

It explicitly addresses international distortions resulting from resource constraints and negative externalities namely in the fields of extraction and recycling (see above), and It emphasizes the need for international policy approaches rather than assuming an international diffusion of national environmental policies.

Since our approach covers all natural resources used in economies a guiding question for any green growth is whether and to what extent companies, industries and economies can enhance their prosperity through improvements in resource productivity (see also Weizsäcker et al. 2009). To test our thesis of a positive correlation between resource productivity and prosperity, we use data on the index of competitiveness as measured by the World Economic Forum and on the Domestic Material Consumption for 26 countries. Our results suggest that there is a moderate positive relationship between the material productivity of economies (measured by GDP in purchasing power parity [PPP] US$ per kg DMC) and the score value of the growth competitiveness index (GCI) (Steger and Bleischwitz 2009: 184). The higher the level of material productivity the higher the level of competitiveness (R-squared of 0,3). The usual test statistics was performed; both the t-statistics and the F-statistics are in the 95 % significance level, while heteroskedasticity was rejected using the Breusch-Pagan test and the White test. However Finland and Italy illustrate exceptional cases where a high value in one indicator is accompanied by a low value in the other indicator. Further evidence suggests that the correlation between competitiveness and resource productivity has not been increasing since 2001 on a broad scale, despite


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high raw material prices and resulting efforts to use resources more efficiently. A strong correlation however has been found between the MEI-index of competitiveness (macro-economic institutions) and European energy productivity performance (R-squared of 0,76, Osnes 2010: 31). Thus, more research is needed; time series analysis with co-integrated panel data is probably a suitable methodology to deliver robust results on the causality between different drivers for competitiveness and resource productivity. In such research, critical variables are as follows: &

Relevance of material costs for industry: research needs to clarify the total value of resources and track raw material costs along value chains: ○ Importing costs for raw materials and semi-finished goods are a key variable for the competitiveness; for the EU, the value based share of the top-ten raw material imports in total imports grew between 1998 and 2004 from around 8% up to 13%.8 ○ Data provided by the German Federal Statistical Office reveal that the costs of materials in Germany account for around 40 – 45 % of the gross production value of manufacturing companies (this includes purchased material inputs such as raw materials and intermediate goods). These data is based upon a questionnaire to industry managers and, hence, is relevant for industries but can hardly be added up to an aggregated figure for whole economies. ○ Since most commodities are purchased on a US-Dollar basis, the exchange rate becomes quite relevant. Currently, the financial crisis has weakened the position of the Euro versus the US-$, which will lead to more extreme price increases for energy and metals in Europe compared to the US. ○ The macroeconomic situation – characterized by increasing public debts – increases the vulnerability of economies towards higher commodity prices for raw materials. This may encourage resource savings because such strategy lowers risks of inflation caused by importing fuels and commodities, and it may also favour resource taxation.

&

&

8

It is also worth mentioning that the competitiveness indicators do not capture negative externalities. Countries investing in eco-innovation might earn the benefits at a later point in time, whereas countries with dumping practices and weak environmental standards can gain short-term benefits by lowering production costs at the expense of others. The awareness among managers and companies to pursue material efficiency is still relatively low. Rennings and Rammer (2009) found that just 3% of German companies have reported significant undertakings to increase material efficiency in their analysis of the EU Community Innovation Survey (CIS). However sales per employee in those companies are approximately 15% higher than in average industries. These findings indicate a gap between current awareness and potential benefits that needs to be tested by more in-depth research at an international scale.

Based on Eurostat and 10 minerals, but no semi-final goods; the share actually is higher than the analysis of de Bruyn et al. (2009) suggests.

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The vast majority of innovation can currently be characterized as process innovation, a strategy that offers affordable risks for companies compared to product innovation or system innovation.9 Such process innovation becomes visible in material efficiency when companies accomplish strategies such as ‘zero losses’, ‘design to costs’, or ‘remanufacturing’. At an international scale however, material leakage occurs and an advanced process innovation of closing the loops in international value chains remains a challenge especially when end-of-life stages of consumer goods are considered. A 3R strategy for metals, which could be applied in the product groups of mobile phones and vehicles, requires further efforts and interlinkages between different types of innovation, including institutional change and political action in those countries where the used products are imported. According to Eurostat, the EU exports end-of-life vehicles predominantly to countries such Kazakhstan, Guinea, Russia, Belarus, Serbia, Benin and others. For that reason it will become important to complement producer responsibility with materials stewardship. In this regard and because only a limited number of industrial sectors require a significant share of the total resource requirements of the economy,10 a sectoral approach to innovation (Malerba 2007) is useful to pursue. In such a perspective, new business models for base metal industries might emerge (Petri 2007), which could position the industry at the heart of material value chains. This is a horizontal task, which clearly transcends vertical production patterns, for example, along the automotive chain. Within networks and partnerships of integrated material flows management, the base metal industry can demonstrate stewardship and leadership. The challenge is to overcome the business model of a primary production company delivering basic materials and develop competences towards a fully integrated material flow company network, with high knowledge intensity, customer orientation, worldwide logistics, high-level recycling and a long time horizon. Such base metal companies will manage products, flows and stocks. In total, resource productivity underlines a new category of innovation that can be characterized as “material flow innovation”. It captures innovation across the material value chains of products and processes that lower the material intensity of use while increasing service intensity and well-being. It aims to move societies from the extract, consume, and dispose system of today's resource use towards a more circular system of material use and re-use with less resource use overall. While the established categories of process, product and system innovation (and organisational and advertising innovation, see e.g. the OECD Oslo Manual on Innovation) have their merits, the claim can be made that given the pervasive use of resources across all stages of production and consumption a new category will have to be established to capture innovation activities which include – –

9

Developing new materials with better environmental performance; Substituting environmentally intensive materials with new materials, functionally new products and functionally new services leading to lower demand; See also the paper written by Tomoo Machiba. In Germany, ten sectors induce more than 75% of the TMR; see Acosta et al. 2007.

10


–

Establishing life-cycle wide processes of material efficiency e.g. by sustainable mining, more efficient production and application of materials and strategies such as & & & &

–

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Enhancing re-use and recycling Recapturing precious materials from previously open loop systems (e.g. critical metals, phosphorus) Functionally integrating modules and materials in complex goods (e.g. solar cells integrated in roofs) Increasing the lifetime and durability and offer related services

Transforming infrastructures towards a steady-state stocks society e.g. via improved maintenance systems for roads and buildings as well as developing new resourcelight buildings and transportation systems and other network goods (such as waste water systems) and, in the long run, establishing a solarised technosphere for dwellings and other systems of provision (Bringezu 2009).

Such a perspective on innovation and green growth is also consistent with lead markets worldwide. In distinction to prevailing climate change diplomacy, where it is difficult to engage the emerging economies, our perspective sheds light on attractive lead markets in emerging economies because they can build upon advantages from their natural endowments and allow for the establishment of new development pathways.11

6 Resource policies: strategic pillars and incentives Innovation and lead market perspectives are however faced with barriers and market failures (Bleischwitz et al. 2009b: 228ff); policies will be needed to manage the ensuing transition processes. Corresponding policy objectives are unlikely to be delivered by one single instrument alone. One of the key conclusions of various strands of research is that a well-designed mix of institutional change and policy instruments is better capable of governing transition strategies than single instruments (Smith et al. 2005; Bleischwitz 2007) Fig. 6.12 Better information is crucial for sustainable resource management, especially for improving material efficiency at the business level. The issue is not the supply of information alone, but the dissemination and appropriate application of such information in daily business routines. Public programmes to promote material efficiency and resource productivity can help to improve the information base, especially in SMEs, and facilitate market entry. The German Material Efficiency Agency, the regional eco-efficiency agency of North Rhine–Westphalia and the UK Resource Efficiency Network have demonstrated good success in approaching companies and disseminating knowhow on promoting material efficiency. From a mid-term perspective, the establishment of an international database and data centre on the resource intensity of products and services is needed 11 12

See also the contribution Rainer Waltz in this issue (Aghion et al. 2009; OECD 2009). See also the contributions by Rene Kemp and Paul Ekins in this issue.

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Fig. 6 Resource policy

(Bleischwitz et al. 2009b: 241ff). The main objective of an international database is to provide users with validated, internationally harmonised and periodically updated data on key resources, the resource intensity and related key indicators of raw materials, semi-manufactured goods, finished products and services. Following the slogan ‘no data no market’, such data facilitates a sustainable management of material flows in value chains and economies and a dematerialisation of currently unsustainable production and consumption patterns. Over time, such an international database should also offer data on indirect resource flows as well as data on material cost structures of industries. A regulatory perspective should be emphasised. Clear long-term signals, credible commitments and strong incentives need to be given from policies. Economic incentives can play a key role by triggering markets towards eco-innovation. Taxes have the advantage of being implementable by individual governments without international agreements. All taxes are controversial, but those on recognised ‘bads’ such as tobacco, alcohol or carbon emissions may be less so than others and allow the balance of taxes to be adjusted away from others, such as on income and labour. Towards the model of a ‘Material Input Tax’, which offers theoretically convincing but less operational advantages, a real world proposal is on taxing construction minerals. Following a tax on aggregates that has been successfully implemented in the UK (EEA 2008), a construction tax could address basic materials such as sand, gravel, crushed rocks and start from a level that is approximately 30% above market price, with a stepwise increase of 3 – 5% p.a. The objective is to facilitate recycling and innovation – including system innovations such as resourcelight construction and functionally integrated building envelopes. Besides the intended steering effect, parts of the revenues could also be used to finance innovation programmes in such direction. A combination of information-based, knowledge generating incentives supported by a pricing policy can be seen as a strong momentum for increasing resource productivity. Other instruments such as standard setting may add to this. It will be important to address the international level. In this case, a 3R policy will have to address open trade for critical metals and recycling as well as to facilitate action by establishing an international contract (‘covenant’) on closing material loops for resource-intensive consumer goods. Such a covenant might include the main countries of production and final consumption of vehicles and electronic devices, and establish principles of materials stewardship, certification and responsibility. While providing investment opportunities and stability, it may also offer incentives for Developing Countries to join.


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Furthermore, an international agreement on sustainable resource management is deemed necessary in the long run (Bleischwitz et al. 2009b). 7 Conclusions Our paper emphasizes the transformation to a green economy that comes along with resource constraints and increasing resource productivity. It puts the need to limit and lower the emissions of greenhouse gases in the wider context of managing ecosystems and natural resources in a sustainable manner while acknowledging the prospects for eco-innovation and green growth. The claim is made that this offers a comprehensive view on possible resource constraints as well as on tangible business opportunities, in particular if policies act as a ‘visible hand’. This means that policies should provide a long-term orientation, essential information and sound economic incentives, complemented by international cooperation. Regarding the latter, our paper proposes an international covenant to establish material stewardship for metals and an international agreement on sustainable resource management. However more research ought to be done to understand and explore the international economics of such transition strategies and its interdisciplinary dimensions. Research needs to conduct time series analysis to establish causality on drivers for resource use and competitiveness as well as to explore the relevance of lifecycle material costs across different industries and economies. In that regard, international economics and economic policy are entering a fascinating field.

References Aghion P, Hemous D, Veugelaers R (2009) No green growth without innovation, Bruegel Policy Brief No. 7, Brüssel Angerer G, Erdmann L, Marscheider-Weidemann F, Scharp M, Lüllmann A, Handke V, und Marwede M (2009) Rohstoffe für Zukunftstechnologien. Fraunhofer IRB Verlag, Stuttgart Bleischwitz R (ed) (2007) Corporate governance of sustainability: a co-evolutionary view on resource management; Cheltenham [u.a.]: Elgar Bleischwitz R, Welfens P, Zhang ZX (ed) (2009a) Sustainable Growth and Resource Productivity – Economic and Global Policy Issues, Greenleaf Publisher Bleischwitz R et al (2009b) Outline of a resource policy and its economic dimension, In: Bringezu S, Bleischwitz R (eds) Sustainable Resource Management. Trends, Visions and Policies for Europe and the World, Greenleaf Publisher, pp. 216-296 Bringezu S (2009) Visions of a sustainable resource use. In Sustainable Resource Management. Trends, Visions and Policies for Europe and the World. Greenleaf, S. S. 155-215 Bringezu S, Bleischwitz R (2009) Sustainable resource management : global trends, visions and policies, Greenleaf Bringezu et al (2009) Europe’s resource use: basic trends, global and sectoral patterns, environmental and socio-economic imapcts. In: Bringezu S, Bleischwitz R (eds) Sustainable Resource Management. Trends, Visions and Policies for Europe and the World, Greenleaf Publisher, pp. 52 – 154 Cordell D, Drangert J-O, White S (2009) The Story of Phosphorus: Global food security and food for thought. Global Environ Change 19(2009):292–305 De Bruyn S, Markowska A, de Jong F, Blom M (2009) Resource productivity, competitiveness and environmental policies, CE Delft Dittrich M (2009) The physical dimension of international trade, 1962-2005. In: Bleischwitz R, Welfens PJJ, Zhang ZX (eds) Sustainable growth and resource productivity. Economic and global policy issues. Greenleaf Publishing, Sheffield

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Ericsson M (2009) Will the mining industry meet the global need for metals? In Sustainable Growth and Resource Productivity. Sheffield: Greenleaf, S. 14-30 Commission of the European Communities (2005) Thematic Strategy on the Sustainable Use of Naural Resources Eurostat, IFF (2004) Economy-wideMaterial Flow Accounts and Indicators of Resource Use for the EU-15 Giljum S, Dittrich M et al (2010) Resource use and resource efficiency in Asia. A pilot study and trends over the past 25 years, commissioned by UNIDO, SERI/WI Global Witness (2008) “‘Faced with a gun, what can you do?’” (London: Global Witness) Gylfason T (2009) Development and growth in mineral-rich countries. In Sustainable Growth and Resource Productivity. Sheffield: Greenleaf, pp. 42-85 Lutz C, Giljum S (2009) Global resource use in a business-as-usual world up to 2030: updated results form the GINFORS model. In Sustainable Growth and Resource Productivity. Sheffield: Greenleaf, pp. 30-42 MacLean HL, Duchin F, Hagelüken C, Halada K, Kesler SE, Moriguchi Y, Mueller D, Norgate TE, Reuter MA, van der Voet E, Hagelüken C, und Meskers CEM (2010) Stocks, Flows and Prospects of Mineral Resources. In: Graedel T, van der Voet E (eds) Linkages of Sustainability. Strüngmann Forum Report 4. The MIT Press, Cambridge Malerba F (2007) Innovation and the dynamics and evolution of industries: Progress and challenges. Int J Ind Organ 25(4):675–699 McNulty JP, Khay A (2009) Lithium. Extracting the Details of the Lithium Market. Credit Suisse, p. 18. Available at: http://www.docstoc.com/docs/12415608/Lithium OECD (2008) Measuring Material Flows and Resource Productivity. OECD, Paris OECD (2009) Eco-Innovation in Industry: Enabling Green Growth; Paris: Organisation for Economic Cooperation and Development Osnes M.-A (2010) Energy Use and Competitiveness. The relationship between energy intensity and national competitiveness, Thesis submitted at the College of Europe Bruges, Belgium Petri J (2007) New Models of Sustainability for the Resources Sector: A Focus on Minerals and Metals Process Safety and Environmental Protection, pp. 88–98 Rennings K, Rammer C (2009) Increasing energy and resource efficiency through innovation – an explorative analysis using innovation survey data. ZEW discussion paper No. 09-056 Saurat M, Bringezu S (2009) Platinum Group Metal Flows of Europe: PART II: Exploring the Technological and Institutional Potential for Reducing Environmental Impacts. J Ind Ecol 13:406–421 Schepelmann P, Stock M, Koska T, Schüle R, Reutter O (2009) A green new deal for Europe : towards green modernisation in the face of crisis ; a report by the Wuppertal Institute for Climate, Environment and Energy. - Brussels : Green European Foundation, 2009 - (Green new deal series ; 1) SERI, FOE, Global 2000 (2009) Ohne Mass und Ziel? Über unseren Umgang mit den natürlichen Ressourcen der Erde, Wien Smith A, Stirling A, Berkhout F (2005) The governance of sustainable sociotechnical transitions. Res Pol 34:1491–1510 Solow RM (1974) ‘The Economics of Resources or the Resources of Economics’, American Economic Review, Papers and Proceedings 64: 1-14 Solow RM et al (2009) Special issue on ‘The Economics of Resources or the Resources of Economics’), in: Journal of Natural Resources Policy Research 1.1 Steger S, Bleischwitz R (2009) Decoupling GDP from resource use, resource productivity and competitiveness: a cross-country comparison. In: Bleischwitz R, Welfens PJJ, Zhang ZX (eds) Sustainable Growth and Resource Productivity. Greenleaf Publisher, p. 172–193 Stern N (2008) The Economics of Climate Change. Am Econ Rev 98.2:1–37 Stern D, Cleveland C (2004) Energy and Economic Growth, Rensselaer Working Papers in Economics, Number 0410 UNCTAD (2010) Trade and environment review. Promoting the poles of clean growth to foster the transition to a more sustainable economy, Geneva Walz R (2009) Competences for Green Development and Leapfrogging in Newly Industrializing Countries, accepted for publication in: International Economics and Economic Policy (in press). Weizsäcker E et al. (2009) Factor Five: Transforming the Global Economy Through 80% Improvement in Resource Productivity, Earth scan World Resources Forum Davos (2009) Declaration of the World Resources Forum - Sept. 16, 2009: Resource Governance – Managing Growing Demands for Material on a Finite Planet, available at: http://www.worldresourcesforum.org

Int Econ Econ Policy (2010) 7:245–265 DOI 10.1007/s10368-010-0164-x O R I G I N A L PA P E R

Competences for green development and leapfrogging in newly industrializing countries Rainer Walz

Published online: 30 May 2010 # Springer-Verlag 2010

Abstract Competences for green development and leapfrogging in Newly Industrializing Countries are becoming increasingly urgent from a global perspective. The integration of these innovations into the development process in the rapidly growing economies requires knowledge build-up and technology cooperation. The prospect of exporting sustainability technologies can add an incentive for them to move towards sustainability technologies. These issues also affect innovations to increase material efficiency, which are receiving increasing interest among sustainability innovations. The competences for green development are analyzed with an innovation indicator approach. The general innovation capabilities are evaluated using R&D indicators and survey results about general innovation capabilities. Technological competences in the sustainability fields are a key indicator for the absorptive capacity of sustainability technologies and for the ability to export them. International patents and publications, and successes in foreign trade indicate to what extent a country is already able to participate in global technology markets. The resulting pattern shows various strengths and weaknesses of the analyzed countries. In general, the knowledge build up in material efficiency strategies is above-average in the Newly Industrializing Countries. There is a strong need for strategic positioning of the countries and for coordination of the various policy fields involved. Keywords Sustainability technologies . Absorptive capacities . Patents . Trade patterns . Material efficiency . Newly industrializing countries JEL Classifications F14 . O14 . O3

Acknowledgements The author is very grateful for the suggestions provided by two anonymous referees. He also wants to thank his colleagues Rainer Frietsch, Nicki Helfrich and Frank Marscheider-Weidemann from Fraunhofer ISI for their help in data search. The financial contribution of the German BMBF is acknowledged. R. Walz (*) Fraunhofer Institute for Systems and Innovation Research, Breslauer Strasse 48, 76139 Karlsruhe, Germany e-mail: [email protected]

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1 Introduction Competences for green development and leapfrogging in Newly Industrializing Countries (NICs) are becoming increasingly urgent from a global perspective. This also holds for innovations to increase material efficiency, which are receiving increasing interest among sustainability innovations. The integration of these innovations into the development process in the rapidly growing economies requires knowledge build-up and technology cooperation. The prospect of exporting sustainability technologies can add an incentive for Newly Industrializing Countries to move towards sustainability technologies. The first part of the paper deals with conceptual issues. First, the importance of innovation and technology cooperation are discussed within the traditional view of environmental economics on global environmental challenges. Prerequisites for successful technology cooperation and export success in international trade are presented. Secondly, the empirical research concept to measure capabilities for green development is explained. The remainder of the paper analyses selected NICs. The empirical results include the general framework condition for sustainability innovations. The technological capabilities in sustainability technologies are analyzed. They comprise 6 fields of sustainability technologies: (1) material efficiency, including renewable resources, ecodesign of products and recycling, (2) environmental friendly energy supply technologies, including renewable energy, cogeneration and CO2 neutral fossil fuels, (3) energy efficiency, both in buildings and in industry, (4) transport technologies, (5) water technologies, and (6) waste management technologies. These technological fields are analyzed with innovation indicators such as publications, patents and trade. In an additional section, disaggregated results are presented for the case of material efficiency. Based on these results, first conclusions for the role of sustainability innovations for the economic development process in NICs are drawn. Finally, the limitations of such an indicator based overview are explored.

2 Conceptual issues 2.1 Prerequisites for leapfrogging There is general consensus that environmental sustainability requires an integration of environmental friendly technologies in the economic catching up process of Newly Industrializing Countries (NICs). Since the seminal paper of Grossmann and Krueger (1995), this challenge is discussed within the concept of the Environmental Kuznets Curve (EKC). According to the EKC-hypothesis, environmental pressure grows faster than income in a first stage of economic development. This is followed by a second stage, in which environmental pressure still increases, but slower than GDP. After a particular income level has been reached, environmental pressure declines despite continued income growth. Graphically, this hypothesis leads to an inverted U-curve similar to the relationship Kuznets suggested for income inequality and economic per capita income (Fig. 1).

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Environmental pressure

emissions industrialized countries

technology and knowledge transfer between countries

tunnel emissions catching up countries

GDP/capita

Fig. 1 Concept of tunneling through the Environmental Kuznets Curve

Within the global environmental debate, it is argued that NICs do not necessarily have to follow the emissions path of the industrialized countries. An alternative development path can be labeled “tunneling through the EKC” or “leapfrogging” (Munasinghe 1999; Perkins 2003; Gallagher 2006). It is argued that countries catching up economically can realize the peak of their EKC at a much lower level of environmental pressure than the developed countries. Developing countries could draw on the experience of industrialized countries allowing them to leapfrog to the latest sustainability technology. This leads to a “strategic tunnel” through the EKC. Here, environmental economists put faith into quick technological development and knowledge transfer as a key for reconciling environmental sustainability with economic development in NICs. There are several critical aspects to this concept (see Ekins 1997 or Dinda 2004 for excellent overviews). First of all, the existence of an EKC is far from certain. Even if the data indicates that for some pollutants, e.g. SO2, an EKC exists, it is far from certain that this holds for global problems such as CO2-emissions or material use. Furthermore, even if such a development can be seen in the developed world, it might just reflect a displacement effect of dirty industries to other less developed countries. In addition, even if environmental pressure is declining, it is far from certain that this results in a sustainable path due to the characteristic of many environmental problems as a stock problem. Finally, there is clear evidence that such a development does not occur naturally, but requires active policies and regulations and an appropriate institutional setting (Dutt 2009). With regard to transferring the EKC-concept to NICs, two additional critical questions to this concept have to be addressed: & &

First, is the interest of the NICs strong enough to push in that direction? Second, are the countries—given their stage of development—able to absorb the latest sustainability technologies and thus to leapfrog?

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Based on the pollution haven hypothesis and the environmental dumping mechanism it can be argued that there might be a disincentive for strong environmental policies in the NICs in order to attract pollution intensive industries (Copeland and Taylor 2004). However, there are also different incentives for NICs to push for sustainability technologies: & &

&

Firstly, environmental problems and related health issues are becoming major issues within NICs, and many of the sustainability technologies would help to improve this domestic environmental pressure. Secondly, many analyzed sustainability technologies improve the infrastructure, e.g. in the energy, water or transportation sector, or address the growing demand for raw materials. Thus, they are also part of an economic modernization strategy. Thirdly, moving towards environmental sustainability will create huge international markets for sustainability technologies. It is estimated that the sustainability technologies will be a major market in the future, with average annual growth rates for technology demand in the fields of energy supply, energy efficiency, transport, water technologies and material efficiency in the order of 5 to 8% per year. These high growth rates will lead to an annual demand for technologies in these five fields above 2,000 billion Euro in 2020 (Roland Berger 2007; Ecorys et al. 2009). Thus, another incentive is that NICs engage in the development and production of these technologies and compete with the countries of the North for lead roles in supplying the world market with sustainability technologies.

The debate on technological catch-up and leapfrogging can be traced back some time. It gained prominence among the scholars developing an evolutionary theory of trade (Soete 1985; Perez and Soete 1988; Dosi et al. 1990). Technological cooperation focuses on the knowledge base required by the technologies and on enabling competences in the countries. Since the end of the 1980’s, the concepts of Social or Absorptive Capacity (Abramovitz 1986; Cohen and Levinthal 1990) and technological capabilities (Lall 1992; Bell and Pavitt 1993) are widely known. The results of the catching-up research in the last years (e.g. Fagerberg and Godinho 2005; Nelson 2007; Malerba and Nelson 2008) and of empirical studies on developing capabilities especially in the context of the Asian countries (Lall 1998; Lee and Lim 2001; Lee 2005; Lee and Lim 2005; Rasiah 2008) have underlined the importance of absorptive capacity and competence building. Furthermore, there is increasing debate about the changing nature of technology transfer and cooperation with regard to learning and knowledge acquisition. One aspect to consider is the tendency that the build up of technological and production capabilities are becoming increasingly separated (Bell and Pavitt 1993). Another aspect relates to the effect of globalization on the mechanisms for knowledge dissemination. Archibugi and Pietrobelli (2003) stress the point that importing technology has per se little impact on learning, and call for policies to upgrade cooperation strategies towards technological partnering. Nelson (2007) highlights the changing legal environment and the fact that the scientific and technical communities have been moving much closer together. All these factors lead to the conclusion that indigenous competences in sustainability related science and technology fields are increasingly a prerequisite for the successful absorption of sustainability technologies in NICs.


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The economic rationale for pushing for sustainability innovations in order to realize export potential is linked to the concepts of first mover advantages and lead markets. A first-mover advantage requires that competition is driven not so much by cost differentials and the resulting attractiveness of international production location alone, but also by quality aspects. Empirical results indicate that under these conditions, unit labor costs play a lower role in determining exports (Amable and Verspagen 1995; Wakelin 1998). Above all for technology-intensive goods, which include many environmental innovations, high market shares depend on the innovation ability of a national economy and its early market presence. Thus, the argument can be made that if countries push for increasing material efficiency, they tend to specialize early in the supply of the necessary technologies. If there is a subsequent expansion of the international demand for these technologies, these countries are then in a position to dominate international competition due to their early specialization in this field. The following factors have to be taken into account when assessing the potential of countries to become a lead market in a specific technology (Walz 2006): &

&

&

Lead market capability: it is not possible to reach a lead-market position for every good or technology. One prerequisite is that competition is driven not by cost differentials alone, but also by quality aspects. This prerequisite is fulfilled especially for knowledge-intensive goods. Other important factors are intensive user-producer relationships and a high level of implicit knowledge (Archibugi and Michie 1998, Archibugi and Pietrobelli 2003; Dosi et al. 1990, Fagerberg 1995). The importance of the demand side is an important part of the analysis of von Hippel (1986), Porter and van der Linde (1995) or Dosi et al. (1990). Beise (2004) classifies the demand factors in 5 categories, distinguishing demand and price advantage, market structure, and transfer and export advantage. A lead market situation must also be supported by regulation which at the same time is innovation-friendly and sets the example for other countries to follow the same regulatory path (Blind et al. 2004; Beise and Rennings 2005; Walz 2006, 2007). This relates to different aspects: First, for environmentally friendly technologies, the demand depends very much on the extent by which regulation leads to a correction of the market failures which consists in the externality of the environmental problems (Rennings 2000). Without such regulation, the demand will be much lower, and the various demand effects are less likely to be strong. Second, the national regulation should not lead to an idiosyncratic innovation, in other words an innovation that can be only applied under the very specific national regulatory regime. In contrast, the regulation should be open to diverse technical solutions, which increase the chance that they fit into the preferences of importing countries. Third, the national regulation should set the standard for the regulatory regime, which other countries are likely to adopt. Examples for this are product standards or testing procedures, which have to be fulfilled before a technology becomes classified as environmentally benign. If the procedure from the lead country is adopted in other countries, the national suppliers from the lead country have additional advantages on the world market, because they have adapted their technologies early on to pass the requirements of such a regulatory regime, and have developed administrative capabilities how to deal with all the

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procedures. However, even though there has been some clarification of the mechanisms which make regulation an important parameter for a lead market, there is a lot of additional research necessary to develop a clear methodology on how to operationalize the empirical evaluation of an existing regulatory regime with regard to its innovation friendliness. It has become increasingly accepted that international trade performance depends on technological capabilities (for an overview see Dosi et al. 1990; Fagerberg 1994). Despite all the problems and caveats associated with measuring technological capabilities, indicators on R&D expenditures and patent indicators such as share of patents or the relative patent advantage are among the most widely used indicators. The empirical importance of these indicators for trade patterns is also supported by recent empirical research (e.g. Sanyal 2004, Andersson and Ejermo 2008 and Madsen 2008). It is widely held that innovation and economic success also depend on how a specific technology is embedded into other relevant industry cluster. Learning effects, expectations of the users of the technology and knowledge spillovers are more easily realized if the flow of this (tacit) knowledge is facilitated by proximity and a common knowledge of language and institutions (Archibugi and Pietrobelli 2003; Dosi et al. 1990; Fagerberg 1994).

Altogether, it is more and more acknowledged that the absorption of developed technologies and the development of abilities to further advance these technologies and their international marketing are closely interwoven (Nelson 2007). For both strategies—transfer of knowledge from traditional industrialized countries and establishing export oriented market success—it is necessary to develop substantial capabilities for sustainability innovations within the NICs. 2.2 Research concept This paper addresses the competences for sustainability innovations in green technology markets. It concentrates on an indicator framework to develop a top down macro overview on the technological capabilities in sustainability technologies in Newly Industrializing Countries (NICs). The following technological fields were included under the heading of sustainability innovations: (1) material efficiency, including renewable resources, ecodesign of products and recycling, (2) environmental friendly energy supply technologies, including renewable energy, energy storage, cogeneration and CO2 neutral fossil fuels, but excluding nuclear energy, (3) energy efficiency, both in buildings and in industry, (4) transport technologies, (5) water technologies, and (6) waste management technologies. In addition to an analysis for the aggregate of sustainability innovations, a more disaggregated analysis for material efficiency is performed. Measuring technological capabilities can draw on the experience with innovation indicators made over the last two decades (see Grupp 1998; Smith 2004; Freeman and Soete 2009). In the remaining of the paper, empirical results for the following aspects are presented: 1. Sustainability innovations require good framework conditions for innovations in general. These general innovation framework conditions in NICs are analyzed


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by using general science and innovation indicators on the one hand, and survey data from WEF (2006) on the other. However, the results depend on the analytical framework of these approaches, and must be cautiously interpreted. 2. Publication indicators are an intermediate output indicator for measuring the capability related to scientific output. Publications covered by the Science Citation Index (SCI) in the field of environmental engineering are used in order to measure the capabilities of NICs with regard to sustainability innovations. It has to be acknowledged that—compared to the natural and social sciences— publications are seen as a less reliable indicator for measuring the scientific output of engineers. Nevertheless, they provide a good data source for changes in the development over time. 3. Patents are among the most used indicators in innovation research. They belong also to the intermediate output indicators of knowledge build up, but are more directly related to technological capabilities than scientific literature. The analysis in this paper primarily draws on patent applications at the World Intellectual Property Organization and thus transnational patents (for the concept see Walz et al. 2008 and Frietsch and Schmoch 2010). In this way, a method of mapping international patents is employed which does not target individual markets such as Europe but is much more transnational in character. The NICs' patents identified in this way reveal those segments in which patent applicants are already taking a broader international perspective. In this paper, the years 2002–2006 were chosen as the period of study so that a statistically more reliable population is achieved in which chance fluctuations in individual years are evened out. 4. International trade figures indicate the degree to which a country is able to compete internationally. As argued in Section 2.1, the competitiveness with regard to technology intensive goods is influenced by the technological capabilities of the countries. Sustainability innovations mostly fall into the category of sectors which are classified as medium-high-technologies industries. Thus, trade figures for these technologies also indicate the degree of technological capabilities. The database UN-COMTRADE is referred to for trade figures. It is not limited to trade with OECD countries, but also covers South-South trade relations. In addition, the classification of the technologies is using the Harmonized System (HS) 2002. This foreign trade classification allows more disaggregation and therefore a better targeting of the sustainability technologies compared with the older classifications common in international comparisons (Standard International Trade Classification SITC). The latest year available for the analysis was 2006. For patents, literature publications, and world trade, the share of the NICs at the world total was calculated (literature share, patent share, world export share). Furthermore, specialization indicators (relative patent advantage (RPA); relative literature advantage (RLA), relative export activity (RXA) and revealed comparative advantage (RCA) were calculated, in order to analyze whether or not the NICs specialize on the sustainability technologies: For every country i and every technology field j the Relative Patent Activity (RPA) " , !# , is calculated according to: RPAij ¼ 100» tanh ln

P pij pij i

P j

pij

P

pij

ij

The RLA and the RXA are calculated in a similar way as the RPA, by substituting patents (p) by literature publications (l) and exports (x) respectively.

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In addition to exports, which are the basis of the RXA, the RCA takes also the imports m into account and is calculated according to: " , !# , X X xij mij RCAij ¼ 100» tanh ln xij mij j

j

All specialization indicators are normalized between +100 and–100 (see Grupp, 1998). Positive values indicate an above average specialization on the analyzed technologies, a negative value shows that the country is more specializing on other technologies. Sustainability technologies are neither a patent class nor a classification in the HS-2002 classification of the trade data from the UN-COMTRAD databank which can be easily detected. Thus, for each technology, it was necessary to identify the key technological concepts and segments. They were transformed into specific search concepts for the patent data and the trade data. This required an enormous amount of work and substantial engineering skills. Furthermore, there is a dual use problem of the identified segments. The data only indicates that there is a technological capability which could be used for sustainability—not necessarily that these technologies are already implemented in a way that the environmental burden is reduced. Thus, in order to reflect that ambiguity, the term sustainability technology, which is used in the remainder of the text, has to be interpreted as sustainability relevant technology.

3 General framework conditions for innovations The quantitative data on innovation capacity give a first indication of the general conditions for innovation. Figure 2 indicates that the national R&D intensity or the share of the business expenditures on R&D of industry (BERD) is rather different for the NICs covered. It reaches from very small numbers, e.g. for Indonesia ID) or the Philippines (PH), to values typical for OECD countries, e.g. for Singapore (SG), Taiwan (TW), or South Korea (KR). Thus, there is considerable heterogeneity among the NICs. Among the NICs, particular interest is often put towards the so called BICS countries, that is Brazil (BR), India (IN), China (CN) and South Africa (ZA). The number for the BICS countries is around average for the analyzed NICs. However, China has increased the R&D expenditures lately, and runs ahead within BICS. Given the size of China, the volume of national R&D expenditure and BERD or the number of scientists is much higher in China than in the other BICS countries. Looking at specific numbers with regard to inhabitants, India clearly lacks behind the other BICS countries. A second approach for the analysis of the general framework conditions uses the survey data of the World Economic Forum (WEF 2006), which is based on expert opinions. In order to obtain an innovation system index, the indicators are classified into the categories human resources, technological absorption, innovation capacity and innovation friendliness of regulation. For this index, 56 countries are taken into account, comprising OECD countries as well as NICs and a few developing countries for which the indivcator values are available. The indicator values are


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3,00 Total R&D expenditures (2005)*

R&D expenditures as percentage of GDP

BERD (2005)*

2,50

2,00

1,50

1,00

0,50

0,00

id

ph

th

ve

mx

ar

my

tr

cl

za

br

in

cn

sg

tw

kr

Fig. 2 R&D indicators for the analyzed NICs. Source: Compilation of ISI, based on OECD and UNESCO data

aggregated using principal component analysis (see Peuckert 2008). The index values are normalized in a way that a value of zero indicates that the general innovation capabilities of a country are estimated to be at the average of all 56 countries included in the survey. According to these results, Singapore, Taiwan, South Korea, and Malaysia, but also India and Chile are classified as those countries with the best framework conditions among the analyzed NICs (Fig. 3). Comparing the results from both approaches, some differences become apparent, e.g. with regard to the results for Malaysia versus China. Thus, a careful interpretation is necessary which takes into account results from both methods.

Fig. 3 Innovation system index for the general innovation conditions in selected Newly Industrializing Countries. Source: calculations from Peukert 2008, based on survey data of WEF (2006)

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4 Technological capability in the area of sustainability relevant technologies 4.1 Analysis of publications The development of publications can be used as an indicator for the change in the importance of scientific fields over time. Clearly the topic of environmental engineering has received increasing importance. For both, the world and selected Newly Industrializing Countries (Brazil, India, China, South Africa, Korea, Taiwan, and the other NICs in South East Asia, the growth of environmental engineering publications has outpaced the growth of all SCI publications over the last 13 years (Fig. 4). Furthermore, the growth in publications has been much stronger in the NICs than the rest of the world. Thus, it can be argued that the topic of environmental engineering is increasingly taking a hold in the scientific community of NICs. The development within the NICs has not been homogenous, however. This can be seen from a detailed look on the development within Brazil, India, China, and South Africa (the BICS countries). The growth in the overall importance of environmental engineering publications has been accompanied by an increasing share from the BICS countries. In 2007, the BICS accounted for 12% of the world’s publications in this field, up from 4% in 1995 (Fig. 5). However, this growing importance of environmental engineering publications is distributed very differently among the BICS countries. Especially China and India have experienced growing importance of publications is this field. The growth for Brazil has been rather modest, and there has been even a decrease in the world shares for South Africa. The specialization on environmental engineering literature is measured with the RLA (Fig. 6). Looking at the development of the specialization profile of publications, the following conclusions emerge: &

China and India have experienced a strong simultaneous increase in publications as such and a growing importance of environmental engineering publications within the portfolio of publications. This is reflected by an increase in the values of the RLA.

Fig. 4 Development of publications in the field environmental engineering in Newly Industrializing Countries and in the world. Source: Calculations of Fraunhofer ISI based on SCI-Data


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Fig. 5 Development of world shares in the field environmental engineering in Brazil, India, China, and South Africa. Source: Calculations of Fraunhofer ISI based on SCI-Data

& &

In Brazil, the growth of publications from environmental engineering equals the growth in overall publications; thus, the importance of the topic (and the value of the RLA) within Brazil has not been changing much. The share of publications in all fields from South Africa constantly holds a share of 0.5% of all SCI publications over the years. The share at environmental engineering publications was higher than that in the past, but has been declining. Thus, a declining of positive RLA values results indicating that the importance of environmental engineering among publications is just below average now.

Fig. 6 Development of specialization of publications in the field environmental engineering in Brazil, India, China, and South Africa. Source: Calculations of Fraunhofer ISI based on SCI-Data

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4.2 Analysis of patents and trade The shares of the NICs at the worldwide patents for the sustainability relevant technologies are between a few per mills to almost 2% for China and 3% for South Korea (Fig. 7). There are also some countries there the patent indicators show very limited activity in transnational patenting of sustainability technologies. On the other hand are some countries becoming important exporters, e.g. China with a share of more than 7% at worldwide exports of sustainability related technologies. Altogether, the NICs account for about 7% of worldwide patents, and around 20% of all exports of sustainability related technologies. Thus, in most NICs, the world trade shares are considerably higher than the patent shares. That shows that these countries are quite active in exporting sustainability relevant technologies, but based on a rather below average domestic knowledge base. Perhaps Foreign Direct Investment (FDI) and multinational enterprises, which produce in these countries for the world market, play a role in explaining this pattern. Furthermore, this also points towards a high importance of exports as driving force of technological catch up, a pattern which has been found by Malerba and Nelson (2008) for a number of sectors in NICs. The importance of the sustainability relevant technologies within the individual countries is also reflected in the specialization profile. The specialization indicators RPA, RXA or RCA show the knowledge and technological competence in sustainability technologies within each country compared to the average of all technologies. Positive values have an above average, negative values have a below average activity of the country regarding the sustainability relevant technologies. For the countries with very limited activity in international patenting of sustainability technologies, the use of a specialization profile was omitted. For depicting the

Fig. 7 Share of selected Newly Industrializing Countries at transnational patents and at world exports for the sustainability relevant technologies. Source: Calculations of Fraunhofer ISI


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specialization in trade, the RXS was used. However, the overall picture does not change, if the RCA is used instead of the RXA. The results in Fig. 8 show considerable differences between the countries: &

& &

Brazil (BR), Malaysia (MY), Mexico (MX) and South Africa (ZA) are specializing on the sustainability technologies with regard to patenting. Thus, the build-up of knowledge in these countries is especially strong in the fields of sustainability technologies. In China (CN), South Korea (KR) and Argentina (AR), the specialization indices show an average importance of the sustainability technologies for both patents and exports. The negative specialization profiles for India (IN) and Singapore (SG) indicate that the catching-up process in these countries is taking place more strongly in fields which are not related to the sustainability technologies.

5 Disaggregated profile of technological capability in material efficiency Efficiency analyses and optimization approaches in companies very often concentrate on the cost factor of personnel costs. However the gross production costs in manufacturing contain alongside personnel costs also material and energy costs, depreciations and rents as well as other costs. There is an increasing public awareness of the significance of material efficiency. There are differing approaches what to include under the heading of resource or material efficiency. Within the context of the Material Efficiency and Resource Conservation Project (Maress), for example, Rohn et al. (2009) name 24 top technologies with a high potential of increasing resource efficiency. Some of these topics are rather disaggregated specific technologies which aim at increasing material efficient production (e.g. microreactors in chemical industry), enabling sustainability technologies 100 Specialisation Exports

BR CN IN ZA

0

KR SG MY MX Ar

-100 -100

0

100

Specialisation Patents

Fig. 8 Specialization pattern of NICs for sustainability technologies. Source: Calculations of Fraunhofer ISI

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recycling (e.g. shiftable adhesives for better separability) or resource efficient products (e.g. fibre substitution in clothing). Other topics are less technology specific, but also point to reduce the material input in production or products (e.g. production on demand, resource efficient design, light construction). Finally, a third set of topics is defined more broadly towards resource efficiency and includes areas such as electric vehicles, traffic systems, use of membranes in water management, or energy production and energy storage. In this paper, the field of material efficiency is defined as in between a very narrow and very wide interpretation. On the one hand, it does not include the third set of the above mentioned Maress topics which relate to the energy, water and transportation sector. These technologies are dealt with in this paper under the headings of energy supply, transport or water technologies (see Section 2.1), but they are not part of the material efficiency technologies. On the other hand, the topic of material efficiency does not only comprise “material-efficient production processes” and “recycling” but also the technology segment “renewable raw materials”. Furthermore, the level of aggregation relates to technologies, which are in most cases not specific to a single sector. The segments covered by the subsector recycling include the detection, separation and sorting of waste and its material recycling. The subsector of material-efficient processes and products is based on the fundamental idea of designing products as environmentally-friendly as possible. It represents a compilation of different measures. These include technologies such as, e. g. lightweight construction, lifespan extension, fiber reinforcement or corrosion protection and also more recent service sector concepts (e. g. car sharing, print-on-demand). The subsector of material-efficient production processes also incorporates various sub-aspects such as optimizing the production processes (e. g. by reducing wastage or by standardizing quality), a better utilization of appliances, systems and specialized machinery or optimizations which affect the whole of the value added chain. However, there are difficulties here with specifying these concepts in the data, especially with regard to trade. Thus, the numbers only include part of the important technologies. Many industrial sectors have a long tradition of using renewable raw materials. In the past, products based on renewable materials were often displaced by fossil-based products (e. g. celluloid, linoleum). However, more and more attention is being paid to renewable-based products recently because of raw material and degradability considerations. Both chemical raw materials (e. g. sugars and starches, oils and fats) and products based on renewable raw materials (e. g. polymers, adhesives, varnishes, and coatings) should be listed here. The trade indicators for renewable materials comprise technologies to produce them and selected renewable raw materials. Thus, the trade indicator in this subsector has to be interpreted with caution because the numbers are influenced not only by technological capability but also resource availability. This limitation does not apply to the patents in this subsector. More fundamentally, the use of renewable raw materials has to be interpreted with caution with regard to its environmental effects. Even though renewable raw materials have not been debated as hotly as biofuels, the same fundamental problems—e.g. crowding out of food production, loss of biodiversity, use of pesticides or high virtual water content—have to be taken into account. Thus, renewable raw materials cannot be judged as environmentally friendly per se, but


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require a careful environmental impact assessment whose outcome depends on the specific framework conditions. The accumulated share of the 9 analyzed NICs in worldwide patents in the field of material efficiency is around 7.5% (for comparison: Germany reaches 17%). Figures 9 and 10 demonstrates that China and Korea have the largest shares among these NICs, followed by Brazil and India, which are on the same level. The indicators reveal a strong specialization of Brazil, Malaysia, South Africa and Argentina in both patents and exports. In addition, a very positive RPA indicates that Mexico is specializing on knowledge build up in material efficiency technologies, too. China, India, Singapore and South Korea all show below average specialization in the field of material efficiency. However, only for South Korea a clear negative RPA results, indicating that the knowledge build-up in South Korea is stronger in other areas than material efficiency. The aggregated figures for material efficiency disguise large differences between the different sub-sectors. The activities in Malaysia, for example, are dominated by renewable raw materials. The strong specialization in exports can also explained by the effect that the exports numbers in the sub-sector renewable resources also include exports of some processed natural resources. In Brazil, patenting in recycling technologies adds to the positive specialization in renewable resources. China and India have negative export specialization in all the examined sub-sectors of material efficiency. However, the patent specialization indicates a strong build-up of knowledge in renewable raw materials and material-efficient production processes and products. This indicates that there are efforts being made in these sub-sectors to build up the domestic knowledge base. Patent activities in recycling are below average; this implies that this sector will operate in a “low tech” mode for some additional time. In South Africa, there is a clear three-way split: the country shows strong above average competence in recycling, around average specialization for renewable raw materials, but is below average in material-efficient production

Fig. 9 Shares of NICs in world exports and transnational patents in material efficiency. Source: Calculations of Fraunhofer ISI

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Fig. 10 Specialization profile of NICs in material efficiency. Source: Calculations of Fraunhofer ISI

processes and products. This holds for both specialization in patents and exports. Mexico shows a strong positive specialization in patenting in all the sub-sectors, but below average specialization in trade. Thus, material efficiency seems to be one area Mexico is building up knowledge, without relying on foreign knowledge as much as in other fields. However, Mexico has not been able to translate this in above average export performance yet. Korea, finally, shows a clear below average specialization in almost all technological fields relevant for material efficiency for both patenting and exports. The only exception is the field of material efficient production processes and products, where the indicator values point to a substantial knowledge build up. To sum up the results: almost all of the analyzed NICs show positive patent specialization in the field of material efficiency. Thus, among the sustainability technology fields, material efficiency seems to be a field in which the NICs are especially building up their knowledge base. The disaggregated analysis shows that there are different rationales which can explain the specialization pattern: For Brazil, Malaysia and Argentina, the natural resource availability in these countries and the related export potential call for further build up in the knowledge base of associated technologies along the value chain. However, other technological areas are also contributing to the knowledge build up, e.g. recycling in Brazil and very strongly in South Africa. On the other end of the spectrum are Singapore and South Korea, which are already highly successful in various manufacturing fields, but put a below average emphasis on material efficiency. India and China both show a negative trade specialization. The positive patent specialization is more likely to be explained by the efforts made to build up domestic knowledge competences, in order to augment the strategies of securing access to raw materials from abroad with additional options to reduce the demand for these raw materials.

6 Conclusions and outlook Global environmental sustainability requires that environmentally friendly technologies are put in place all over the world. Environmental Economists stress the


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opportunities for NICs to use the latest environmentally more friendly technology, leading to a technological leapfrogging. However, this requires an interest of the NICs to push in this direction. One perspective is that these technologies help to reduce national environmental problems and to modernize the infrastructure. Another incentive is that by moving towards the latest sustainability relevant technologies, NICs might gain enough competences in order to compete on the world market in this growing market segment. Both perspectives require that NICs build up (technological and institutional) competences in the field of these technologies and their diffusion. In this paper, a first picture on the existing (technological) competences of NICs in the field of sustainability relevant technologies is presented. Various indicators are used, which are, however, not without caveats. Thus, the results must be interpreted with caution. The various indicators do not show a clear-cut picture. The differences in the results for the general innovation capabilities between the survey based methodology and the general R&D indicators (see chapter 3) point to the importance of not only relying on a single indicator. Nevertheless, there are some very robust results: The general innovation capabilities differ substantially within NICs, with Korea and Singapore showing the most favorable general innovation conditions and the highest absorptive capacity for new technologies. The innovation indicators with regard to the sustainability relevant technologies also show that NICs are highly heterogeneous. Furthermore, the increase in capabilities varies, but is especially high in the South (East) Asian countries. Combining the different criteria (Table 1), the following clusters can be observed: & & & &

higher level of general absorptive capability, but without specialization on sustainability technologies: Korea, Singapore, Taiwan (and perhaps China, especially if the overall size of the country is taken into account), specialization on sustainability with a medium overall level of general absorptive capability: Brazil, Malaysia, Mexico, South Africa, medium overall level of general absorptive capability, without specialization on sustainability technologies: Argentina, India, and Chile, lower overall level of technological capability: Venezuela, Thailand, Philippines, Indonesia.

The analysis also reveals that there are quite considerable differences between the technological sustainability areas within the NICs, which are reflected in the specialization patterns. In general, NICs specialize more on material efficiency than on the other sustainability technologies. Thus, especially material efficiency seems to be a promising field for leapfrogging. For some of the NICs, the high specialization on material efficiency technologies can be traced back to a very high specialization on renewable resources (e.g. Malaysia, Brazil). This can be explained by the availability of natural resource base in these countries, which make an augmentation with technological competences in this field especially attractive. In other NICs, e.g. China and India, there is a tremendous increase in the build up of knowledge in material efficiency. This can be perhaps explained by the need to augment traditional strategies to secure resource availability by the additional option of material efficiency.

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Table 1 Overview of indicator results Country

Survey based indicators on innovation capability

General R&D indicators

Specialization on sustainability technologies

Increase in sust. capabilities

Specialization on material efficiency

China

Medium

Rather high

Average

High

Average

India

Medium

Medium

Negative

High

Average

Brazil

Rather low

Medium

Positive

medium

Positive

S. Africa

Medium

Medium

Rather positive

lower

Positive

Singapore

High

High

Negative

High

Rather neg.

Korea

Rather high

High

Average

High

Negative

Mexico

Rather low

Rather low

Positive

Rather high

Rather pos.

Malaysia

Rather high

Medium

Rather positive

High

Positive

Argentina

Low

Rather low

Average

medium

Positive

Even though there is still a high dependency of technology imports in a lot of the areas analyzed, the overall picture does not reflect a “classical” dependency of the NICs on the traditional industrial countries as technology providers. In addition to the countries which have already obtained an above average position in some sustainability relevant technologies, the international patent activities show— particularly in China, India and Malaysia—an enormous upward trend. The same holds for the development of publications in environmental engineering. In this respect it might seem realistic that some of the NICs will also become more and more successful in these technology areas in the future. Furthermore, the results differ with regard to the disaggregated technology areas. Thus, there are complementary strengths within NICs, which also open up the potential for increased South-South cooperation in the future technology development. Examples are the use of renewable resources or various forms of renewable energy, which have a high diffusion potential for almost all NICs, and considerable technological expertise in some NICs. However, moving towards a greater role for sustainability technologies also requires additional efforts by the NICs. First of all, higher attention must be paid to sustainability technologies within the national research priorities. The analysis of Walz et al. (2008) shows that in none of the BICS countries the research and innovation policy is especially aimed at decoupling environment and resource consumption from the economic development. In all BICS countries, the general support of the innovation activity in the business sector has priority. By and large, the sustainability research within the Science & Technology policy of the BICScountries is not institutionally differentiated. Mostly the sustainability topics are integrated into general, technology-independent funding instruments. Thus, sustainability issues do not represent an own field of the research support. This calls for a research policy which specifically targets sustainability. Another policy issue relates to demand. The supply oriented R&D policies have to be augmented with a demand oriented innovation policy. The demand for the sustainability technologies is strongly influenced by the (environmental) regulatory


263

system. Thus, the latter must be tailored to enhance further innovations. Strengthening environmental regulation must be seen not as a trade-off between environmental protection and economic development within the NICs, but as an instrument of demand side driven innovation policy in one of the most dynamic growing economic sectors. This also calls for integration of the traditional R&D policies with the demand side oriented policies, which are typically performed by different actors—a challenge which is not unique to NICs, but which can be found in almost every OECD country, too. The analysis in this paper relied on various indicators. However, the limits of such an indicator approach have to be kept in mind: the indicators serve as a proxy for both the absorptive capability of the NICs for sustainability innovations and the ability to compete on international technology markets. However, the indicators of technological capability should not be misinterpreted as a proxy for measuring if the country moves towards sustainability. They neither cover the diffusion of the technology nor the contribution of the potentially sustainable technology towards environmental improvement. Thus, this indicator approach does not allow answering the question, whether the incentives for moving towards environmentally friendly production and products are stronger than the incentive stated in the pollution haven hypothesis. More empirical research is needed to come up with answers for this question. The used indicator concepts have been derived from experience within OECD countries for goods with above average technological content. Even though sustainability technologies are typically also having an above average technology content, there still might be a problem that the indicators do not account for innovations which are not internationally patented because of a low propensity to patent in the country/region or because the innovation is taking place in sectors where it is more difficult to obtain patents (e.g. services). There are also missing factors which the indicators cannot account for. Due to the environmental externality problem, the formation of demand depends strongly on environmental policy. Thus, together with the problem of externalities of R&D, environmental innovations face a “double externality problem” (Rennings 2000). Furthermore, especially sustainability innovations are rather often associated with sectors which are subject to economic regulation. Thus, sustainability technologies in these sectors even face a triple regulatory challenge (Walz 2007). This also leads to the conclusion that policy coordination between the different regulatory regimes becomes a major challenge for policy making. However, there is the need for further empirical research to analyze if and how NICs are coping with this challenge. Social factors are another issue which play a very important role, but are not adequately addressed in the indicator approach so far. The importance of innovations in institutions, or knowledge spillovers from other sectors can be added to that list, together with the important aspects of communication patterns within the system of innovation, lock-ins, path dependency, and power structures within industry and politics (Walz and Meyer-Krahmer 2003). Thus, to sum up the argument, indicators can be helpful to give an overview and form a basis for a first assessment of likely strengths and weaknesses of countries, and the resulting (economic) perspectives of leapfrogging in the fields of sustainability technologies. However, they are not able to answer all of the arising

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questions alone. Clearly the use of such indicators must be accompanied by careful interpretations, reflections about the limits of the indicators, and additional analysis on the linkages between the actors in the innovation system, their interactions with the numerous institutions, and the nature of the learning processes taking place.

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Int Econ Econ Policy (2010) 7:267–290 DOI 10.1007/s10368-010-0162-z O R I G I N A L PA P E R

Eco-innovation for environmental sustainability: concepts, progress and policies Paul Ekins


Abstract There is increasing scientific evidence that natural systems are now at a level of stress globally that could have profound negative effects on human societies worldwide. In order to avoid these effects, one, or a number of technological transitions will need to take place through transforming processes of eco-innovation, which have complex political, institutional and cultural, in addition to technological and economic, dimensions. Measurement systems need to be devised that can assess to what extent eco-innovation is taking place. Environmental and eco-innovation have already led in a number of European countries to the establishment of substantial eco-industries, but, because of the general absence of environmental considerations in markets, these industries are very largely the result of environmental public policies, the nature and effectiveness of which have now been assessed through a number of reviews and case studies. The paper concludes that such policies will need to become much more stringent if eco-innovation is to drive an adequately far-reaching technological transition to resolve pressing environmental challenges. Crucial in the political economy of this change will be that eco-industries, supported by public opinion, are able to counter the resistance of established industries which will lose out from the transition, in a reformed global context where international treaties and co-operation prevent the relocation of environmentally destructive industries and encourage their transformation. Keywords Eco-innovation . Environmental sustainability . Technological transitions . Eco-industries . Innovation policies

1 Introduction Given the scale of contemporary environment and resource challenges in relation to climate change, energy and other resources, and biodiversity, it is common to hear Acknowledgements The author would like to thank two anonymous referees for helpful comments on an earlier draft of this paper. P. Ekins (*) UCL Energy Institute, University College London, London, UK e-mail: [email protected]

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international bodies and policy makers at both international and national levels call for major changes in most aspects of contemporary resource use and interactions with the natural environment. To give just one example, in 2005 the Synthesis Report of the Millennium Ecosystem Assessment (MEA) concluded: “The challenge of reversing the degradation of ecosystems while meeting increasing demands for their services ... involve significant changes in policies, institutions, and practices that are not currently under way.” (MEA 2005, p.1) The scale of the changes that seem to be envisaged goes well beyond individual technologies and artefacts, and involves system innovation through what the literature calls ‘a technological transition’. However, clearly it is not just any technological transition that is being advocated in response to these challenges, but one that greatly reduces both environmental impacts and the use of natural resources. The innovation that could lead to such a transition has been variously called environmental or eco-innovation, with a key role for environmental technologies. The European Union has adopted an Environmental Technologies Action Plan (ETAP),1 and in May 2007 the European Commission published a report (CEC 2007) on trends and developments in eco-innovation in the European Union, which confirmed the strong growth of environmentally related industries, also called ecoindustries, while emphasising that the state of the environment and climate change call for the take-up of clean and environmentally-friendly innovation “on a massive scale”,2 and proposing “a number of priorities and actions that will raise demand for environmental technologies and eco-innovation”. Similarly, the Background Statement for the OECD Global Forum on Environment on Eco-innovation3 in November 2009 declares: “Most OECD countries consider eco-innovation as an important part of the response to contemporary challenges, including climate change and energy security. In addition, many countries consider that eco-innovation could be a source of competitive advantages in the fast-growing environmental goods and services sector.” Similarly the goal of ETAP was explicitly to achieve a reduction in resource use and pollution from economic activity while underpinning economic growth. This linkage between environmental challenge and economic opportunity recurs throughout discussion of eco-innovation. Section 2 considers both the nature of eco-innovation, while Section 3 discusses how it might be measured. Section 4 looks at some developments in the eco-industries in Europe. The development of eco-industries is driven by public policies. Section 5 looks at the kinds of environmental policies that have been implemented and presents some evidence as to which have been most effective. What is clear is that the introduction of such policies has been and continues to be contested. However, it is also the case that there is little to be gained environmentally if such policies simply result in the relocation of such industries to parts of the world that do not introduce them. This illustrates the importance of global agreements if countries are to be able to stimulate environmental innovation without loss of competitive advantage.

1

See the ETAP website at http://ec.europa.eu/environment/etap/actionplan_en.htm. See http://ec.europa.eu/environment/news/brief/2007_04/index_en.htm#ecoinnovation. 3 See http://www.oecd.org/document/48/0,3343,en_2649_34333_42430704_1_1_1_37465,00.html. 2

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2 A technological transition through eco-innovation Technologies do not exist, and new industries and technologies are not developed, in a vacuum. They are a product of the social and economic context in which they were developed and which they subsequently help to shape. The idea of a technological transition therefore implies more than the substitution of one artefact for another. It implies a change from one techno-socio-economic system (or ‘socio-technical configuration’ as it is called below) to another, in a complex and pervasive series of processes that may leave little of society unaffected. There is now an enormous literature on technological change and the broader concept of technological transition, ranging from relatively simple descriptions of the way technologies are developed and diffused in society in terms of ‘technologypush/market-pull’ (e.g. Foxon 2003; Carbon Trust 2002), to theories that emphasise transition management and the co-evolution of socio-economic systems (e.g. Freeman and Louça 2001; Bleischwitz 2004, 2007; Nill and Kemp 2009) and multi-level interactions between technological niches and socio-technical regimes and landscapes (Geels 2002a, b). These theories are discussed in some detail in Ekins 2010 (forthcoming), and see the papers by Kemp and Walz (this issue). However such changes are conceptualised, to achieve the radical improvements in environmental performance that are required they will need to be driven by processes of innovation that emphasise the environmental dimension, which have variously been called eco-, or environmental, innovation. Innovation is about change. Moreover, in the economics literature it always means positive change, change which results in some defined economic improvement. Similarly, in respect of the environment, environmental innovation means changes that benefit the environment in some way. In the ECODRIVE project (Huppes et al. 2008) the now much-used term ‘eco-innovation’ was defined as a sub-class of innovation, the intersection between economic and environmental innovation, i.e. “eco-innovation is a change in economic activities that improves both the economic performance and the environmental performance of society” (Huppes et al. 2008, p.29). In other words,

Economic Performance

EcoInnovation

R Absolute Deterioration

Environmental Performance

R

= Reference for comparison

Fig. 1 Eco-innovation as a sub-class of innovation

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Economic, Cultural, Institutional and Policy Incentives for Eco-Innovation:

Factors:

Supply Push Knowledge implemented:

Propositional Knowledge

Performance:

Prescriptive Knowledge

Demand Pull Applied EcoInnovation

Eco-Innovation Performance

Fig. 2 Knowledge creation and eco-innovation performance. Source: Huppes et al. 2008, p.23

whether or not eco-innovation has taken place can only be judged on the basis of improved economic and environmental performance. This is illustrated in Fig. 1. Innovation (compared to the reference technology R, which defines the current economy-environment trade-off along the curved line) that improves the environment, (environmental innovation) is to the right of the vertical line through R and the curved line. The lighter shaded area shows where improved environmental performance has been accompanied by deteriorating economic performance. Similarly, economic innovation is above the horizontal line through R and above the curved line. The lighter shaded area in this case shows where improved economic performance has been accompanied by environmental deterioration. Eco-innovation is the darker shaded area where performance along both axes has improved. Figure 2 relates this conception to the two kinds of knowledge— propositional and prescriptive—identified by Mokyr (2002), illustrating how this knowledge is pushed and pulled through to eco-innovation performance by the economic, cultural, institutional and policy incentives supplied by markets and governments. Another approach to conceptualising eco-innovation was taken by the so-called MEI European Framework 6 research project.4 This adopted a different definition of eco-innovation from the ECODRIVE project, defining it as “the production, application or exploitation of a good, service, production process, organisational structure, or management or business method that is novel to the firm or user and which results, throughout its life cycle, in a reduction of environmental risk, pollution and the negative impacts of resources use (including energy use) compared to relevant alternatives.” (Kemp and Foxon 2007, p.4). Close inspection of this definition reveals that the only difference between this and the ECODRIVE definition is that it does not insist on improved economic as well as improved environmental performance. In other words, it is what is called above ‘environmental innovation’, the light as well as the darker shaded areas in Fig. 1 to the right of the vertical line through R and the curved line (the ‘relevant alternative’). Both ECODRIVE and MEI identify that a requisite of eco-innovation is improved environmental performance or results. For the concepts to be operational, it is necessary to be able to measure the extent to which eco- or environmental innovation are being achieved.

4

See http://www.merit.unu.edu/MEI/.


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3 Measuring eco-innovation There are now well developed frameworks for the measurement of innovation in general, such as the European Innovation Scoreboard,5 which is reported on an annual basis. The same is not true for environmental or eco-innovation, although the OECD now has in hand a programme of work in this area, described in OECD (2009), which seeks to develop “indicators of innovation and transfer in environmentally sound technologies (EST)”, and concludes that the most promising approach in both areas is the use of suitably selected and structured patent data. Some of its early work on patents as an indicator of environmental innovation is reported in OECD (2008). The MEI project derived a list of possible indicators of eco-innovation (using the MEI terminology), which cover a wide area, including products, firms, skills, attitudes, costs and policies (Kemp and Pearson 2008, pp.14–15). However, the proposed indicators actually focus on the predisposing conditions for environmental improvement rather than on whether the environmental improvement has actually taken place. There are no indicators of environmental performance per se. There is presumably an assumption that the areas covered are likely to have a positive relationship with environmental performance. Many of the areas derive from or are closely related to measures of environmental policy, the implications of which for eco-innovation are discussed in Section 4. In line with MEI’s exclusively environmental definition of eco-innovation, its list of proposed indicators gives no attention to economic performance or results at all. As noted above, the ECODRIVE project proceeded in contrast from the perception that eco-innovation needs to deliver improvements in both economic and environmental performance and therefore sought to determine how this joint outcome could be indicated. The project came up with numerous suggestions for how economic and environmental performance could be measured, at different economic and spatial levels. In principle, the methodologies for the measurement of environmental performance are now quite well developed, and were discussed in detail in Huppes et al. (2008, pp.64ff.) and will not be further considered here. Economic performance, however, is another matter. The purpose of economic activity is to deliver functionalities that meet human needs and wants, at a cost consumers (which may be individuals or businesses) are prepared to pay. In Fig. 3 the functionalities are delivered by processes and products (including services) produced by firms, which may be classified as belonging to economic sectors, and which have supply chains consisting of firms which may belong to different sectors. The sectors will belong to a national economy. The most basic measure of improved economic performance for products and processes is therefore one which can show that greater functionality is being delivered for the same cost, or the same functionality is being delivered for reduced cost. The basic measure is therefore Functionality/Cost, where functionality may be measured in a wide variety of different ways, depending on the product or process under consideration.

5

See http://www.proinno-europe.eu/index.cfm?fuseaction=page.display&topicID=5&parentID=51.

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P. Ekins FUNCTIONALITIES

SUPPLY CHAIN

FIRMS

SECTORS

COUNTRIES

PRODUCTS

Water Flushing Washing Cooking/drinking Shelter

PROCESSES

Furnishing

ENVIRONMENTAL IMPACTS Depletion, Pollution (air, water, land), Occupation (space, biodiversity)

PROCESSES

Energy Warmth (space, water) Transport Light Power (for other services) Nutrition

Tourism Etc.

Fig. 3 The delivery of functionality in an economy. Source: Huppes et al. 2008, p.53

For example, in the case of transport, the unit of functionality may be (vehicle-km), and the cost to the owner will be the life-cycle cost of acquiring, operating and disposing of the vehicle over the period of ownership. However, it should be borne in mind that many products have multiple functionalities, so that in comparing the functionalities of different products, one must be careful to compare like with like. For example, cars have many functionalities apart from the delivery of vehicle-km (an obvious one is conferring status, or making a social statement), so that it is important when comparing products like cars that they are as similar as possible in terms of other functionalities. The ‘ecoinnovative product or process’ will then be one which delivers greater functionality per unit cost and improves environmental performance. Products and processes are produced or operated by firms. Clearly a firm may have different products and processes, delivering different functionalities, so a complete view of its performance will require some aggregation across these different outputs. Normally this aggregate is expressed in money terms, so that measures of a firm’s performance will often be some measure of economic (money) output compared with economic inputs (e.g. value added, profitability, labour productivity), sometimes compared with other firms (e.g. market share). The ‘ecoinnovative firm’ will then be one which improves its economic performance while also improving its environmental performance. Firms are conventionally grouped into economic sectors, obviously introducing a higher level of aggregation. Many of the measures of sectoral economic performance are the same as for firms and will consist of an aggregate, or average, of the sectors’ firms’ performance. And then sectors are aggregated into national economic statistics. One critical issue in the consideration of economic performance is time. Economies are inherently dynamic, and the consideration of timescale will be


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crucially important to a judgement as to whether or not economic performance has improved. Many new technologies, and new firms, are not ‘economic’ to begin with (i.e. they deliver lower functionality per unit cost than incumbents). There is always a risk in investment that it will not pay off, and different investments pay off, when they do, over different periods of time. In any evaluation of economic performance, the timescale over which the evaluation has been conducted should therefore be made explicit. An example may be renewable energy, and the ‘feed-in’ tariffs which a number of countries have introduced to promote it. At present most such energy is not economic (i.e. it is more expensive per kWh delivered than a non-renewable alternative). That is why it needs the subsidy of a feed-in tariff. In the short term, therefore, it does not deliver enhanced economic performance and therefore, despite its enhanced environmental performance, it is an environmental innovation, rather than an eco-innovation, as the terms are used here. However, this situation may change. Mass deployment of renewable energy technologies through feed-in tariffs may engender learning by doing or economies of scale, reducing unit costs (see Fig. 9 below for PV). The costs of competitors (e.g. the price of fossil fuels) may rise. Other countries may decide to deploy these technologies, generating export markets. All these developments are likely to take time. Provided that economic performance is computed over that time, it may well be that an environmentally-improving new technology (i.e. an environmental innovation) which in the short term was an economic cost actually turns out to deliver enhanced economic performance, and therefore to be an eco-innovation. For any product or process which delivers improved environmental performance, there are therefore three possibilities: ○ It immediately delivers improved economic performance as well (e.g. compact fluorescent light bulbs, some home insulation), in which case it is unequivocally an eco-innovation ○ It does not deliver immediately improved economic performance, in which case it is only a potential eco-innovation which & &

Becomes an actual eco-innovation when its economic performance improves and it is widely taken up (a process which may take decades or even centuries) Never becomes an eco-innovation because its economic performance never improves adequately

The boundary within which economic performance is considered is also a relevant consideration. For example, although the feed-tariff is currently a net economic cost for the German economy as a whole (because the energy produced is more expensive than non-renewable energy), for the producers of renewable energy it may result in highly profitable businesses. If the boundary of the calculation of ‘economic performance’ is just those businesses, clearly the economic performance picture will be positive. If it is the national economy, and the German renewable energy businesses are focused on the German market, a different picture will emerge, and the overall change in economic performance may be negative. If, again, the German renewable energy industries generate significant exports, this may make their overall effect on the German economy positive.

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Another example relates to the market boundary being considered. Many markets are highly imperfect and exhibit many market failures, especially in respect of environmental impacts. An economic activity may be highly successful in market terms (i.e. deliver a certain functionality at low cost, and result in profitable businesses), but generate environmental costs which actually exceed the market benefits. Similarly, an environmentally preferable activity may seem to be uneconomic in market terms, but actually be socially desirable because of the environmental benefits it delivers. It is obviously important that analysis takes the full picture (all the market and external costs and benefits) into account, but because of uncertainties in the monetary valuation of external costs and benefits it may not be possible to say definitively whether they change the picture as revealed by markets. Because of the existence of market failures like environmental externalities, environmental innovations may be socially desirable even if they are not ecoinnovations, if the social judgement is that the environmental benefit outweighs their economic cost. For example, it may well be that, because of their reduction in carbon emissions, renewable energy technologies are highly desirable socially, even if at present they are not eco-innovations (though over time they may become so, as discussed above). Eco-innovations are always socially desirable (because they are win-win across the environmental and economic dimensions). The argument can be extended to incorporate the socio-economic and cultural dimensions, in line with the ‘sub-systems’ approach of Freeman and Louça (2001), as shown in Fig. 4. This shows that the outcomes of economic activity (processes, products, firms, which are conceived as satisfying consumer demands for services as in Fig. 3) of interest in relation to environmental and eco-innovation are economic and environmental performance. Economic activity is driven by institutions, the framework of laws, norms and habitual practices that define how markets and other economic structures (e.g. public sector, households/families as sources of production) operate. These institutions in turn derive from an interaction between polity and culture. There are multiple feedbacks between the boxes as shown and the whole socio-economic cultural construct should be thought of as a system in dynamic evolution. The drivers of eco-innovation are in the first place institutions, and in the second place the polity (which produces policies that feed into, or become, institutions) and culture, (e.g. social values), which also feed into or create new institutions. Both polity and culture are affected both by institutions, and by the economic and environmental performance of economic activities. In addition to indicators of economic and environmental performance, the ECODRIVE project also derived

Polity Institutions Culture

Economic activity (processes, products, firms)

Economic performance Environmental performance

Fig. 4 The socio-economic cultural system in dynamic evolution. Source: Author


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predictive institutional, policy and cultural indicators (including those based on societal values) that might be used to show whether eco-innovation was likely to take place (see Huppes et al. 2008). Many of these predictive indicators gives insights into the political economy interactions between the social, political, economic and cultural forces and processes discussed above that will jointly determine whether eco-innovation takes place or not. Oosterhuis and ten Brink (2006) show that there is widespread agreement in the literature that environmental policies have the potential to exert a strong influence on both the speed and the direction of environmental innovation. Rather than being an autonomous, ‘black box’ process, technological development is nowadays acknowledged (as illustrated in the previous section), to be the result of a large number of different factors that are amenable to analysis. Environmental policy can be one of these factors, even though its relative importance may differ from case to case. The policies which might promote environmental innovation and eco-innovation are the subject of Section 5. Of crucial importance to delivering both the improved economic and environmental performance of the ECODRIVE definition of innovation is that sub-set of economic activity shown in Fig. 4 that is explicitly concerned with environmental outcomes, the numerous firms and sectors now grouped under the heading of ‘ecoindustries’, to brief consideration of which this paper now turns.

4 The nature and growth of eco-industries Eco-industries are likely to come about through a mixture of environmental innovation and eco-innovation. Classifying ‘eco-industries’, also called the environmental, or environmental goods and services, industry, is not straightforward. Enterprises engaged in many different types of activities are involved, making it difficult to single out environmental protection products within the standard international classification of industrial activities (ISIC). An OECD/Eurostat Informal Working Group on the Environment Industry was established in 1995 to address the issues and develop a common methodology. The working group agreed on the following definition of the environment industry: ‘The environmental goods and services industry consists of activities which produce goods and services to measure, prevent, limit, minimise or correct environmental damage to water, air and soil, problems related to waste, noise and eco-systems. This includes cleaner technologies, products and services that reduce environmental risk and minimise pollution and resource use.’ (OECD/Eurostat 1999) Environmental industries thus fall into three main groups6: A. Pollution management group: Includes Air pollution control; Wastewater management; Solid waste management; Remediation and clean-up of soil and water; Noise and vibration abatement; Environmental monitoring, analysis and assessment A more detailed list can be found in Annex 1 and Annex 7 of ‘The Environmental Goods and Services Industry: Manual for Data Collection and Analysis’ (OECD/ EUROSTAT, 1999).

6

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B. Cleaner technologies and products group: Activities which improve, reduce or eliminate environmental impact of technologies, processes and products (e.g. fuel-cell vehicles) C. Resource management group: Prime purpose of activities is not environmental protection but resource efficiency and development of new environmentally preferable resources (e.g. energy saving, renewable energy plant) A specific feature of environmental technology is the particular mechanism by which the environmental impact is reduced. The following types are often distinguished: & & &

‘End-of-pipe’ technology (isolating or neutralizing polluting substances after they have been formed). End-of-pipe technology is often seen as undesirable because it may lead to waste that has to be disposed of.7 ‘Process-integrated’ technology, also known as ‘integrated’ or ‘clean’ technology. This is a general term for changes in processes and production methods (i.e. making things differently) that lead to less pollution, resource and/ or energy use. Product innovations, in which (final) products are developed or (re)designed that contain less harmful substances (i.e. making different things), use less energy, produce less waste, etcetera.

Eco-industrial activities have been distributed across many industrial sectors for a number of years. For example, OECD/Eurostat 1999 (Annex 6) showed that in 1992 the environment industry in Germany was significant (in descending order of importance) in the following standard sectors: machinery, instruments and machinery, ceramics, electronics, fabricated metal products, plastics, rubber, textiles, non-metallic mineral products, vehicles, chemicals, pulp and paper, and iron, steel and metals. 4.1 The eco-industries in the European Union Following the recommendations of the environment industry working group, national statistical classification systems are being revised to include separate items for the environment industry. In the future, this will allow for easier identification and analysis of this cross-cutting industry. Because of the difficulties involved in classifying the environment industry, only a very limited amount of data on the size of this industry can be retrieved from standard national statistical sources. In recognition of this data gap the European Commission (DG Environment) published a comprehensive study: ‘Eco-industry, its size, employment, perspectives and barriers to growth in an enlarged EU’ (EC 2006). The study is based on data on environmental protection expenditures provided by Eurostat and a number of interviews with representatives of the industry and administration. Jänicke and Zieschank (2010, forthcoming) are among those who have stressed the unsatisfactory nature of current statistical classifications of the 7

This is not necessarily the case, though. For example, reducing nitrogen oxides at the end of a smokestack or car exhaust produces the harmless substances nitrogen and oxygen, which are natural components of the air (although even then particles from the platinum catalyst from the vehicle’s catalytic converter may cause pollution).


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sustainable resource management and environment industries, which tend greatly to underestimate the industries’ quantitative significance, and the following numbers need to be interpreted in that light. The estimated total turnover of eco-industries in 2004 in the EU-25 is €227 billion (Fig. 5). The largest eco-industries are solid waste management and wastewater treatment (both around €52 bio.) and water supply (€45 bio.). The countries with the largest eco-industry sectors are Germany (€66.1 bio.) and France (€45.9 bio.), followed by the UK (€21.2 bio.) and Italy (€19.2 bio.). Pollution management activities make up 64% of total turnover in 2004, resource management activities account for the remaining 36%. Figure 6 shows the split between pollution and resource management activities for the EU-25 countries. Germany and France together account for roughly half of both pollution and resource management activities. In the UK a higher proportion of activities fall into the resource management category, 11.2% versus 8.4% pollution management activities. Across the EU-15 the eco-industry grew by around 7% (constant €) from 1999– 2004 (DG Environment 2006, p.33), although the growth rates for different EU countries vary widely. Around 3.4 million jobs (full-time equivalent, direct and indirect employment) are attributed to the eco-industries, over two-thirds of which fall into the pollution management category. Figure 7 shows the distribution of employment across the sectors. The three largest employers are the solid waste management sector accounting for just over 1 million jobs, followed by wastewater treatment (800 thousand) and the water supply sector (500 thousand).

50000

million

40000

30000

20000

10000

Source: EC 2006

Fig. 5 Eco-industry turnover in 2004, EU-25

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Fig. 7 Eco-industry employment in 2004, EU-25

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Fig. 6 Eco-industry turnover as % of EU-25

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4.2 Eco-industries’ diffusion and cost-reduction Oosterhuis and ten Brink (2006) note that new technologies, when they are successful in being applied and finding their way to the market, often follow a pattern in which the uptake starts at a low speed, then accelerates and slows down again when the level of saturation approaches. This is reflected in the well-known logistic or S-curve (see Fig. 8). The acceleration in uptake is not only due to the fact that the technology is becoming more widely known, but also to improvements and cost reductions occurring in the course of the diffusion process due to economies of scale and learning effects. Cost reductions as a function of the accumulative production (or sales) of a particular technology can be represented by ‘learning curves’ or ‘experience curves’. Figure 9 shows a learning curve for photovoltaic energy technology. The ‘learning rate’ (the percentage cost reduction with each doubling of cumulative production or sales) persisted throughout three decades of development of the technology. IEA (2000) has assessed the potential of experience curves as tools to inform and strengthen energy technology policy. It stresses the importance of measures to encourage niche markets for new technologies as one of the most efficient ways for governments to provide learning opportunities. McDonald and Schrattenholzer (2001) have assembled data on experience accumulation and cost reduction for a number of energy technologies (including wind and solar PV). They estimated learning rates for the resulting 26 data sets, analyzed their variability, and evaluated their usefulness for applications in long-term energy models. Junginger (2005) applied a learning curve approach to investigate the potential cost reductions in renewable electricity production technologies, in particular wind and biomass based. He also addressed a number of methodological issues related to the construction and use of learning curves. Several studies have been carried out to assess the quantitative relationship between the development of costs of environmental technologies and time. A TME study (1995) pioneered this, and RIVM (2000) further explored the consequences of

prototypes

demo

niche early adopters

mass application

Fig. 8 Stages in the introduction of a new technology; the S-curve

laggards saturation

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Source: Harmon, 2000

Fig. 9 Learning curve of PV-modules, 1968–1998

this phenomenon. Several other studies address this issue (e.g. Anderson (1999), Touche Ross (1995)). Both RIVM and TME conclude that the reduction of unit costs of environmental technologies goes faster than the—comparable—technological progress factor that is incorporated in macro-economic models used by the Netherlands Central Planning Bureau. In these models the average factor is about 2% annually. The results of both the RIVM and TME study for the annual cost decrease of environmental technologies are presented in Table 1. Both studies show comparable results: the annual cost decrease is mostly between 4% and 10%. Therefore, when modelling environmental costs for the longer term, some form of technological progress needs to be taken on board in addition to what is assumed in the macro-economic model. In the TME and the RIVM study no attempt was made to differentiate between two types of technological progress (see Krozer 2002): Table 1 Annual decrease in costs of applying environmental technologies Technology/Cluster

Annual cost decrease Min

Average

Max

Dephosphating sewage

3.8%

Desulphurisation of flue gas at power stations

4%

10%

Regulated catalytic converter

9%

10.5%

Industrial low NOx technologies

17%

1. High efficiency central heating

6.7%

31% 1.4%

2. Energy related technologies

4.9%

3. End-of-pipe, large installations

7.6%

4. End-of-pipe, small installations (catalysts)

9.8%

5. Agriculture low emission application of manure

9.2%

TME 1995, p. vi; RIVM 2000, p. 13, cited in Oosterhuis (2006, p.26)


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gradual improvements of already existing technologies (for which Krozer assumes that these will mainly lead to cost-savings and not so much to increased reduction potential); innovations (or “leap technologies”) for technologies which are new and can compete with existing technologies in both efficiency (lower costs) and effectiveness (larger reduction potential).

This distinction is important, especially concerning the development of the reduction potential, because this will enable in the future a greater reduction in pollution than currently thought. The anecdotal evidence on waste water treatment and low NOx technologies in industry actually shows both developments: & &

increasing reduction potential (to almost 100% theoretical) in a period of about 30 years; decreasing unit costs.

So from the empirical point of view both developments are important enough to be separately considered when estimating future costs of environmental technologies. Because most environmental impacts are external to markets, for eco-innovation to occur it will need to be largely driven by public policy rather than by (free) markets. Aghion et al. (2009a) find that such policy is not yet anything like strong enough to generate the level of eco-innovation that is required to address major environmental problems such as climate change. It is to the nature and effectiveness of the required policies that this paper now turns.

5 Policies for environmental innovation and eco-innovation While some resources have prices that are considered in market transactions, the great majority of environmental considerations do not enter into the cost calculations of markets, unless government policy causes this to happen through the various kinds of policy instrument. Jordan et al. (2003) categorised them as follows: & & & &

Market/incentive-based (also called economic) instruments (see EEA 2006, for a recent review of European experience). Regulatory instruments, which seek to define legal standards in relation to technologies, environmental performance, pressures or outcomes (Kemp 1997 has documented how such standards may bring about innovation). Voluntary/self-regulation (also called negotiated) agreements between governments and producing organisations (see ten Brink 2002, for a comprehensive discussion). Information/education-based instruments (the main example of which given by Jordan et al. (2003) is eco-labels, but there are others), which may be mandatory or voluntary.

Broadly, the market-based and regulatory instruments may be thought of as ‘hard’ instruments, because they impose explicit obligations, whereas voluntary and information-based instruments may be thought of as ‘soft’ instruments, because

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they rely more on or seek to stimulate discretionary activities. The distinction is not hard-edged, in that the provision of information may be obligatory (e.g. mandatory reporting standards) and voluntary agreements may have ‘hard’ sanctions in the event of non-compliance, so that it might be more accurate to think of these instruments as on a spectrum rather than in discrete categories. The ‘soft’ instruments also include public support for research and development (R&D), which is likely to be a particularly important instrument in relation to the stimulation of eco-innovation. In fact, Aghion et al. (2009a, b) say that the two crucial instruments for low-carbon innovation are a carbon tax and subsidies for low-carbon technologies (both market-based instruments), and public spending on R&D. It has been increasingly common in more recent times to seek to deploy these instruments in so-called ‘policy packages’ or ‘instrument mixes’ (OECD 2007), which combine them in order to enhance their overall effectiveness across the three (economic, social and environmental) dimensions of sustainable development. One of the main distinguishing characteristics of the eco-industries described in the previous section is that they came about through the prescriptions of public policy, and their growth is almost entirely driven by it. A literature review by Oosterhuis and ten Brink (2006) discusses what is known about the effects of different types of environmental policy on innovation, noting that the impact of environmental policy on innovations in environmental technology has been studied in various ways, both theoretically (often using models) and empirically. From their review, Oosterhuis and ten Brink (2006) find that the significance of environmental policies in driving eco-innovation is usually confirmed by empirical studies, but they conclude that there is no unanimity about the question as to what kinds of policy instruments are best suited to support the development and diffusion of environmental technology. However, they did feel able to make some general observations: ■ Economic instruments (charges, taxes and tradable permits) are often seen as superior to direct regulation (‘command-and-control’), because they provide (if designed properly) an additional and lasting financial incentive to look for ‘greener’ solutions. For example, Jaffe et al. (2002) conclude that marketbased instruments are more effective than command-and-control instruments in encouraging cost-effective adoption and diffusion of new technologies. Requate (2005), in a survey and discussion of recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology, concludes that under competitive conditions market-based instruments usually perform better than command and control. Moreover, taxes may provide stronger long term incentives than tradable permits if the regulator is myopic. Johnstone (2005) also presents some arguments from the literature suggesting that taxes are more favourable to environmental innovations than tradable permits. ■ Nevertheless, direct regulation was shown to work well in Germany when applying air emissions standards to power plants when the energy sector was still not liberalised and the energy companies had the possibility of passing through the costs. The context was important in having parties accept the required command and control. Evidence suggests that German emissions


■

■

■ ■

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reductions fell very quickly due to the instrument and context and faster than countries where economic instruments were used. This gives one counter example to the oft- quoted position that market-based instruments are more effective. Direct regulation may also be a powerful instrument in spurring eco-innovation (provided that the standards set are tight and challenging) because firms may have an interest in developing cleaner technology if they can expect that that technology will become the basis for a future standard (e.g. BAT), so that they can sell it on the market. Ashford (2005) argues that a ‘command-and-control’ type of environmental policy is needed to achieve the necessary improvements in eco- and energy efficiency. According to Ashford, the ‘ecological modernization’ approach, with its emphasis on cooperation and dialogue, is not sufficient. Economic instruments may also be less appropriate if the main factor blocking eco-innovation is not a financial one. For instance, simulations with the MEI Energy Model (Elzenga and Ros 2004), which also takes non-economic factors into account, suggest that voluntary agreements and regulations may be more effective than financial instruments (such as charges and subsidies) in stimulating the implementation of energy saving measures with a short payback period. Some authors, such as Anderson et al. (2001) stress that ‘standard’ environmental policy instruments are not sufficient to induce eco-innovation, and that direct support for such innovation is also needed. The main reasons for this are the positive externalities of innovation and the long time lag between the implementation of a standard policy and the market penetration of a new technology. The appropriateness of particular instruments (or instrument mixes) may depend on the purpose for which they are used (e.g. innovation or diffusion) and the specific context in which they are applied (see e.g. Kemp 2000). Finally, the design of an instrument may be at least as important as the instrument type. One type of instrument can produce widely different results when applied differently. For example, Birkenfeld et al. (2005) show remarkable differences in the development of trichloroethylene emissions in Sweden and Germany. Both countries used direct regulation, but in Sweden this was done by means of a ban with exemptions, whereas Germany opted for a ‘BAT’ approach. The latter proved to be much more effective in terms of emission reduction.

A study commissioned by DG Environment of the European Commission investigated the innovation dynamics induced by environmental policy through five case studies. The study was reported in Oosterhuis 2006, and its results were summarised by Ekins and Venn (2009). The headline conclusions of the five case studies were: 1. Automotive industry—Innovation levels differed greatly between the three countries studied. Japan had incentivised the most innovation, although there was little information about the development of its standards, the USA set standards unambitiously low, and Europe had induced ‘modest’ levels of innovation. In the European case other trends (i.e. dieselisation) had influenced the EU car manufacturing sector more.

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2. Office appliances—Innovation levels as identified in Japan and the USA were high and directly correlated to the respective policies which were implemented, in both cases strict public procurement policies. In Japan these were combined with increasingly stringent standards. The European case study saw that there was an uneven use of energy efficiency criteria in member states’ public ICT tenders. This is coupled with the fact that the EU still tends to shy away from mandatory energy efficient public procurement despite industry support. 3. Photovoltaics—This sector has undergone rapid, and innovative, development in recent years. Japan and Germany have both encouraged significant expansion and development of the sector through substantial financial incentives and R&D support. With far lower financial commitment, the UK has not managed to achieve substantial deployment of installed PV capacity. 4. Pulp and paper—In Europe there has been innovation with respect to abatement technologies, but the extent to which this has been induced by policy is not clear. Insofar as an effect is discernible, it seems to be more due to the characteristics of the instrument (e.g. its stringency) than to the nature of the instrument itself. 5. Hazardous chemicals—In general there has been success in encouraging innovation or diffusion of existing technology. Policy approaches in Sweden, Denmark and Germany have in different ways all been influential in encouraging innovation and reducing environmental impact. There is an interesting contrast between approaches that seek to reduce the use of hazardous substances (Sweden, Denmark) and those that seek to contain them (Germany). It is of note that Sweden and Denmark, the two EU countries applying the substitution principle, also have the highest rate of R&D in their respective chemical industries. Table 2 categorises the environmental policy instruments used, as revealed by the case studies, in terms of the typology above, and shows whether the type of innovation which seems to have been primarily induced was end-of-pipe, processintegrated or product innovation. It also provides an overall indication of the success of the policy in inducing eco-innovation. Table 2 shows that a wide range of different environmental policies has been used in different countries, ranging in Europe across voluntary approaches, directives, investments, grants, bans, taxes and technical standards. In the USA classic regulation, i.e. command-and-control, appears most common. Across the case studies there are a number of cross-cutting themes with policy implications. &

&

Technological development—One assumes that most regulatory approaches seek to allow for technological development and increasing efficiencies over a time period. However, the technical expertise required to understand all factors at play in such sectors as the hazardous chemicals sector or the PV sector is formidable, and there are bound to be problems of asymmetric information between industry and the policy maker. Commercial factors—The extent of innovation is often reflected in commercial learning curves and economies of scale associated with the production and development of new technologies and processes. These developments will rarely

Europe

2

USA

Germany

5

5

Poor

Good

X

Excellent

X X

X

X

X

X

X

X

X

X

Good

Good

X

X X

Good

Excellent

X X

X

Excellent

Unclear

Information Based

Xa

X

X

X

X

Xb

X

X

Process Integrated

End of Pipe

Voluntary

Incentive/MarketBased

Classic Regulation

Innovation type experienced

Policy type

Excellent

Poor

Good

Poor

Medium

Policy result in inducing innovation

X

X

X

X

X

X

X

X

X

X

X

Product Innovation

Although there has been product innovation, a main success of the policy has been the eco-innovation of new processes and capital stock together with a reduction in the use of hazardous chemicals.

b

a Although a Directive is used, and an obligation is present, other considerations supersede obligations making the approach voluntary. The option of mandatory public procurement is being discussed currently by the European Community Energy Star Board.

Sweden

Denmark

5

5

UK

Various

3

4

Germany

Japan

3

3

USA

Japan

1

Japan

USA

1

2

Europe

1

2

Country or area

Case study

Table 2 Comparison of innovation observed

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&

&

&

P. Ekins

be disclosed due to their sensitive commercial nature—making it hard for the policy maker to accurately predict potential rates of innovation, as they will rarely be party to such sensitive information. Standards—It seems from analysis in case studies 1, 2 and 5 that setting standards for industry can work effectively. An incentivised approach, with technical standards and green procurement plans, allowed firms to approach the target flexibly and innovate to meet it. However, when standards are set low (such as in case study 1—USA) unsurprisingly there is little incentive to exceed the benchmark. Focus—It is apparent that unless actions are targeted to specific areas and take into account external trends, as they were in Japan with the Top Runner Programme, policies will generally not aid in encouraging innovation. This was seen in the UK PV market where policies both failed to take account of external developments in the global market, and involved low levels of funding, resulting in insignificant levels of innovation or deployment. Historical trends—There can be historical factors at play which present barriers to innovation in certain sectors or geographical locations. For example in the pulp and paper industry innovation is low due to the mature nature of the industry, and the fact that the median age of paper machines in Europe is 23 years. In the USA the historical setting of low levels for fuel economy improvements in automobiles encouraged a poor performance in the sector. The headlines lessons learned from the case studies may be summarised as:

& &

&

Inducing innovation requires strong policy. Weak policy, whether in terms of weak standards (e.g. 1—USA), or low levels of expenditure (3—UK) will not be likely to achieve it. Classic regulation was the single most important type of policy in the case studies where eco-innovation was stimulated, sometimes combined with marketbased instruments (especially public purchasing or subsidies). However, an overall conclusion from the case studies was that ‘No general statements can be made about the kind of policy instruments that are best suited to support the development and diffusion of environmental technology.’ Oosterhuis (p.vi, 2006). Regarding learning curves and economies of scale, case studies 2, 3 and 5 all found that when policy, or external factors, encouraged innovation, positive relationships between increases in production and reduction in costs were found. The PV case study noted that it was not merely learning curves of PV which must be taken into account, but also learning curves of associated infrastructural technology.

In terms of the categorisation introduced earlier, Table 2 shows that the great majority of the policy instruments used in the case studies were ‘hard’ (market-based or regulatory) rather than ‘soft’. In fact, with only one exception (and with a Poor result) the latter were really only employed as subsidiary instruments. In such a role, however, they still may help the policy to have a better overall result. It is also interesting to reflect on the case studies in terms of Fig. 4. In all cases, institutions are important to the implementation of any policy, whether ‘hard’ or


287

‘soft’. New instruments may require new institutions, or institutional change, but whether or not this is the case strong branding of the policy is likely to help its implementation and contribute to its effectiveness. The branding, however, will be crucially related to the political and cultural context, so that it is difficult to make generalisations across different countries, except to say that the context is likely to find most obvious expression through the ‘soft’ instruments that are deployed.

6 Conclusions History shows that innovation is one of the normal characteristics of markets and capitalist economic development, and current innovation rates are, in historical terms, very high. However, normal innovation is driven by a desire for market success, which may have little to do with environmental impacts. In fact, normal innovation may increase or decrease environmental impacts. The environmental policy makers’ task is to seek to harness normal innovation forces in order to achieve win-win outcomes, i.e. environmental improvements as well as improvements in products and processes from a market point of view. Because innovation is inherently unpredictable, and there is no methodology that can reliably assess the ‘without policy’ counterfactual, there is an inherent problem in assessing the results of policy in relation to eco-innovation. However, as shown above, careful case study comparisons can generate insights as to whether and how eco-innovation has been achieved. Just because policy can achieve eco-innovation does not mean that it will be easy to introduce. As this paper has made clear throughout, there is a political economy of eco-innovation as of any other subject that affects the distribution of resources. Aghion et al. (2009a) present worrying evidence that, despite recent rhetoric on green innovation, not only is this not the dominant direction of innovation, it is even lagging behind the rate of non-directed innovation. This situation will have to change if increasingly serious environmental problems are to be effectively addressed. The eco-industries, supported by public opinion, need to become crucial actors in the political economy of eco-innovation if such innovation is to become more widespread and transformational, leading to a profound eco-innovatory transition. Such a transition (like all transitions) will adversely affect many well established industries and interests and will be fiercely resisted by those interests. The ecoindustries need to become an increasingly effective counter-force to this resistance. Because eco-innovation will be largely driven by public policy rather than by (free) markets, established industries will do everything they can to prevent or slow the introduction of policies to promote eco-innovation (for example, the campaign by the US fossil fuel industries against the climate policies of President Obama, [Goldenberg 2009]). At the same time, for global environmental problems like climate change, there is little point in imposing policies on firms subject to global competition and industries that are mobile, such that they simply relocate without any overall change to global production or consumption or environmental impacts. Although there is very little evidence to date that such relocation has actually taken place, the possibility is resonant in the political rhetoric around environmental policy

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and adds to the difficulty of driving eco-innovation in the contemporary global marketplace. Clearly national policies on eco-innovation need to be underpinned by international agreements that all countries will take action to reduce their environmental impacts. While such agreements now exist (perhaps most importantly the UN Framework Convention on Climate Change), there is a long way to go before they assert a sufficient influence on global market developments for eco-innovation to proceed at the pace identified at the beginning of this paper as scientifically necessary to avoid major disruption to natural systems and human societies.

References Aghion P, Veugelers R, Serre C (2009a) Cold Start for the ‘Green innovation machine’, Bruegel Policy Contribution, Issue 2009/12, November, Bruegel, Brussels, http://www.bruegel.org/uploads/ tx_btbbreugel/pc_climateparvcs_231109.pdf, accessed April 8 2010 Aghion P, Hemous D, Veugelers R (2009b) ‘No green growth without innovation’, Bruegel Policy Brief, Issue 2009/07, November, Bruegel, Brussels, http://www.bruegel.org/uploads/tx_btbbreugel/pb_clima tervpa_231109_01.pdf, accessed April 8 2010 Anderson D (1999) Technical Progress and Pollution Abatement:—an economic view of selected technologies and practices, mimeo, Imperial College of Science, Technology and Medicine, London, June 1999 Anderson D et al (2001) Innovation and the environment: challenges & policy options for the UK. Imperial College Centre for Energy Policy and Technology & the Fabian Society, London Ashford NA (2005) Government and environmental innovation in Europe and North America. In: Weber M, Hemmelskamp J (eds) Towards environmental innovation systems. Springer, Berlin, pp 159–174 Birkenfeld F, Gastl D, Heblich S, Maergoyz M, Mont O, Plepys A (2005) Product ban versus risk management by setting emission and technology requirements. The effect of different regulatory schemes taking the use of trichloroethylene in Sweden and Germany as an example. Universität Passau, Wirtschaftswissenschaftliche Fakultät, Diskussionsbeitrag Nr. V-37-05, October 2005 Bleischwitz R (2004) Governance of sustainable development: co-evolution of political and corporate strategies. Int J Sustain Dev 7(1):27–43 Bleischwitz R (2007) Corporate governance of sustainability: a co-evolutionary view on resource management. Elgar, Cheltenham Carbon Trust (2002) Submission to energy white paper consultation process, Carbon Trust, London CEC (Commission of the European Communities) (2007) ‘Report of the Environmental Technologies Action Plan (2005–2006)’, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, COM (2007) 162 final [SEC(2007) 413], May, CEC, Brussels. http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2007:0162:FIN:EN:PDF, accessed August 27 2009 EC (European Commission) (2006) ‘Eco-industry, its size, employment, perspectives and barriers to growth in an enlarged EU’, Final Report to DG Environment from Ernst & Young, European Commission, Brussels. http://ec.europa.eu/environment/enveco/industry_employment/pdf/ecoindustry2006.pdf EEA (European Environment Agency) (2006) Using the Market for Cost-Effective Environmental Policy: Market-based Instruments in Europe, EEA Report No.1/2006, EEA, Copenhagen Ekins P (2010) (forthcoming) System innovation for environmental sustainability: concepts, policies and political economy. In: Bleischwitz R, Welfens P, Xiang Zhang Z (eds) 2010 (forthcoming) International Economics of Sustainable Growth and Resource Policy. Springer, Heidelberg Ekins P, Venn A (2009) Assessing innovation dynamics induced by environmental policy. In: MacLeod M, Ekins P, Moran D, Vanner R (eds) 2009 Understanding the Costs of Environmental Regulation in Europe. Edward Elgar, Cheltenham, pp 193–229 Elzenga H, Ros J (2004) MEI-Energie: RIVM’s energiebesparingsmodel (MEI Energy: RIVM’s energy savings model). Kwartaalschrift Economie 1(2):168–189 Foxon T (2003) Inducing innovation for a low-carbon future: drivers, barriers and policies, a report for the Carbon Trust, July, Carbon Trust, London Freeman C, Louça F (2001) As time goes by. Oxford University Press, Oxford


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Geels F (2002a) Understanding the Dynamics of Technological Transitions, Twente University Press, Enschede NL, published in revised form as Geels 2005 Geels F (2002b) Technological transitions as evolutionary reconfiguration processes: a multi-level perspective and a case-study. Res Policy 31:1257–1274 Goldenberg S (2009) Oil lobby to fund campaign against Obama’s climate change strategy, The Guardian, August 14, http://www.guardian.co.uk/environment/2009/aug/14/us-lobbying Harmon J (2000) Experience curves of photovoltaic technology. Interim Report IR-00-014, International Institute for Applied Systems Analysis (IIASA), Laxenburg Huppes G, Kleijn R, Huele R, Ekins P, Shaw B, Esders M, Schaltegger S (2008) Measuring eco-innovation: framework and typology of indicators based on causal chains. Final Report of the ECODRIVE Project, CML, University of Leiden. http://www.eco-innovation.eu/wiki/images/Ecodrive_final_report.pdf IEA (2000) Experience curves for energy technology policy. International Energy Agency, Paris Jaffe AB, Newell RG, Stavins RN (2002) Environmental policy and technological change. Environ Resour Econ 22:41–69 Jänicke M, Zieschank R (2010) (forthcoming) ETR and the environmental industry’, Ch.12 In: Ekins P, Speck S (eds) 2010 (forthcoming) Environmental Tax Reform: A Policy for Sustainable Economic Growth. Oxford University Press, Oxford Johnstone N (2005) The innovation effects of environmental policy instruments. In: Horbach (ed, 2005), p 21–41 Jordan A, Wurzel R, Zito A (eds) (2003) ‘New’ instruments of environmental governance?: National experiences and prospects. Cass, London Junginger M (2005) Learning in renewable energy technology development. PhD Thesis, Utrecht University Kemp R (1997) Environmental policy and technical change: a comparison of the technological impact of policy instruments. Elgar, Cheltenham Kemp R (2000) Technology and Environmental Policy: Innovation Effects of Past Policies and Suggestions for Improvement. In: OECD, Innovation and the Environment, Paris, p 35–61 Kemp R, Foxon T (2007) Typology of eco-innovation. Deliverable 2 of MEI project, April, UNU-MERIT, Maastricht, available at http://www.merit.unu.edu/MEI/deliverables/MEI%20D2%20Typology%20of %20eco-innovation.pdf Kemp R, Pearson P (2008) Policy brief about measuring eco-innovation. Deliverable 17 of MEI project, April, UNU-MERIT, Maastricht, available at http://www.merit.unu.edu/MEI/deliverables/MEI% 20D17%20Policy%20brief%20about%20measuring%20eco-innovation.pdf Krozer Y (2002) Milieu en innovatie (Environment and innovation). PhD Thesis, Groningen University (http://irs.ub.rug.nl/ppn/241947103). McDonald A, Schrattenholzer L (2001) Learning rates for energy technologies. Energy Policy 29:255–261 MEA (Millennium Ecosystem Assessment) (2005) Ecosystems and human well-being: synthesis. Island, Washington Mokyr J (2002) The gifts of Athena: historical origins of the knowledge economy. Princeton University Press, Woodstock (GB) Nill J, Kemp R (2009) Evolutionary approaches for sustainable innovation policies: from niche to paradigm? Res Policy 38(4):668–680 OECD (Organisation for Economic Cooperation and Development) (2007) Instrument mixes for environmental policy. OECD, Paris OECD (Organisation for Economic Cooperation and Development) (2008) Environmental policy, technological innovation and patents. OECD, Paris OECD (Organisation for Economic Cooperation and Development) (2009) Indicators of innovation and transfer in environmentally sound technologies. ENV/EPOC/WPNEP/(2009)FINAL, Environment Directorate/Environment Policy Committee, June, OECD, Paris, available at http://www.olis.oecd.org/ olis/2009doc.nsf/LinkTo/NT0000300E/$FILE/JT03267148.PDF OECD/ Eurostat (1999) The environmental goods & services industry, manual for data collection and analysis. OECD, Paris Oosterhuis F (Ed) (2006) Innovation dynamics induced by environmental policy. Final report to the European Commission DG Environment, IVM Report E-07/05, November, http://ec.europa.eu/ environment/enveco/others/index.htm#innodyn Oosterhuis F, ten Brink P (2006) Assessing innovation dynamics induced by environment policy: findings from literature and analytical framework for the case studies, The Institute for Environmental Studies (IVM). Vrije Universiteit, Amsterdam Requate T (2005) Dynamic incentives by environmental policy instruments—a survey. Ecol Econ 54(2– 3):175–195

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Int Econ Econ Policy (2010) 7:291–316 DOI 10.1007/s10368-010-0163-y O R I G I N A L PA P E R

The Dutch energy transition approach René Kemp

Published online: 23 June 2010 # The Author(s) 2010. This article is published with open access at Springerlink.com

Abstract The article describes the Dutch energy transition approach as an example of an industrial policy approach for sustainable growth. It is a corporatist approach for innovation, enrolling business in processes of transitional change that should lead to a more sustainable energy system. A broad portfolio of options is being supported. A portfolio of options is generated in a bottom-up, forward looking manner in which special attention is given to system innovation. Both the technology portfolio and policies should develop with experience. The approach is forward-looking and adaptive. One might label it as guided evolution with variations being selected in a forward-manner by knowledgeable actors willing to invest in the selected innovations, the use of strategic learning projects (transition experiments) and the use of special programmes and instruments. Initially, the energy transition was a selfcontained process, largely separated from existing policies for energy savings and the development of sustainable energy sources. It is now one of the pillars of the overall government approach for climate change. It is a promising model but economic gains and environmental gains so far have been low. In this article I give a detailed description of the approach and an evaluation of it.

1 Introduction The term transition is employed by various scholars and organisations working on sustainable development. The first book containing these terms was the book The Transition to Sustainability. The Politics of Agenda 21 in Europe, edited by Timothy O’Riordan and Heather Voisey, published in 1998. This book was followed by two other books which similar titles: Our Common Journey: A transition toward sustainability by The Board on Sustainable Development of the US National Acknowledgement The author wants to thank the reviewers and the editor for their comments. R. Kemp (*) UNU-MERIT, Maastricht, The Netherlands e-mail: [email protected] R. Kemp ICIS, Maastricht, The Netherlands

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Research Council (NRC 1999) and Sustainable development: The challenge of transition edited by Jurgen Schmandt and C.H. Ward (2000) contained contributions from Frances Cairncross, Herman Daly, Stephen Schneider which came out in 2000. In all three books the term transition is used as a general term, not as a theoretical organizer. In the last 8 years various articles appeared in which the term transition is explored and used in a more theoretical sense. The new literature consisted of historical studies looking back at past transitions using a multilevel perspective (Geels 2002, 2005, 2006, 2007), theoretical deliberations about transitions (Geels 2002, 2004; Berkhout et al. 2004; Smith et al. 2005; Geels and Schot 2007; Genus and Cowes 2008), and deliberations about steering societies towards more sustainable systems of provision and associated practices (Rotmans et al. 2001; Grin 2006; Kemp and Loorbach 2006; Kemp et al. 2007a, b; Loorbach 2007; Shove and Walker 2007, 2008; Rotmans and Kemp 2008; Smith and Stirling 2008; Holtz et al. 2008; Foxon et al. 2009). People in this literature are concerned with transformative change (system innovation), drawing on a co-evolutionary perspective, with technology and society mutually shaping each other, instead of one more or less determining the other.1 This article will do two things: a) it will describe transition thinking (Section 2) and b) it will describe attempts by the Dutch government to apply transition thinking in the area of energy (Section 3). A reflection and tentative evaluation of transition policy is offered in Section 4.

2 Transition thinking in the Netherlands In this section we give an overview of transition research and thinking in the Netherlands. The Dutch “transition to sustainability” literature is concerned with fundamental changes in functional systems of provision and consumption. It involves contributions from innovation researchers, historians of technology, political scientists and systems analysts. It is not rooted in one discipline and people tend to be multidisciplinary (some are even transdisciplinary which means that they are working with practitioners). Basically there are four traditions: the work on sociotechnical transitions by Frank Geels and others, the work on transition management by Jan Rotmans and others, the work on social practices and systems of provision by Gert Spaargaren and others, and the work on reflexive modernisation by John Grin and others. People in those traditions are cooperating in the Dutch KSI programme on system innovation and transition. Each of the traditions will be briefly described. 2.1 The sociotechnical approach The sociotechnical transition approach is created in Twente by Arip Rip and Johan Schot, and was used by historians in a big research programme about the history of technology in the Netherlands. It is based on a co-evolutionary view of technology and society and a multilevel perspective (Rip and Kemp 1998; Geels 2002, 2004; Hoogma et al. 2002). The co-evolutionary holds that technology and society 1

Various contributions on the idea of co-evolution steering for sustainable development can be found in the special issue of The International Journal of Sustainable Development and World Ecology.

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codetermine each other and that the interactions give rise to irreversible developments and path dependencies. The multilevel perspective is an attempt to bring in structures and processes of structuring into the analysis through the use of the following three elements: the sociotechnical landscape, regimes, and niches. The socio-technical landscape relates to material and immaterial elements at the macro level: material infrastructure, political culture and coalitions, social values, worldviews and paradigms, the macro economy, demography and the natural environment. Within this landscape we have sociotechnical regimes and special niches. Sociotechnical regimes are at the heart of transition scheme. The term regime refers to the dominant practices, search heuristics, outlook or paradigm and ensuing logic of appropriateness pertaining in a domain (a sector, policy domain or science and technology domain), giving it stability and orientation, guiding decision-making. Regimes may face landscape pressure from social groups objecting to certain features (pollution, capacity problems and risks) and may be challenged by niche developments consisting of alternative technologies and product systems. Faced with these pressures, regime actors will typically opt for change that is non-disruptive from the industry point of view, which leads them to focus their attention to system improvement instead of system innovation. A visual representation of the multilevel model is given in Fig. 1. taken from Rip and Kemp (1996), indicating three important processes: 1) the creation of novelties at the microlevel against the backdrop of existing (well-developed) product regimes, 2) the evolution of the novelties, exercising counter influence on regimes and landscape, 3) the macro landscape which is gradually transformed as part of the process occurring over time (X-axis). The key point (basic hypothesis) of the multi-level perspective (MLP) is that transitions come about through the interplay between processes at different levels in different phases.2 In the first phase, radical innovations emerge in niches, often outside or on the fringe of the existing regime. There are no stable rules (e.g. dominant design), and actors improvise, and engage in experiments to work out the best design and find out what users want. The networks that carry and support the innovation, are small and precarious. The innovations do not (yet) form a threat to the existing regime. In the second phase, the new innovation is used in small market niches, which provide resources for technical development and specialisation. The new technology develops a technical trajectory of its own and rules begin to stabilise (e.g. a dominant design). But the innovation still forms no major threat to the regime, because it is used in specialised market niches. New technologies may remain stuck in these niches for a long time (decades), when they face a mis-match with the existing regime and landscape. The third phase is characterised by wider breakthrough of the new technology and competition with established regime, followed by a stabilisation and new types of structuring. A transition example is the transition from coal to natural gas in the Netherlands for space heating.3 Here multiple developments coincided; the discovery of large amounts of natural gas in the Netherlands at the end of the 1950s, experience with large-scale production and distribution of gas produced in coke factories, cheap imports of coal which made Dutch coal production unprofitable. Furthermore with 2 3

This section comes from Geels and Kemp (2007). Based on Rotmans et al. (2000, 2001) who based themselves on Verbong (2000).

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Fig. 1 The multilevel model of innovation and transformation. Source: Rip and Kemp (1996)

the rise of nuclear power, there was also a general expectation that the price of energy was about to fall sharply. So when a large gas field was discovered in Slochteren in 1959, exploiting it became a political priority. Important meso factors were the creation of a state gas company, the Staatsgasbedrijf, for the distribution of gas, and a national gas company, the Nationale Gas Maatschappij, for the supply of gas. The creation of these companies was resented by local councils and the semi-nationalized companies (Hoogovens and Dutch State Mines—DSM) who did not want to give up their power. However, after tough negotiations of government with oil companies Shell and Esso (now Exxon), the gas supply became the monopoly of the Gasunie (Gas Association), whose shares were owned by the state and the two oil companies. Under the supervision of the Gasunie, local councils retained responsibility for distribution. Hoogovens was bought out and DSM was included in the Gasunie on behalf of the government as a compensation for the closing of the mines. Households were sold to the idea of using natural gas, thanks to campaigns. By international standards, the condition of the Netherlands’ housing stock was poor. Houses were uncomfortable, lacked insulation and were poorly heated, representing a (large-scale) socio-technical niche. People wanted the comforts of central heating and warm water for showers/baths. By the end of the 1960s, the transformation was complete: the gas supply was based fully on natural gas and controlled by the Gasunie. The transition from coal to natural gas in the Netherlands is an example of a government-induced (one could say managed) transition. The Dutch government had clear objectives and sub-objectives, which resulted in a very quick and relatively smooth transition. Such a goal-oriented transition is rather exceptional; most transitions are the outcome of the many choices of myopic actors who do not based their decisions on a clear long-term view. The transition scheme has been refined and used by Frank Geels and others in a series of studies. This work resulted in several theoretical innovations: the identification of 4 transition patterns (transformation, de-alignment and re-alignment, technological substitution and reconfiguration) (Geels and Schot 2007) and the distinction between local and global elements in the development of new trajectories Geels and Raven (2007). More attention is also given to the interplay between multiple regimes


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(Verbong and Geels 2007) and interplay of functions in the development of technological innovation systems (Jacobsson and Bergek 2004; Hekkert et al. 2007; Bergek et al. 2008; Markard and Truffer 2008). Most of the work is retrospective, based on secondary sources, but the multilevel perspective has also been applied prospectively, for example by Verbong and Geels (2008). The authors are all based in Eindhoven (in 2008 Frank Geels moved to SPRU in the UK). Much attention is given to technology aspects, because they are focussing their studies on transformations in which technology is a key element. Geels studied the following transitions: 1. 2. 3. 4. 5. 6. 7. 8. 9.

From sail to steamships UK (1840–1890) From horse-drawn carriage to automobiles US (1870–1930) From cesspools to sewer systems NL (1870–1930) From pumps to piped water systems NL (1870–1930) From traditional factories to mass production (1870–1930) From crooner music to rock ‘n’ roll US (1930–1970) From propeller-aircraft to jetliners US (1930–1970) Transformation of Dutch highway system (1950–2000) Ongoing transition in NL electricity system (1960–2004)

This type of research builds on the work of Mumford (1934[1957]), Landes (1969), Rosenberg (1982) and Freeman and Louçã (2001). The above work may be usefully labelled the sociotechnical transition approach, given its focus on the co-evolution of technology, organisation and society. Technology is seen both as an outcome and a driver of transformations. 2.2 The transition management approach The second type of scholarship is rooted in systems theory and complexity theory and is very much concerned with issues of steering and governance. This approach may be called either the societal transition approach or the transition management approach.4 It is being associated with people at DRIFT (especially Jan Rotmans and Derk Loorbach) in Rotterdam in the Netherlands, who have been active in the formulating principles of transition management.5 I am part of both traditions, having worked with Frank Geels, Johan Schot and Arie Rip, and with Jan Rotmans and Derk Loorbach. In the first study on transition and transition management (Rotmans et al. 2000), a transition is being defined as a gradual, continuous process of change where the structural character of a society (or a complex sub-system of society) is being transformed (Rotmans et al. 2000). Transitions are transformations processes that lead to a new regime with the new regime constituting the basis for further development. A transition is thus not the end of history but denotes a change in dynamic equilibrium. A transition is conceptualised as being the result of developments in different domains and the process of change is typically non-linear; slow change is followed by rapid change when concurrent developments reinforce each other, which again is followed 4

It may be called the societal transition approach because it has a stronger focus on (societal) actors and political conflict as primary drivers of transformations. 5 DRIFT stands for the Dutch Research Institute for Transitions.

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by slow change in the stabilisation stage. There are multiple shapes a transition can take but the common shape is that of a sigmoid curve such as that of a logistic (Rotmans et al. 2000, 2001). The multilevel, multi-phase model of transition was developed in a project for the 4th National Environmental Policy Plan of the Netherlands. In the project called Transitions and Transition management, principles for transition management were developed by Jan Rotmans, René Kemp and Marjolein van Asselt, together with policy makers, which were. & & & & &

Long-term thinking as a framework of consideration for the short-term policy (at least 25 years). Thinking in terms of more than one domain (multi-domain) and different actors (multi-actor) at different scale levels (multi-level). A focus on learning and a special learning philosophy (learning-by-doing and doing-by-learning). Trying to bring about system innovation besides system improvement. Keeping open a large number of options (wide playing field). (Rotmans et al. 2000, 2001)

Transition management is based on a story line that persistent problems require fundamental changes in social subsystems, which are best worked at in forwardlooking, yet adaptive manner, based on multiple visions. Transition management consists of a deliberate attempt to work towards a transition offering sustainability benefits, in a forward-looking, yet adaptive manner, using strategic visions and actions. The concept is situated between two different views of governance: the incremental ‘learning by doing’ approach and the blueprint planning approach. Governance aspects were worked out in later years in a number of publications (Dirven et al. 2002; Rotmans 2005; Kemp et al. 2007a, b; and Loorbach 2007). The various elements of transition management are combined into a model of multi-level governance by Loorbach (2007) which consists of three interrelated levels: & & &

Strategic level: visioning, strategic discussions, long-term goal formulation. Tactical level: processes of agenda-building, negotiating, networking, coalition building. Operational level: processes of experimenting, implementation.

Transition management tries to improve the interaction between different levels of government by orienting these more to system changes to meet long-term policy goals. It is about organizing a sophisticated process whereby the different elements of the transition management process co-evolve: the joint problem perception, vision, agenda, instruments, experiments and monitoring through a process of social learning (Loorbach 2007). Transition management should lead to different actor-system dynamics, with altered actor configurations, power-constellations and institutional arrangements that form a different selection environment wherein social innovations can mature more easily (Loorbach 2007). The basic steering philosophy is that of goal-oriented modulation, not planningand-control. Transition management joins in with ongoing dynamics and builds on bottom-up initiatives. Different sustainability visions and pathways towards achieving them are being explored. Over time, the transition visions are to be


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adjusted as a result of what has been learned by the players in the various transition experiments. Based on a process of variation and selection new and better visions are expected to emerge, while others die out. It is important to note that in the transition scheme, government and government is seen as part of transitions or transformations instead of an external force. Policy is influenced by the interests, values, beliefs and mental models within the societal systems it seeks to alter and by the values and beliefs of society at large. The new role of government is to act as a facilitator of transformative change, something it can do on the basis of powers granted to them. 2.3 The social practices approach The third tradition is that of social practices. Following Giddens, social practices are taken as the central unit of analysis. The concept of social practice refers to “a routinized type of behaviour which consists of several elements, interconnected to one another: forms of bodily activities, forms of mental activities, ‘things’ and their use, a background knowledge in the form of understanding, know-how, states of emotion and motivational knowledge” (Reckwitz 2002, p. 249). A distinction is made between integrated practices such as cooking, work and vacation and diffuse practices, being relatively simple standardised practices such as shaking hands or steering a car. Integrated practices are being undertaken in socially and materially situated contexts the characteristics of which shape (but do no determine) these practices, which have an individual and social element. The social practices approach has been developed into a transition approach by Spaargaren et al. (2007) using the notions of niche, regime and landscape. It analyses how transition processes take shape at the level of everyday-life, focussing on the connection points between consumers and providers (consumption junctions). One such connection point is the supermarket where people may find biological food in special corners, shelves, which may be part of a particular line of food products such as “pure and honest” products and who may or may not be singled out for attention by providers. Transitions refer to changes in regimes of housing, mobility, clothing and professional care. More than the other transition approaches attention is given to social and symbolic dimensions and the situational context of behaviour and decision making. Researchers in this tradition (for example Shove 2004; Spaargaren 2003) are interested in de-routinisation and re-routinisation of everyday practice. 2.4 The reflexive modernisation approach The fourth tradition is that of reflexive modernisation. This tradition uses the term system innovation instead of the term transition. The focus of this work is on the governance aspects around transformative change, the values, strategies and beliefs of societal actors. Sustainable development is viewed as a project of reflexive modernisation. Researchers in this tradition are especially interested in normative disputes, processes of re-structuration and issues of legitimacy and power (See Grin 2006; Hendriks 2008). Meadowcroft, Shove, Walker, Bulkely, Smith, Stirling and Voss can be viewed as international representatives of this approach by emphasizing the importance of power, legitimacy and conflict.

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What these four traditions unite is: & &

An interest in understanding the mechanisms and politics of transformative change offering sustainability benefits A co-evolutionary view on societal transitions, in which different evolutionary (evolving) systems are influencing each other.

There are differences in focus. Some researchers are more interested in understanding change than in how transitions may be managed (Geels), others are more interested in evaluating policy and governance arrangements (Hendriks, Kern, Howlett, Smith), and there are those who are primarily interested in offering guidance for the management of system change processes (Rotmans and Loorbach). The scholars share a view that transitions defy control because they are the result of endogenous and exogenous developments in regimes and the macro-landscape: there are cross-over effects and autonomous developments. Technical change interacts with economic change (changes in cost and demand conditions), social change and cultural change, which means that in managing transitions one should look for virtuous cycles of reinforcement (positive feedback). The term transition management is only used by people from the transition management school, where it is variously labelled as goal-oriented modulation, directed incrementalism, co-evolutionary steering and reflexive governance for sustainable development (Rammel and van den Bergh 2003; Kemp and Loorbach 2006; Kemp et al. 2007a). It is a form of multilevel governance that is concerned with the co-evolution of technology and society in specific domains. In the Netherlands the national government is using transition thinking in its innovation policies. The transition approach is one of the pillars of the programme “Clean and Resource-Efficient” (In Dutch: Schoon en zuinig). In so doing they are using ideas from transition management. The next section will describe the Dutch transition approach for sustainable energy.

3 The Dutch transition approach Concerns about the depletion of fossil fuels, dependencies on foreign suppliers, and climate change led policy makers in the Netherlands to gradually adopt a transition approach for sustainable energy, mobility, agriculture and resource use, which is novel and very interesting. It is interesting because of its focus on transformative change, its reliance on bottom-up processes and enrolment of business and other non-state actors in the transformation process.6

First ideas about transition management were created in the project “Transitions and transition management” for the fourth National Environmental Policy Plan (NMP4). In this project, a group of scientists and policy makers met to discuss a new strategic framework. A description of the coproduction process can be found in Kemp and Rotmans (2009) and Smith and Kern (2009). After the project the TM model was further developed by Derk Loorbach and Jan Rotmans and more or less independently by the Ministry of Economic Affairs (a description and discussion of this is given by Loorbach 2007).

6


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The transition approach relies on guided processes of variation and selection. It makes use of “bottom-up” developments and long-term thinking. A set of 31 transition paths are being traversed (including biomass for electricity, clean fossil, micro cogeneration, energy-producing agricultural greenhouses). The government acts as a process manager, dealing with issues of collective orientation and interdepartmental coordination. It also takes on a responsibility for the undertaking of strategic experiments and programmes for system innovation. Control policies are part of the transition approach but the government does not seek to control the process—it is not directing the process but seeks to facilitate learning and change. At the heart of the energy transition project are the activities of 7 transition platforms. In these platforms individuals from the private and the public sector, academia and civil society come together to develop a common ambition for particular areas, develop pathways and suggest transition experiments. The 7 platforms are: & & & & & & &

New gas Green resources Chain efficiency Sustainable electricity supply Sustainable mobility Built environment Energy-producing greenhouse

The transition approach officially started in 2002 with the project implementation transition management (PIT) of the Ministry of Economic Affairs |(EZ). In 2004– 2005, the energy transition process gained speed through the establishment of 4 platforms (new gas, green resources, chain efficiency and sustainable mobility), and the creation of the Interdepartmental Project directorate Energy transition (IPE). In 2006 two additional platforms were established (sustainable electricity supply and built environment). The transition path energy producing greenhouse became a platform of its own in 2008. In the Interdepartmental Project directorate Energy transition (IPE) created in 2005, issues of policy coordination are being discussed and dealt with by the secretary generals of six ministries: EZ responsible for innovation policy, energy policy and economic policy, VROM responsible for the environment, V&W responsible for mobility, LNV responsible for agriculture, fisheries and nature development, BuZA responsible for foreign development aid and biodiversity and the Finance Ministry.7 Based on suggestions from the transition platforms a transition action plan has been formulated which contains the following goals: ➢ −50% CO2 in 2050 in a growing economy ➢ An increase in the rate of energy saving to 1.5–2% a year 7

EZ is the Ministry of Economic Affairs, VROM is the Ministry of Health, Spatial Planning and Environment, V&W is the Ministry of Traffic and Water, LNV the Ministry of Agriculture and Nature, BUZA the Ministry of Foreign Affairs)

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➢ The energy system getting progressively more sustainable ➢ The creation of new business8 The transition action plan was prepared by the Taskforce energy transition, based on inputs form the platforms. With the action plan entitled “More with energy. Chances for the Netherlands” the Dutch energy transition approach went ‘public’. In May 2006, in a television news-broadcasted event, it was presented by the chair person (Rein Willems, CEO of Shell Netherlands) to the Dutch public and political parties. It is a highly corporatist approach, which has been criticized on democratic grounds (Hendriks 2008). Interestingly, however it was government who enrolled business in it, and not the other way. It took a lot of persuasion of the Ministry of Economic Affairs to have business involved. It was EZ who took the initiative to create a platform by appointing a chair, whose task was to invite innovative business people to the platform, together with experts and people from civil society. In each platform there is someone from government serving as a “linking pin” with policy. Each platform has 10 to 15 members. They are selected by the chair on the basis of personal knowledge of, and visions related to, the theme in question; they are not invited as representatives of particular interests (Dietz et al. 2008, p. 223). Some of the platform members will chair temporary working groups comprising an ad hoc selection of experts, entrepreneurs and NGOs, which prepare or define solution directions or strategic processes for the platform theme. In this way, in each platform some 60 to 80 ‘leaders’ are involved (Dietz et al. 2008, p. 223). The task force only existed for less than 2 years, in which it produced two reports; the transition action plan (May 2006) and a set of recommendations (Dec 2006). It was superseded by the Regieorgaan Energietransitie Nederland (REN) created in 2008. The Regieorgaan is responsible for developing an overall vision for the energy supply (electricity and heat) in the Netherlands and to formulate a strategic agenda based on inputs of the platforms.9 In 2009 they will produce recommendations for policy, as part of an official advice, solicited by the Dutch government. The Regieorgaan is composed of 11 people: the chairs of the 7 transition platforms and 4 “independent members”. The transition platforms selected 31 transition paths. An overview of these is given in Appendix I, together with the self-stated goals and transition experiments. 8

In 2009 the official goals for 2020 are: 2% rate of energy saving a year, 20% share for renewable energy and 30 reduction of CO2. 9 The formal tasks of the Regieorgaan are: 1) to create a basis for support among public and private parties for the energy transition to stimulate the design, formulation and implementation of transition paths, 2) to actively stimulate the bundling of ambitions, ideas about possibilities, knowledge and experience of business, 3) to stimulate cohesion between the different activities of the energy transition and to guard and monitor progress, 4) to promote long-term planning for the energy transition and the development and implementation of transition paths, 5) to make recommendations to Ministers about the energy transition and the implementation of transition paths on the basis of monitoring, analysis and evaluations, 6) to identify, select and stimulate new developments, initiatives and innovations relevant to the energy transition, based on ambitions and competences of market actors and government energy transition goals, 7) to make recommendations to Ministers for what they can do in terms of policy interventions for the energy transition, 8) to evaluate the transition paths every 4 years, to actualize them and to make recommendations for an actualization of long-term plans, 8) to create a network of public and private partners for the promotion of clear communication between the parties of the energy transition and between the transition paths, 9) to promote information provision for the general public about the energy transition.


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The portfolio of transition paths contains technological innovation at different states of development. The Platforms Sustainable Mobility, Built Environment, and Chain Efficiency concentrate themselves on the accelerated introduction of available technologies; the other platforms oriented themselves more towards emerging technologies (such as 2nd generation biofuels). In the 2004–2007 period 160.2 million euro has been spend on the transition experiments and demonstration projects in the area of sustainable energy through the UKR and EOS-DEMO schemes. An overview of the expenditures over the 7 platforms can be found in Tables 1 and 2. In order to qualify for support under the UKR the experiments should – – –

be part of an official transition path involve stakeholders (beyond business) in an important way have explicit learning goals for each of the actors of the consortium.

In the period Oct 2007–Dec 2008 86 projects have been funded through various programmes. Total investments for these projects amounted to 191 million euro. The government contribution for these programmes was 56 million euro. The projects cover a wide range of transition paths, and not just a few (Table 3). The production of sustainable energy is supported through the SDE (Stimulering Duurzame Energieproductie) instrument. For 2009 the total budget amounts to 2.585 million euro (this sum does not include support for offshore windpower). http:// www.senternovem.nl/sde/algemene_subsidie_informatie/index.asp The transition approach goes beyond technology support. It is oriented at creation capabilities, networks and institutions for transitional change through the creation of agendas, partnerships, new instruments, and vertical and policy coordination are part of it. The IPE plays an important role in “taking initiatives”, “connecting and strengthening initiatives”, “evaluate existing policy and to act upon the policy advice from the Regieorgaan and transition platforms”, to “stimulate interdepartmental coordination” and to “make the overall transition approach more coherent” Table 1 Overview of transition experiment projects in the area of sustainable energy funded by the unique opportunities scheme (UKR) in the 2004–2007 period Unique opportunities scheme(UKR) Platform

Projects approved

Investment amount × 1 million euro

Subsidy amount × 1 million euro

CO2reduction in kton/year

New gas

22

316.7

45.7

1,647

2

9.1

2.0

2

10

150.1

10.8

1,053

Green raw materials

5

100.4

12.5

39

Greenhouse as energy source

1

111.0

4.0

90

Chain efficiency

7

260.2

42.1

377

Sustainable electricity supply Transport (sustainable mobility)

Built environment Total

1

10.1

1.2

1

48

957.8

118.3

3,211

Energy Innovation Agenda (2008, p. 112)

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Table 2 Overview of demonstration projects in the area of sustainable energy funded under the EOSDEMO programme in the 2004–2007 period Unique opportunities scheme(UKR) Platform

New gas

Projects Investment amount × Subsidy amount × CO2reduction Projects in kton/year approved approved 1 million euro 1 million euro 49

125.5

18.3

74

9,234

Sustainable electricity supply

9

26.5

4.0

2

855

Transport (sustainable mobility)

4

9.3

1.1

4

618

Green raw materials

4

6.3

1.5

4

289

Greenhouse as energy source

14

61.6

7.6

142

8,485

Chain efficiency

16

50.1

9.4

46

2,793

–

–

–

–

–

96

279.3

41.9

273

22,274

Built environment Total

Energy Innovation Agenda (2008, p. 113)

(Staatscourant 25 Feb 2008, nr. 39, p. 29). The position of the energy transition approach within the policy framework for sustainable energy is given in Fig. 2. As one can see the energy transition approach is but one element in the policy framework for sustainable energy, which is much wider and includes production subsidies, environmental covenants and green procurement policies at the demand side, various RTD policies and other policies at the supply side, policies for start ups, cluster policies and other sociotechnical alignment policies. The whole approach is set up as a vehicle for sociotechnical change and policy change in a coordinated manner. This is evident from the following quote from policy makers Frank Dietz, Hugo Brouwer and Rob Weterings: “It is clear that working on fundamental changes to the energy system can only be successful if the government adjusts its policy instrumentarium accordingly. This means that the policy for research and development, the stimulation of demonstration projects, and the (large-scale) market introduction must be brought in line with the selected transition pathways. In addition, the suggestions for new policies put forward by the platforms must be taken seriously. At this point, the government faces a major challenge, because much of the current policy was formulated based on the classic way of thinking that is characterized by a topdown approach and dominated by short-term objectives, implemented by fragmented and individually-operating departments and Ministries, on which market influences do not or hardly have any effect” (Dietz et al. 2008: 238) It is also evident from the activities of the Regieorgaan and the platforms for 2009 (Table 4). As one can see the platforms seek to produce advice, take stock of what has been achieved, they commission studies and are involved in all kind institutional alignment activities (also between the platforms). The platforms are currently


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Table 3 Government policy instruments for innovative transition projects Period

Government instrument providing support to innovative transition projects 2007–2008

Number of projects funded

Number of project applications

Subsidies (€)

Total investments (indicative)

Demonstration demo

1×

Oct 07–Jan08

21

66

11,248,588

96,000,000

Towards energy-neutral homes UKR

1×

Feb–Apr 08

15

42

7,500,000

30,300,000

Clean busses

1×

Nov 07–May 08

6

9

10,000,000

20,000,000

Fuelling stations alternative fuels

1×

May–Jun 08

pm

44

1,800,000

5,000,000

Semi-closed greenhouse/ other energy systems MEI

1×

Feb–Mar 08

17

20

13,206,145

Heating/cooling in industry SBIR

1×

Sep–Dec 08

8

14

40,000,000 (indicative)

371.623

Heating/cooling UKP

1×

Sep–Dec 08

Unknown yet

pm

10,000,000

pm

Bio-innovative products SBIR

1×

Aug–Oct 08

20

47

1,800,000

nvt

Total

8×

86

242 (3,0× more)

55,926,356

191,300,000 (3,3× more)

IPE werkplan 2008, pp. 6–7

working with municipal authorities and national government to create pilots for energy neutral living districts to learn about alternative energy systems (with the systems going beyond particular technologies from the platforms) and to create visibility for the energy transition. 3.1 Front-runners desk An interesting initiative is the front-runners desk, created in 2004, designed to help innovative companies with problems encountered and to help policy to become more innovation friendly. Problems varied from difficulties with getting financial support (from government or private finance) to problems with getting permits. Between Jan 2004 and March 2006, 69 companies approached the desk to discuss problems. In 59% of the cases, the problems were solved thanks to the intervention of the desk, in 12% of the cases the companies could not be helped, and in the remaining cases (29%) the desk was still dealing with the issue at the time of the evaluation. An overview of the functions of the desk for innovators and policy is provided in the Table 5. The government also funded an evaluation of 31 transition paths, to examine transition path specific “motors” and barriers. 3.1.1 Budget and staffing From the 6 Ministries involved (Ministry of Economic Affairs, Ministry of Health, Spatial Planning and Natural Environment, Ministry of Traffic and Water, Ministry of Agriculture and nature, Ministry of Foreign Affairs, Ministry of Finance) more than 20 people are directly involved in the energy transition activities. In the government period 2007–2008 in total 130 innovative projects started with a total

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Fig. 2 Position of the energy transition approach within the Dutch policy framework for sustainable energy. Source: Author

investment sum of 800 million Euro. For the 2008–2012 period 438 million euro has been allocated for energy innovation research. In total the following sums of money have been allocated for cleaner energy and energy saving: 1,747 million euro in 2009, 1.898 million euro in 2010 and 1.898 million euro in 2011. The Dutch energy transition approach covers the entire energy supply system (including clean coal) with the exception of nuclear energy. The energy innovation agenda formulated in 2008 is oriented towards the 7 themes of the energy transition. For each theme, the government has formulated specific activities. For sustainable mobility the following activities are announced for the government period: 1. The creation of a programme to create the basic infrastructure for natural gas and green fuels (liquid and gaseous) for vehicles. A subsidy scheme for filling stations for alternative fuels will be created. The 2nd generation of biofuels is prioritised for sustainable development reasons including a higher CO2 reduction effect. Together with market parties a new programme for pilots will be set up for innovative, sustainable drive systems and the use of biofuels in busses and trucks, plus the use of additives for fuel reduction and reduction of fine particles. Foreign experiences will be studied and lessons will be used. 2. The government will act as a launching customer for the use of innovative and sustainable vehicles and fuels. City distribution will be stimulated too.


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Table 4 Planned activities in 2009 Platform

Planned activities in 2009

Regieorgaan

• Production of an official advice on policy, in which they make recommendation for instrument choices

Green resources

• To follow the implementation of sustainability criteria for biomass • Position paper on CO2 allowances for biomass • To launch an explorative study into the macroeconomic effects of biomass production and use in the Netherlands • To develop a systematique for measuring green resources

Sustainable mobility

• To make recommendations for fiscal treatment of clean vehicles • To discuss the action plan on alternative mobility with leasing companies • To examine how natural gas and green gas may pave the way for hydrogen • Evaluate experiences with buss experiments funded in the first tender • To offer advice on how public transport concessions may be used for innovation • To assist in the implementation of 5 pilots about smart grids and electric mobility • To launch or stimulate pilots for sustainable biofuels (high blends and biogas) and hydrogen in five cities in cooperation with Germany and Flanders in Belgium

New gas

• To investigate product-market-combinations for decentralised gas use • To commission or undertake a study into the potential of gas motors and absorption heat pumps

Chain efficiency

• Starting the first phase of the programme for precision agriculture

Sustainable electricity production

• Formulate platform positions on off shore energy,

• Working out a development plan for process intensification • rules for co-burning of biomass, cogeneration, and conditions for coal-fired plants • Implementation the earlier formulated action plan Decentralised infrastructure (smart nets) • To examine and utilise opportunities in blue energy Built environment

• Platform advice about the restructuring of existing business parcs • Workplan (script) for achieving energy saving using a district-based approach • Investigation of how local authorities may be involved, on a voluntary and less voluntary basis

Bloemlezing energietransitie, November 2008

3. The government will continue the innovation programme for clean busses. A 2nd tender will be implemented. A programme for “trucks of the future” will be created geared towards the demonstration of very clean and silent trucks for city distribution. 4. In line with the EU Joint technology Initiative Fuel Cell and Hydrogen, large scale experiments will be undertaken in cooperation with EU partners. One possibility which is being considered is the creation of a corridor between the Randstad (west region of the Netherlands in which the 4 largest cities are located), NordrheinWestfalen (Germany) and Flanders (Belgium). In co-operation with local authorities and industrial partners a demonstration programme will be prepared. The hydrogen will be produced in a climate-neutral way in Rotterdam for use in the Amsterdam bus and shipping initiative.

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Table 5 Overview of functions of front runner desk for innovators and policy Functions for innovators

Functions for policy

Obtain financial support from existing instruments To make existing instruments more conducive for innovation To get into contact with relevant agencies and government people

To improve policy coordination between ministries and within ministries

Overcoming legal problems and problems with permits

To stimulate case-sensitive implementation of existing and new policy

To widen their network and strengthen the To stimulate policy development in areas of the organisational set up of the innovation trajectory innovation chain not well covered by policy Business support and public relation help for the successful market introduction

To be serviceable to business in a case-sensitive way

Weterings (2006)

5. The government will stimulate the creation of standards for intelligent transport systems (ITS). Special attention is given to electronic systems for mobility payment which will become the basis for future payment and funding of infrastructure. The government will investigate the consequences of an increased use of plug-in hybrids and other electric vehicles for the electricity grid and will execute a large-scale test at the level of a neighbourhood district. 6. The government will take steps towards a consistent and continuing fiscal support for sustainable vehicles and for transparent information supply about such vehicles for consumers. The national government will support the leasing market for sustainable vehicles. 7. The national government will work with Airport Schiphol for making Schiphol more sustainable. Source: Innovatieagenda Energie (2008, pp. 40–41) Technological and organisational capabilities are being created endogenously, alongside strategic knowledge and aligned policies. Alignment between sociotechnical developments and policy is being achieved in various ways: through the (programming) activities of transition platforms and taskforces, a frontrunners desk, specially commissioned research into the development of transition paths, the transitions knowledge centre (KCT), the competence centre for transitions (CCT), and transition experiments. There are also regular interactions between transition researchers, practitioners and government. The government funded a 10 million social research programme on transitions. Researchers meet with practitioners at special network days and are involved in the government-funded innovation programmes for sustainable energy mobility, buildings, agriculture and health care. The author of this article was involved in a workshop with project managers of the Transumo programme, a 30 million programme for sustainable mobility involving 150 organisations. In the workshop project managers were asked to reflect on the following questions: &

Does the project offer a contribution to a societal problem (challenge)? Which challenge is this?


& & &

307

Is it informed by a vision of sustainable mobility? Is it designed to learn about this vision? Is it part of a transition path? If so, what path? Is it oriented towards demonstration or learning? Does it learn about sustainability aspects, markets, how various actors may be enrolled and how the project may be scaled up? These questions helped them to reflect on their project in a novel way.

3.1.2 Policy integration and cooperation The energy transition is something for all domains and layers of government. It involved various ministries and many different dossiers. For example, in the area of sustainable mobility a task force for mobility management has been set up to think about ways to reduce congestion not through road pricing but through flexible working times, teleworking, promoting the use of bicycles and public transport for commuting, which are being supported by business and workers. IPE is engaged in coordination activities for offshore wind power: allocation of spots, safety, financing of power cables. On this topic they have some influence, on other topics such as environmental regulations and fiscal measures it does not have great influence. It is also wrong to think that the platform’s choices are fully limitative for innovation. The official paths have an advantage but they do not foreclose other paths. New initiatives may emerge outside the platforms through parliament or because certain powerful parties in society are able to secure policy support for it. An example is the programme for battery electric vehicles which was defined by others. A coalition of NGOs, business (Essent, Better Place), finance (ING, Rabo) and the Urgenda (a coalition for sustainability action) successfully lobbied Ministers and parliament to give special support to BEVs. The platform for sustainable mobility was critical about the programme, it considered the hybrid-route more promising given the present state of development of batteries and thought that the goal of 1 million battery electric cars in 2025 was unrealistic but is working constructively with this initiative. On the whole policy coordination has improved in the last 6 years. For example, battery electric vehicles, hybrid electric vehicles and low-emission other vehicles are subject to special fiscal treatment.10 There is more co-operation between Ministries and between government, business, research and civil society. There is also more co-operation of national initiatives and regional initiatives. The platforms are also working together more than before. For example, the platform for sustainable electricity supply (working group decentralised infrastructure) is investigating issue of charging stations for (plug-in hybrid) electric vehicles: technical standards for vehicle charge points, the capacity implications of a big fleet of (plug-in hybrid) for the electricity systems with different technical configurations, how to avoid 10

In the Netherlands many vehicles are leased from companies. People driving a leased vehicle must add 25% of the value of the car to their income before taxes and pay taxes over this extra sum. If you lease a battery electric vehicle, 10% of the value of the car is subjective to income taxes; for hybrid electric vehicles it is 14%. Charging points are up for a fiscal advantage of 20%. The tax incentives for cars proved very effective: in the first 5 months of 2009, 7456 hybrid electric cars were sold in the Netherlands, an increase of 63% compared to the same period in 2008. Between 2008 and 2009 the number of HEV doubled: from 11,000 to 23,000.

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peak loads through load management. For now they are focussing on grid-to-vehicle and not on the reverse issue of vehicle-to-grid. All this is done as part of a four-year action plan To foster the “flexible use of instruments” for fostering energy innovation a special arrangement is created, the temporary energy arrangement market and energy innovation (Tijdelijke Energie Regeling Markt en Innovatie). IPE encouraged the development of it and was instrumental in aligning it with the innovation agenda for energy (Werkplan 2009 of IPE). These instruments complement the European Emissions Trading System for carbon emissions and the sectoral covenants for energy use reduction. Control policies are not part of the transition approach as such, in the future they might become part of it but they are now outside it. The transition approach for system innovation is a long-term approach for achieving carbon reductions which complements short-term policies for obtaining carbon reductions through the use of available energy saving options and carbon-low technologies. For achieving carbon reductions of 96 Mton by 2020 a “three waves” approach is used. The first wave consists of the picking of low-hanging fruit (low-cost carbon reduction options). The second wave consists of options that are almost mature, the third wave of options that require a great deal of R&D and experimentation. Examples of third wave options are CO2 capture and storage and the use of biological raw materials in the chemical industry (biorefining) (Energy Innovation Agenda 2008, p. 22). The three waves approach is given in Fig. 3. Anticipated carbon reductions from the (3 waves) Clean and Efficient programme are given in Table 6. 4 Reflection and tentative evaluation In the Netherlands the national government is using a “transition approach” for making the transition to sustainable energy, drawing on ideas about transition

Fig. 3 The 3 waves approach for achieving carbon reductions. Source: Energy Innovation Agenda (2008, p. 22)


309

Table 6 Anticipated carbon reductions from the Clean and Efficient programme in Mton/year

1990 2005 2010

2020 With clean and With clean and Cabinet’s reduction Unchanged Unchanged efficient according efficient cabinet goal compared to to ECN/MNP goals, unchanged policy policy policy

Built

30

39

27

26

Industry/ electricity

93

101

105

131

Traffic

30

39

40

47

9

7

9

7

54

36

35

35

215

212

215

246

Agriculture Other greenhouse gases Total CDM/JI

20–23

15–20

6–11

75

70–75

56–61

30–34

30–34

13–17

5–6

5–6

1–2

28–29

25–27

8–10

158–167

150

96

−15

Energy Innovation Agenda (2008, p. 20), based on calculations by ECN/MNP

management articulated by Dutch scientists, based on insights from innovation and transition studies (the work of Rip, Schot, Kemp and Geels, Jacobsson) and evolutionary economics (Nelson and Winter, van den Bergh, Bleischwitz and Hinterberger). The Dutch energy transition approach is a corporatist approach for innovation, enrolling business in processes of transitional change that should lead to a more sustainable energy system. A broad portfolio of options is being supported. A portfolio of options is generated in a bottom-up, forward looking manner in which special attention is given to system innovation. Both the technology portfolio and policies should develop with experience. The approach is forward-looking and adaptive. One might label it as guided evolution with variations being selected in a forward-manner by knowledgeable actors willing to invest in the selected innovations, the use of strategic learning projects (transition experiments) and the use of special programmes and instruments. It is a Darwinist approach which relies on market selection but does not do so in a blind way. Initially, the energy transition was a self-contained process, largely separated from existing policies for energy savings and the development of sustainable energy sources. It is now one of the pillars of the overall government approach for climate change. Internationally, contacts have been established with Finland, the UK, Austria and Denmark, which are using similar approaches. The Ministries of Environment (VROM) and Economic Affairs (EZ) are collaborating with each other on energy innovation issues, both national and internationally. It is an approach of ecological modernisation in which special attention is given to system innovation, as a new element. Options to make the existing energy system more sustainable (such as carbon capture and sequestering) are not excluded. They are also receiving attention and support. It bears noting that despite the attention to system-innovation it is entirely possible that coal-fired power plants and nuclear power plants will be build in the years to come, even when nuclear energy is not a transition path (clean coal is an official transition option but carbon capture and sequestering is not a proved technology yet). In the privatised energy markets, electricity producers can opt for those options. The commitment to privatisation and

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liberal energy markets is not helpful to the energy transition process (Kern and Howlett 2009). In the eyes of the Dutch government, the energy approach so far is a success, by being able to exploit latent business interests in sustainable energy. Alternative energy (use) systems are worked at in a prudent manner through special learning projects and programmes. Policies for innovation are combined with policies to achieve immediate carbon reductions, through carbon trading, covenants about energy savings and a support scheme for sustainable energy production. The transition literature sparked a debate about possibilities for managing transitions and the DRIFT transition management model11. Smith et al. (2005) together with Jacob (2007) criticise the idea of transitions occurring through niche development processes, pointing to other pathways and the need for regime-changing policies to complement innovation support schemes. Shove and Walker (2007) are openly critical of the “transition through modernisation” idea and transition management approach. They doubt the ability of societies to transform themselves and criticise the central role given to technical change in societal transitions (arguing that culture and social practices have been neglected). Transition management is also criticised for being an elitist and technocratic approach of modernisation (Hendriks 2008; see also Smith and Kern 2007) for the reason that none of the platforms is democratically chosen and the public not really being involved. They say the process is dominated by regime actors. Meadowcroft (2009) questions the possibility for achieving closure through willful transition policies, saying that transitions are messy and open processes. At a workshop in Germany where I presented the Dutch transition approach, the approach was criticized for not delivering much on renewable energy and greenhouse gas reductions. It is true that The Netherlands have been underachieving in terms of renewable energy and CO2 emission reduction. The share of renewable electricity in the Netherlands (9% in 2010) is far below the European average of 22% for the EU15 and 21% for the EU27 (see Appendix II). CO2 levels have not fallen. In 2008 CO2 emissions were higher than in 2007. In terms of CO2 equivalents a 3% reduction has been achieved in greenhouse gas emissions, which is half of the 6% reduction that is required to achieve according to the Kyoto protocol. It is wrong to blame the Dutch energy transition approach for this as it is just one element of sustainable energy policy. The transition approach is an approach for achieving long-term benefits, not short-term reductions in CO2. One may question whether a broad portfolio is not too broad. A broad portfolio may be something for a big country such as Germany and not something for a small country with limited resources. The dominance of incumbents has been acknowledged by Hugo Brouwer, the director of the energy transition process but no steps have been undertaken against this.

11

In Kemp (2009) the various criticisms leveled against transition management are discussed more extensively.


311

Germany moved much further into the direction of a low-carbon economy than the Netherlands. But this owed more to political circumstances: the willingness to stimulate renewable energy. The German experience shows that market pull can stimulate not only diffusion but also innovation. One important conclusion for policy is that for bringing about a transition something more is needed than innovation support. For instance for achieving a transition to a low-carbon economy, environmental taxes and other carbon reducing policies are needed, as pointed out by environmental economists such as Ekins and Bleischwitz. It was hoped by this author that the commitment to sustainability transitions helps to make such choices, but this did not happen. As countries are unlikely to unilaterally introduce carbon-restraining policies for economic fears, it is important to have international carbon-reducing policies. The European Emission Trading system is an important development in this respect. The Netherlands is relying on ETS and sectoral covenants for achieving reductions in greenhouse gas reductions. As an innovation support approach the Dutch transition management model is a sophisticated approach which fits with modern innovation system thinking which says that policy should be concerned with 1) management of interfaces, (2) organizing (innovation) systems, (3) providing a platform for learning and experimenting, (4) providing an infrastructure for strategic intelligence and (5) stimulating demand articulation, strategy and vision development (Smits and Kuhlman 2004; see also Grin and Grunwald 2000). By relying on adaptive portfolio’s two possible mistakes of sustainable energy policy possibly may be prevented, 1) the promotion of short-term options which comes from the use of technology-blind generic support policies such as carbon taxes or cap and trade systems (which despite being “technology-blind” are not technology neutral at all because they favour low-hanging fruit and regimepreserving change (Jacobsson et al. 2009), and 2) picking losers (technologies and system configurations which are suboptimal) through technology-specific policies. Here we should add to say that there are good reasons for relying on market-based instruments (to achieve carbon reductions at a low cost) and for engaging in technology-support but that a combination of such policies is desirable. When engaging in technology specific support policies one task for policy is to not fall prey to special interests, hypes and undue criticisms. The support given to the first generation biofuels turned out to be wrong. The philosophy of guided evolution used in the Netherlands appears a good one as the transition to a lowcarbon economy really consists of two challenges: to reduce carbon emissions and to contain the side-effects of low-carbon energy technologies, whether nuclear, wind power, or systems of carbon capturing and sequestering. All new energy technologies come with specific dangers and hazards, which have to be anticipated and addressed. For sustainable energy there are no technical fixes, nor are there perfect instruments. There is a need for policy to be more concerned with system change. The capacity to do so has to be created. It can be created in different ways. The Dutch model described in this article is one possible way. It is not a substitute for control policies such as environmental taxes and regulations, which remain necessary.

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Appendix I Table 7 Overview of transition platforms, pathways and experiments Platforms

Pathways

Chain efficiency Goal: savings in the annual use of energy in production chains of: - 40 à 50 PJ by 2010

KE 1: Renewal of production systems

- 150 à 180 PJ by 2030

KE 2: sustainable paper chains

- 240 à 300 PJ by 2050

KE 3: sustainable agricultural chains

Green resources Goal: to replace 30% of fossil fuels by green resources by 2030

GG 1: sustainable biomass production GG 2: biomass import chain GG 3: Co-production of chemicals, transport fuels, electricity and heat GG 4: production of SNG GG 5: Innovative use of biobased raw materials for non-food/non-energy applications and making existing chemical products and processes more sustainable

New gas Goal: to become the most clean and innovative gas country in the world

NG 1: Energy saving in the built environment NG 2: Micro and mini CHP NG 3: clean natural gas NG 4: Green gas

Sustainable mobility Goals: • Factor 2 reduction in GHG emissions from new vehicles in 2015

DM 1: Hybrid and electric vehicles

• Factor 3 reduction in GHG emissions for the entire automobile fleet 2035

DM 2: Biofuels DM 3: Hydrogen vehicles DM 4: Intelligent transport systems

Sustainable electricity Goal: A share of renewable energy of 40% by 2020 and a CO2-free energy supply by 2050

DE 1: Wind onshore DE 2: Wind offshore DE 3: solar PV DE 4: centralised infrastructure DE 5: decentralised infrastr

Built environment Goal: by 2030 a 30% reduction in the use of energy in the built environment, compared to 2005

GO 1: Existing buildings GO 2: Innovation GO 3: Regulations

Energy-producing greenhouse Goals for 2020:

KE 1: Solar heating

• Climate-neutral (new) greenhouses

KE 2: Use of earth heat


313

Table 7 (continued) Platforms

Pathways

• 48% reduction in CO2 emissions

KE 3: Biofuels

• Producer of sustainable heat and energy

KE 4: Efficient use of light

• A significant reduction in fossil fuel use

KE 5: Cultivation strategies and energy-low crops KE 6: Renewable electricity production KE 7: Use of CO2

Kern and Smith (2008), http://www.creatieve-energie.nl/ and internet search

Appendix II Table 8 Electricity generated from renewable sources (% of gross electricity consumption) 2000 2001 2002 2003 2004 2005 2006 2007 2010 European Union (27 countries)

13.8

14.4

12.9

12.9

13.9

14.0

14.6

15.6 21.0

European Union (15 countries)

14.6

15.2

13.5

13.7

14.7

14.5

15.3

16.6 22.0

Belgium

1.5

1.6

1.8

1.8

2.1

2.8

3.9

Bulgaria Czech Republic

7.4 3.6

4.7 4.0

6.0 4.6

7.8 2.8

8.9 4.0

11.8 4.5

11.2 4.9

7.5 11.0 4.7 8.0

Denmark

4.2

6.0

16.7

17.3

19.9

23.2

27.1

28.3

26.0

29.0 29.0

Germany (including ex-GDR from 1991)

6.5

6.5

8.1

8.2

9.5

10.5

12.0

15.1 12.5

Estonia

0.3

0.2

0.5

0.6

0.7

1.1

1.4

1.5

Ireland

4.9

4.2

5.4

4.3

5.1

6.8

8.5

9.3 13.2

5.1

Greece

7.7

5.2

6.2

9.7

9.5

10.0

12.1

6.8 20.1

Spain

15.7

20.7

13.8

21.7

18.5

15.0

17.7

20.0 29.4

France Italy

15.1 16.0

16.5 16.8

13.7 14.3

13.0 13.7

12.9 15.9

11.3 14.1

12.5 14.5

13.3 21.0 13.7 22.55

Cyprus

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Latvia

47.7

46.1

39.3

35.4

47.1

48.4

37.7

0.0

6.0

36.4 49.3

Lithuania

3.4

3.0

3.2

2.8

3.5

3.9

3.6

4.6

7.0

Luxembourg (Grand-Duché)

2.9

1.6

2.8

2.3

3.2

3.2

3.4

3.7

5.7

Hungary

0.7

0.8

0.7

0.9

2.3

4.6

3.7

4.6

3.6

Malta

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

5.0

3.9 72.4

4.0 67.2

3.6 66.1

4.7 53.1

5.7 58.7

7.5 57.4

7.9 56.6

Netherlands Austria

7.6 9.0 59.8 78.1

Poland

1.7

2.0

2.0

1.6

2.1

2.9

2.9

Portugal

29.4

34.2

20.8

36.4

24.4

16.0

29.4

30.1 39.0

3.5

7.5

Romania

28.8

28.4

30.8

24.3

29.9

35.8

31.4

26.9 33.0

Slovenia

31.7

30.5

25.4

22.0

29.1

24.2

24.4

22.1 33.6

Slovakia

16.9

17.9

19.2

12.4

14.4

16.7

16.6

16.6 31.0

Finland

28.5

25.7

23.7

21.8

28.3

26.9

24.0

26.0 31.5

Sweden United Kingdom

55.4 2.7

54.1 2.5

46.9 2.9

39.9 2.8

46.1 3.7

54.3 4.3

48.2 4.6

52.1 60.0 5.1 10.0

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Open Access This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.

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Multi-agent modeling of economic innovation dynamics and its implications for analyzing emission impacts Frank Beckenbach & Ramón Briegel


Abstract In this elaboration we focus on the role of multi-agent systems as a tool for modeling economic dynamics. Hence, at the beginning the specific features of this tool are considered. Taking the example of explaining the relationship between innovations and economic growth it will be shown after that how the tool of multiagent modeling can be used for the following purposes: (1) for explaining the occurrence of innovations, (2) for specifying the effects these innovations have on economic growth, (3) for linking emission impacts to this growth and finally (4) for exemplarily assessing political options to reduce these impacts. Keywords Innovation . Economic growth . Simulation . Multi-agent model . Rebound effect . Emission abatement

1 Introduction Undoubtedly many of the observable impacts on ecological systems (e.g. depletion of minerals and species, emissions and waste) can be derived from economic activities. But the relationship between the two is far from being fully clarified in scientific analysis. Either the focus on this impact perspective and/or lack of economic knowledge often leads to a specific framing of economic analysis in this environmental context: Firstly, only economic aggregates (like gross domestic product) and their dynamics are considered; secondly, this analysis is normally carried out by using computable modeling frame works (like computable general equilibrium models). What is missing in such a framework is a realistic Role of the funding source This article is based on research conducted within the research project “2nd order innovations? An actor oriented analysis of the genesis of knowledge and institutions in regional innovation systems”, which was funded by the VolkswagenStiftung, Germany.

F. Beckenbach (*) : R. Briegel Faculty of Economics, Department of Ecological and Behavioral Economics, University of Kassel, Untere Königsstraße 71, 34109 Kassel, Germany e-mail: [email protected]

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F. Beckenbach, R. Briegel

consideration of the microeconomic foundation for the driving forces of economic processes. To assume a representative optimizing agency is not sufficient in this context because neither behavioral constraints (in terms of information processing and knowledge acquisition) nor non-linear interaction effects between economic actors can be taken into account by making this assumption. A realistic view on the microeconomic background of observable economic aggregates is not only important for explaining the (aggregate) economic output itself, it is also essential for assessing the possibilities and constraints for political regulation. The problem at stake here can be illustrated by referring to the endeavor to model the climate change. Obviously there is a dichotomy between the model compartments related to the natural and ecological components of the climate change on one side and the model compartment portraying the economic dynamics on the other side. Whereas the former is usually conceptualized as a complex adaptive system the latter is framed as a more or less straight-forward optimization machine (e.g. IPCC 2007; Rayner and Malone 1998; Janssen 1998; McGuffie and Henderson-Sellers 1997; Walker and Steffen 1996; Nordhaus 1992). Hence, there is a complexity gap between these two model compartments raising the question of their general compatibility. Furthermore concepts of aggregated growth play an essential role in the architecture of the economic modeling compartment. Due to the requirement of prognosis computable general equilibrium models are the most preferred model designs in this domain of economic research (e.g. Nordhaus and Bojer 2000). A meaningful access to evaluating political regulation cannot be given in such a context because there is no possibility to relate political measures to the action of individuals, organizations or groups of both.1 We are suggesting to fill this gap of micro-foundation in economic analysis by using a multi-agent framework. In such a framework there is no necessity to confine the analysis to economic aggregates and to a corresponding stylized microfoundation. Rather different types of agents as well as their interaction can be conceptualized as the driving forces for the (aggregate) economic dynamics without missing the property of computability. At the same time by referring to agents (and their interactions) the addressees of political regulation are explicitly taken into account. Hence, assessing political options from an agent-based perspective is possible in such a framework. In what follows the main focus is on methodological issues. It will be shown how aggregate economic dynamics can be (re-)constructed by using such a multi-agent framework. Therefore we will not deal with the problem of empirical calibration of multi-agent models.2 For demonstrating the importance of such an agent-based approach we will take the example of innovation induced market dynamics. Looking at modern theories of growth there seems to be a consensus that innovation is of

1

This problem is often circumvented by postulating targets (e.g. in terms of reducing emissions) without showing by means of which transitions agents can meet these targets and how these transitions can be triggered. If this would be specified the uncertainty with regard to emission scenarios could be reduced (cf. IPCC 2007; Pielke et al. 2008). 2 Depending on data availability there are generally two different ways to calibrate the initial values of the state variables and the parameters of the model: either indirectly by postulating the reproduction of given data time series or directly by doing behavioral observations (cf. Beckenbach et al. 2009; Beckenbach and Daskalakis 2008; Windrum et al. 2007; Edmonds 2001).

Multi-agent modeling of economic innovation dynamics and its implications

319

utmost importance for explaining the dynamics of economic growth and—as one has to add by encompassing latest developments in the real economy—stagnation. The implication such an approach has for the dynamics of ecological impacts is demonstrated by taking an exemplary emission related to economic activity (e.g. CO2) into account.3 Such a methodological reflection can be considered as a first step for conceptualizing a more realistic economic compartment in combined modeling of climate change. It is only in such a broadened perspective that the ecological boundary conditions for economic activities as well as the influence of impacts generated by economic activities on the ecological dynamics itself can be analyzed more closely.

2 What multi-agent modeling is about Multi-agent systems are the appropriate modeling framework if the focus of the analysis is on a property of the system encompassing all its elements (macro-property) not simply derivable from analyzing singular elements or by aggregating the elements. Rather this macro-property is shown to result from the interaction of the elements which are autonomous in that they have a certain degree of freedom in what they can do. Neither the way they are acting nor what they are doing is therefore predetermined by general or situational conditions. Hence, these elements—the agents—have the possibility to adapt their states according to different conditions for action they can observe (e.g. social results from individual actions like prices). Furthermore the autonomy of the agents includes a variable way of interaction with other agents: according to the experience they face agents can select different ways to coordinate their own action with others. Even if everything else (e.g. initial endowments) should be the same for all agents this autonomy of agents makes them heterogeneous in the course of time due to the different way they are adapting and coordinating their activities. In short, multi-agent modeling is an adequate tool if a “complex adaptive system” is under consideration having emergent properties derivable from interacting autonomous and heterogeneous agents (cf. Holland 1996, 1998). This modeling tool is originated in artificial intelligence research in that it is a radical way to portray the potentials of distributed intelligence in contradistinction to expert systems (cf. Russell and Norvig 1995). Agents are then mapped as (parts of) computer programs interacting with each other. Taking into account the wellknown intricacies of modeling social interaction in general and especially market interaction (cf. e.g. Lee and Keen 2004) it is almost natural to apply multi-agent models in this context and considering agents as a representation of human beings.4 Then the limited capability of agents to generate and to perceive information as a background for their way to act is considered as a partial representation of the 3

Hence, due to methodological reasons we will neither deal with interacting emissions, nor with impacts related to the extraction side, nor with the effects all these impacts have on the state and dynamics of the various parts of the ecological system. 4 This could be either a single human being in its essential properties or a group of human beings having at least one common property being essential for their way to act.

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cognitive processes accrued to real human beings. This necessitates to enrich this modeling of human cognitive processes by picking up insights from sciences investigating the behavior of real human beings like modern (cognitive) psychology, neuroscience as well as experimental economics. According to the findings in these behavioral sciences limited short-term memory capacities, patterns of perception and understanding (like frames, schemata, scripts, mental maps etc.) as well as the cognitive economizing included therein (manifest in the prominent role of routines and habits), different types of learning as well as the process of selecting and weighing goals seem to be an essential part of the (limited) capabilities of human beings to act (cf. Camerer et al. 2005; Gintis 2000). Multi-agent models are on one side a framework predestined for incorporating these insights (cf. Sun 2001, 2006); on the other side there is a constraint in that these insights have to be translated into a computable framework and in that incorporating the above mentioned insights should contribute to the emergent property at stake. Hence, the problems of arbitrariness arising if Pandora’s box of bounded rationality (Simon 2000) is opened can at least be constrained in a multiagent modeling framework: there is firstly a need of computability and secondly a need for plausibility of the assumptions borrowed from the modern behavioral sciences for the given modeling context. According to this strand of thought agent-based modeling has been applied to a lot of phenomena belonging to the realm of economics (cf. the overview in Tesfatsion 2002; Tesfatsion and Judd 2006), especially market processes (Kirman and Vriend 2001; Farmer 2001; Luna and Stefansson 2000), technological change (Dawid 2006; Fagiolo and Dosi 2003), network dynamics (Wilhite 2001) and organizations (Chung and Harrington 2006; Klos and Nooteboom 2001; Prietula et al. 1998). The same is true for ecological phenomena resulting from human impacts. Here a special emphasis has been laid on common pool resources and land use patterns (cf. the overview in Janssen 2002, 2004). Only recently the question has been raised if agent-based modeling is an appropriate tool for analyzing climate change adaptation and sustainability issues (cf. Balbi and Giupponi 2009 for a survey). These studies are a starting point for revealing the potential of multi-agent modeling related to real human beings. Especially with regards to economic phenomena there are still multiple opportunities to unfold and to incorporate ideas about bounded rationality, non-linear interaction in markets and ‘far-fromequilibrium’-regularities on the macro-level into a multi-agent framework. In the following section we will demonstrate how the dynamics of economic aggregates can be explained by agents and their interaction both being based on modern behavioral insights.

3 Agent-based analysis of innovation dynamics In this context economic growth (in aggregated monetary terms) is conceptualized as an emergent property (as explained in section 2). That means growth cannot be derived by simply analyzing a representative economic entity or by only aggregating all entities of an economy under investigation. Hence, there is no simple functional relationship between economic inputs (like ‘capital’, ‘labor’ etc) and outputs (like the


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produced amount of commodities and services expressed in monetary terms).5 As already mentioned in section 1 there are (at least) two basic reasons for being skeptical about such a simple production equation: the behavioral complexity of individuals (or agents) investing capital, labor etc. and the non-linear interaction effects between these agents. The agents we will focus on are firms. Undoubtedly they play the most important part for generating growth in the economy. In the case of firms the adaptive capacity required for the agents in a multi-agent framework (cf. section 2) is given in terms of endowments (finance, knowledge) and different modes of action (like routines, choices etc.). The latter circumscribe different in-house capacities to perceive a situation, to use information as well as knowledge and to select an activity. Furthermore firms have an adaptive potential in determining their way of interaction with other firms (indirect market interaction, direct cooperation or loose network relations). Due to empirical evidence on one side and the corresponding shortcomings in modern economic growth theory on the other side we will confine ourselves to analyze the creation of novelties (innovation and imitation) by firms as a driver for economic growth. Creating novelties is a temporary (very resource-consuming) activity of firms involving a high risk of failure. Accordingly novelty creating activities of firms are triggered by specific behavioral and competitive conditions.6 If it is successful a novelty will generate additional activities; at the same token a devaluation or substitution of old activities will take place.7 Hence, the overall effect of novelties for aggregates of economic activities is by no means trivial. For grasping the relationship between novelty creating activities of agents and the growth of economic aggregates a multi-level approach is suggested (cf. Fig. 1). The first level specifies the triggering conditions for novelty creating activities for the agents i.e. firms. Here the behavioral elements and the modes of actions for the firms are portrayed by using an agent-based approach. On the second level the consequences of successful innovations and imitations in a given sector of economic activities are dealt with. This depends on the frequency of successful novelties and on the way they diffuse in that sector. We use an agent-related functional approach applying difference equations for depicting the stylized facts of the diffusion dynamics. Finally on the third level sectoral interdependencies are taken into account. By referring to an accounting approach (input/output-table) the diffusion effects of novelties in one sector for other sectors can be traced. Only if these different levels of economic dynamics are separated as well as related to each other it is possible to derive aggregate effects of novelties for the whole economy. This

5

To assume one or several simple relations (e.g. as aggregated equations or as production functions) is still the state of the art in modern growth theory (cf. e.g. Fine 2000). No attempt has been made to show that these are empirically and methodologically legitimate assumptions. Using evolutionary methodologies allowing disaggregate defines an alternative path for conceptualizing growth in general and especially environmental innovation (cf. Frenken and Faber 2009). In the sequel we will follow this path of economic thinking. 6 This essential feature of novelty creation is ignored in theories of ‘endogenous growth’ (e.g. Romer 1990) where r&d is a continuous and riskless activity separated from other firm activities. 7 To ignore this (non-linear) interdependency of new and old activities (and of their outcomes respectively) is another failure of most contributions to ‘endogenous growth theory’: here every innovation is immediately patented and the new activity is simply an add-on for total production (cf. Romer 1990).

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Fig. 1 Overview of multi-level approach

procedure manifests the importance of the multi-scale property for analyzing the economy as a ‘complex adaptive system’ (cf. Arthur et al. 1997). On the first agent-related level the question to answer is: Under what conditions and how do agents create novelties or—in knowledge related terms—under what conditions do agents search for new knowledge? Letting a principal methodological caveat against this question apart8 there are two types of answers to it. In the ‘functional approach’ (mainly originated in the work of Hayek) a strategic (first mover) advantage for successful creators of novelties is derived from competition. From this assertion it is directly concluded that there is a person/an agent who makes use of this advantage. In the ‘personal approach’ (mainly originated in the work of Schumpeter) it is assumed that there simply is a specific type of agents whose main profession is to innovate, i.e. the entrepreneurs. Both approaches are not sufficient in explanatory terms. In the personal approach it is neglected that innovation is a temporary activity which can be attributed in principle to every economic agent; in the functional approach no explanation is given why only a part of a whole population linked by a competitive process is in fact innovating and what kind of motives these innovating agents have. To avoid these shortcomings in explaining the novelty creation by firm agents it is necessary to take up insights of modern behavioural research. There exist a lot of conceptual ideas about a behavioral foundation of economic activities in the literature.9 But most of them are not related to novelty creation or not even oriented towards including different modes of activities. Hence, in this literature, empirical evidence, if given at all, is only related to parts of a behavioral framework needed here. Therefore it is necessary to include behavioral evidence as a criterion for selecting conceptual ideas. For elaborating a behavioral synthesis we combine the

8

According to this caveat the novelty creating process is totally conjectural without anything to generalize. Due to the idiosyncratic nature of the processes as well as of the persons involved in innovations there is seen only a limited possibility for some after-the-fact analysis on an aggregated level (cf. e.g. Vromen 2001). 9 Most prominent in this respect are revisions of the expected utility theory (e.g. prospect theory; cf. Kahneman and Tversky 1979) and enhancements of game theory (cf. Gintis 2003).


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approaches of Ajzen (1991) and the Carnegie School (March and Simon 1993; Cyert and March 1992) both of which have been tested and approved empirically. According to this behavioral synthesis (cf. Beckenbach et al. 2007) the traditional microeconomic approach (focusing mainly on preferences and constraints) is reshaped and enhanced. The major behavioral explanantia are attitudes (instead of preferences), endowments as well as control abilities (instead of constraints) and norms (reflecting a minimum of social embeddedness). Instead of the unrealistic optimization rule a satisficing rule (related to an aspiration level) in pursuing and balancing different goals is assumed as the central mechanism of cognitive control. As already mentioned in section 2 the agent’s ability to act is given in terms of different modes of action which are selected according to time-dependent constellations of the behavioral explanantia.10 Corresponding to the multiple-self nature of economic actors these behavioral elements are feeding different cognitive forces each of which is directed in favor of a possible mode of action.11 The strongest force determines which mode of action will be pursued by the agent. Hence, the formation of patterns (routines) as well as erosion of patterns (novelty creation) can be explained on the individual level. A graphical overview for this behavioral architecture is given in Fig. 2. Taking routines as the default mode of action we define the preservation force related to it simply as: F0 ¼ 1

ð1Þ

The force to overcome this routine mode of action is further differentiated in the force directed to imitation (F1) and the force directed to innovation (F2). Formalizing these forces necessitates to distinguish sub-forces or force components (fi) picking up the different traits and state variables characterizing the agents. The first force component to consider here is curiosity which is strongly related to the phenomenon of ‘slack’, i.e. the reserve capacities in terms of knowledge (kr) and finance (fr). In any given time step this slack is tantamount to balancing the given state of knowledge and finance on one side and the amount of these resources needed for a given mode of action on the other side. Again, the intensity of curiosity triggered by this slack is depending on a personal trait, the exploration drive (w0). Hence, curiosity is formally defined as f 0 ðtÞ ¼ w0 ðkrðtÞ þ frðtÞÞ:

ð2Þ

The other two force components to take into account here are related to the goals of the agent: profit (p) and market share (m). They formalize the degree of satisfaction of the goal attainment indicated by the relationship of the aspiration level for profits (asp) and the aspiration level for market share (asm) to the actual degree

10 These explanantia—in model terms: variables—are moderated by behavioral traits (e.g. risk attitude, curiosity)—in model terms: parameters. 11 In the present context only routine, innovation and imitation are taken into account.

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Fig. 2 Specification of agent’s behavior

of goal attainment in a given time step. For each of these goal components parameters in terms of weight (w1, w2) and elasticity (ε1, ε2) are given. The force components for profit aspiration and market share aspiration can be formalized as: aspðtÞ "1 f 1 ðtÞ ¼ w1 ð3Þ pð t Þ f 2 ðt Þ ¼ w 2

asmðtÞ m ðt Þ

"2

:

ð4Þ

The aspiration levels included in these force components are updated at the end of each time step. For the profit aspiration this updating formally means: aspðt þ 1Þ ¼ ð1 fÞ aspðtÞ þ fpðtÞ

ð5Þ

(and analogously for asm) where f is the flexibility of adaptation, which is another personal trait (0 f 1). Then the force directed to imitation can be formalized as: F1 ¼

f1 þ f2 cim

ð6Þ

with cim as the parameter for the expected costs of an imitation. The force directed to innovation also includes the essential force components f1 and f2. But it has three features making it different from the imitation force: Firstly, due to the nature of the innovation process curiosity (f0) has to be included.


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Secondly, there is a comparative difference in expected costs: the expected costs for innovation projects (cin) are higher than the expected cost for imitation projects. Thirdly, the innovation force contains a parameter (α) indicating the role of risk acceptance. Then the force directed to innovation can be formalized as: F2 ¼ a

f0 þ f1 þ f2 cin

ð7Þ

Given the time-dependent amount for F0, F1 and F2, the agent will activate that mode of action for which the corresponding force is highest. If this mode of action is ‘imitation’ or ‘innovation’ it will be pursued by the agent in addition to its ongoing routine activity, i.e. they will start new novelty creating projects. If F1 or F2 remain higher than F0 after these projects have been finished, new projects will be started. If this is not the case the agent will only pursue routine behavior. Hence, it is respected in the simulation model that innovation as well as imitation are specific temporary modes of action. On the second sectoral level we refer to the stylized facts of diffusion analysis: A critical mass has to overcome for initiating a self-feeding diffusion process up to a maximum level where all needs are satisfied. Furthermore according to the dominance of retarding effects at the beginning of this diffusion process and due to the dominance of the promoting effects at later stages of the diffusion process an S-shaped time-dependent diffusion curve is assumed (cf. Rogers 1995). Finally, the shortcomings of economic growth theory (cf. section 2) necessitate to give innovation a twofold effect: a growing of the demand for the products of an innovating firm and a substitution for old products. These stylized features of the diffusion dynamics are summarized in Fig. 3.

Fig. 3 Specification of sectoral diffusion dynamics

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A newly created innovative product (independently of whether it is created individually or cooperatively) is characterized by the following parameters which are determined randomly but influenced by endogenours variables: & & & &

demand potential (ypo), initial value of demand (y(t0)) (at the time when the new product is put on the market), threshold value for diffusion, the ‘critical mass’ (yts), and velocity of diffusion (v).

The expectation value for the demand potential is set proportionally to the turnover of the firm and to a certain power of the amount of declarative knowledge of the firm(s) that has (have) created the new product (more precisely: to the number of knowledge domains where the firm has got knowledge).12 The expectation values for the initial value of demand and for the critical mass are set proportionally to the demand potential. The expectation value for the diffusion velocity depends linearly on an indicator of the intensity of competition in the corresponding production sector. The dynamics of final demand for an innovative product follows a stylized diffusion model. The final demand for this product of a given firm at the next time step y(t+1) is calculated via the following difference equations that leads to a logistic increase (resp. decrease) of demand if and only if the current demand y(t) is greater (resp. smaller) than the threshold value yts: yð t þ 1Þ ¼ yð t Þ þ v

ðyðtÞyts Þðypo yðtÞ ypo yts

yðt þ 1Þ ¼ yðtÞ þ v

yðtÞ ðyðtÞyts Þ yts

if yðtÞ yts ;

ð8Þ

if yðtÞyts :

ð9Þ

Obviously it holds: lim yðtÞ ¼ ypo

if yðt 0 Þ > yts ;

lim yðtÞ ¼ yts

if yðt0 Þ ¼ yts ;

lim yðtÞ ¼ 0

if yðt0 Þ < yts :

t!1

t!1

t!1

If a firm imitates an existing innovative product, the part of the demand potential that has not yet been exhausted at that point in time (distance A in Fig. 3) is shared equally among the imitating firm and the original innovator(s) (and previous imitators if existing). After having been adopted by a certain fraction of all consumers and thus having reached a certain amount of demand, an innovative product may be devaluated by 12

The background for this assumption is the positive relation between the broadness of knowledge and the firm’s flexibility as regards to the demand side.


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further technological process and substituted by newer innovative products (innovation vintage model). Therefore the total final demand Y(t+1) for products of the sector where innovations have been brought to the market13 is rescaled in such a way that it grows only by a certain proportion of the total increase of demand for the current innovations. Formally, if there are r innovations in a given sector, the total increase of demand for all these innovations is w ð t þ 1Þ ¼

r X

ðyk ðt þ 1Þ yk ðtÞÞ:

ð10Þ

k¼1

If we denote by su the substitution factor (a model parameter measuring the degree by which conventional products are substituted by innovative products; 0 su 1), we can now define the time-dependent scaling factor sf(t) by sf ðtÞ ¼

YðtÞ þ ð1 suÞ wðt þ 1Þ : Y ð t Þ þ w ð t þ 1Þ

ð11Þ

Rescaling then means that the demand that each firm of this sector faces is multiplied by this same factor sf. This leads to an endogenous growth of total final demand, which is damped by a partial substitution of demand for conventional (or older innovative) products by demand for new innovative products in the same sector amounting to (1-sf )Y(t). The growth rate of final demand then comes to Yðt þ 1Þ YðtÞ ð1 suÞwðt þ 1Þ ¼ : Y ðt Þ YðtÞ

ð12Þ

The inter-sectoral effects of the diffusion of innovations are the subject matter of the third level. The sectoral final demand derived from the innovation activities in a given sector is enhanced by the intermediary commodities and services delivered by that sector to other sectors.14 The relation between the final demand component and its intermediary components in a given sector are assumed to remain constant.15 Hence, if there is an increase in the final demand component of that sector a proportional increase is necessary for its intermediary components. Consequently further growth is induced in sectors in which these components are produced, which in turn induces further growth (in diminishing amount) in other sectors etc.. This mechanism is an important part of the growth dynamics being effective in modern market economies. For calculating this intersectoral dynamics we use input-/output tables (cf. Leontief 1991). These are well-known statistical accounting schemes being an obligatory part for the System of National Accounts (SNA). In such a table sectoral activities are differentiated between an intermediary component and a value added 13 14

The subscript for the sector is skipped here.

In developed market economies this intermediary part of the sectoral production is on average about 2/3 of the total sectoral production. 15 How these coefficients of intermediary production can be conceptualized dynamically is an intricate question which is beyond the scope of this elaboration (cf. Pan 2006).

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component. Furthermore two perspectives on the sectoral activities are integrated: the perspective of ordering (buying) and delivering (selling). For each sector the ordering and delivering activities are balanced to the same amount. The basic structure of an input/output table is depicted in Fig. 4.

4 Linking innovation dynamics and growth The emergence of economic growth can now be explained by using this 3-level approach. In each sector a multitude of agents is adapting (in different ways) to the market competition which in turn is generated by the agents themselves. In the given context the most important option for an agent to improve his competitive position is to create novelties. Depending on the frequency of successful innovations and imitations a different diffusion dynamics in terms of increase of total demand and substitution of the demand for old products will result in each sector. Summing up the time-dependent sectoral final demand components in each time step (Yi(t)) is tantamount to the total net production (net value or value added). YðtÞ ¼

n X

Yi ðtÞ:

ð13Þ

i¼1

The gross production in each sector can be calculated by taking into account the constant structure of the intermediary production. Denoting the corresponding coefficients (i.e. the total production share of the intermediary commodity j in a given sector i) by AðtÞ ¼ aij ðtÞ the Leontief inverse multiplied by the vector of sectoral net productions YðtÞ ¼ fYi ðtÞg comes to the vector of sectoral gross production (I being the unit matrix): XðtÞ ¼ ðI AðtÞÞ1 YðtÞ:

ð14Þ

Summing up the time dependent components of X(t) is tantamount to total gross production.

Fig. 4 Specification of inter-sectoral diffusion dynamics


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In Figs. 5 and 6 the results of an exemplary run of the simulation model are shown. Here we assume an optimistic scenario leading to an increase of total production by 300% in 120 time steps (30 years) (Fig. 5, left part). In the right part of Fig. 5 the amounts for intermediary and final production as well as primary inputs of the input/ out-table (cf. Fig. 4) are represented by columns. What is clearly understandable in this example is that in t=120 only about one third of total production is net production (value added). That the modes of actions (and their frequencies) at the agent level play an essential role for the growth of total production can be verified by looking at Fig. 6. In terms of the frequencies of the modes of action the system passes through a transition phase (up to about t=50) after which a pattern of moderate irregular fluctuations around an average level occur for all modes of action (routine, imitation and innovation). It is only in this second phase in which the share of firms pursuing only routines and the share of firms additionally creating novelties follows a cyclical pattern that the growth of total production increases significantly (cf. Fig. 5, left part). To sum up, the link between novelty creation and growth is not trivial: First of all the innovation activity itself has to be triggered and has to be successful. If so, it has a primary growth effect in terms of an increased value added (final demand) in the same sector. Furthermore, the secondary effect constituted by substitution and devaluation of old products has to be included. Finally the inter-sectoral (tertiary) effects of the primary and secondary effect have to be considered for getting a comprehensive picture of the dynamics in the whole economy.

5 Driving forces and dynamics of emission impacts The multi-level model developed in section 3 and 4 is now enhanced by including emissions. Because the main purpose here is to demonstrate the applicability of such an approach for analyzing the dynamics of environmental impacts only one exemplary emission (e.g. CO2) is assumed. This emission is related to the level of

gross production net production

40 30 20 10

t

0 Sector0 Sector1 Sector2 Sector3 prim.input

final dem. Sector3 Sector2 Sector1 Sector0

Fig. 5 Gross production over time (left) and sectoral production (input/output-table) in t=120 (right)

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Fig. 6 Modes of action (agent-level) over time

production activity of agents.16 To begin with, the vintage structure of our innovation model has to be explained briefly: The production activities of firm agents consist of innovative products generated by previous innovation activities in different time steps during the simulation and activities related to conventional (or old) products. This vintage structure is of importance for the dynamics of final demand as well as for the emission coefficients related to the various innovative products (see the next paragraph). The driving forces for the internal emission dynamics can be decomposed in four different effects. Firstly and most importantly the type of innovation as regards emission has to be taken into account. Generally the emissions may increase or decrease as a result of innovation. This can be expressed by the time dependent development of the emission coefficient, relating the emission and amount of output in every time step. For getting an adequate idea about the internal dynamics of generating emissions the initial emission coefficient is set on an equal level for all products in all sectors. To each newly created innovative product j in some sector i, a product specific emission coefficient (emi,j) is associated which is calculated on the basis of the current mean emission coefficient of all products in the corresponding sector and the emission reducing or increasing effect of innovation. Given this emission-increasing or emissiondecreasing nature of innovation, the overall effect of innovation secondly depends on the speed of diffusion for the innovated product under consideration. This diffusion effect is tantamount to the time-dependent increase in the share of the innovated product on the corresponding market. Closely related to this growth effect of diffusion is thirdly the substitution effect, i.e. the replacement of old products by new ones17 on the level of final demand. Fourthly, every sector is producing intermediary commodities, i.e. commodities not determined to meet the final demand but to be an input for production in other sectors. That part of the intermediary commodities delivered by innovating firms is also shaped by the vintage structure: It is assumed that 16

This activity level is measured in value terms because price fluctuations are not dealt with in the model. This means that conventional products as well as older innovative products are substituted by newer innovative products.

17


331

the emission coefficients for these intermediary commodities follow the same dynamics as the mean emission coefficient for all final products; in other words, the same emission coefficient is valid for the total gross production in the sector and not only for the mean of innovative products for the consumer market. The total emission in a given time step and a given sector and of the economy can be determined by taking these four effects into account and summing up over all innovative and conventional18 products: PP i ðtÞ emi ðt 1ÞYi;old þ emi; j Yi; j ðtÞ emi ðtÞ ¼

j¼1

Yi;total

ð15Þ

where Pj(t) denotes the number of innovative products in sector i that are on the market in time step t. The overall emission in the time step and sector under consideration then amounts to: Emi ðtÞ ¼ emi ðtÞXi ðtÞ: ð16Þ Two of these effects shall be considered more closely: the type of innovation and the velocity of the diffusion v (a model parameter, cf. section 3 (4)) of given innovations. The former is determined by the model parameter M (change factor of emission coefficient) which co-determines the emission coefficient for an innovative product created in time step t:19 emi;j ðtÞ ¼ M emi ðt 1Þ:

ð17Þ

In order to illustrate the influence of these two crucial parameters, we are going to analyze the dynamics of the emissions for three exemplary cases: (i) the overall growth case (M>1, v is high), (ii) the case with decreasing emission and fast diffusion (M100; cf. lower left part of Fig. 9). Hence, our simulation results indicate that even in a regime of abatement activities of firms economic stagnation and crisis are the only self-organized mechanism to circumvent the rebound effect by stabilizing or even lowering emissions.

6 Redirecting innovations as a regulatory option? The simulations in the previous section manifest that the emission dynamics is strongly influenced by a market induced innovation dynamics which is more or less given in all developed market economies. The core of this dynamics is determined by a self-organized process in which behavioral states and constellations of market


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competition are related to each other triggering different modes of action one of which is novelty creation. Due to the difficulty to anticipate the time dependent frequency of these modes of action, due to the unpredictable outcome of individual novelty creating endeavors, and due to unknown social acceptance of these outcomes (in terms of diffusion) there is no possibility to assess or even to plan such a process in advance. Rather it necessitates to confine political influence or regulation to a trial and error perspective.23 Nevertheless the exemplary simulation analysis given above shows that any kind of political regulation has to face an innovation dilemma: If innovation is successful on the individual as well as on the social level there is a high probability that it generates growth and if it generates growth, it generates additional emissions. The only self-organized way to circumvent this dilemma seems to be economic stagnation and crisis. Against this background three general options for regulation can be distinguished: (i) blocking the core of the innovation dynamics, (ii) fostering differentiation in favor of establishing environmental benign technologies as well as products and (iii) redirecting the innovation dynamics. Option (i) seems to be unfeasible in that it is incompatible with a given market and competition environment. Option (ii) is often pursued by political authorities but faces the problem of establishing and protecting a niche or—to take it the other way round—it is confronted with the constraints of path dependencies (cf. Nill 2009). Due to these constraints for options (i) and (ii) the following discussion focuses on option (iii). Without going into the details of an instrumental debate it is assumed that regulatory authorities are willing and firms are able to implement a predefined path of reducing emissions. This is more specific than the usual framing of the problem to reduce emissions (e.g. in the debate about climate research) in that economic agents as the main subject of these policy options are explicitly taken into account. The first regulatory regime to analyze more closely is a short term dynamic incremental dynamic abatement of emissions. Setting the initial change factor of emission coefficient to 95% (i.e. in the beginning of the simulation, when creating an innovative product, a firm has to reduce the emissions per produced unit by 5% compared to the mean emission factor of the branch) the innovating firms have to comply with the obligation of reducing this change factor of emission coefficient (model parameter M; cf. section 5 (2)) by further 5% every 20 time steps (5 years). This means that the speed of technological progress in terms of the reduction of emission factors is accelerated more and more over the whole simulation. This regime is depicted in Fig. 10. In formal terms this means MðtÞ ¼ 0:95 for t < 20; Mðt þ 20Þ ¼ MðtÞ 0:05 for all t:

ð18Þ

Figure 11 indicates that it is not before t=100 (i.e. only after 5 regulation periods) that the emissions in two of the four sectors start to be reduced leading to an overall

23

For a specification of this perspective of political regulation cf. Kemp and Zundel 2007 and Beckenbach 2007.

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F. Beckenbach, R. Briegel change emission coeff. %

time

Fig. 10 Incremental dynamic abatement regime

stagnation of the emissions (cf. Fig. 11, lower part). Hence, it can be concluded that this incremental dynamic abatement regime is inappropriate for meeting emission reducing targets. Therefore it seems necessary to take more radical dynamic abatement regimes into account. Because the firms need at least more time for conforming to this more ambitious target the regulatory time span has to be longer than in the case of incremental dynamic abatement. In the second regulatory regime the obligation for innovating firms is to reduce the change factor of emission coefficient by 15% every 40 time

Fig. 11 Growth dynamics with incremental dynamic abatement regime


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change emission coeff. %

time Fig. 12 Radical dynamic abatement regime

steps, i.e. 10 years (cf. Fig. 12), beginning with 85%. In formal terms this means: MðtÞ ¼ 0:85 for t < 20; Mðt þ 20Þ ¼ MðtÞ 0:15 for all t:

ð19Þ

As can be seen from Fig. 13 it is only in this strong abatement regime that emission targets similar to those politically defined in the climate change debate can be met (25% reduction of absolute emissions in 30 years). Comparing the upper right part with the lower left part of Fig. 13 it can be deduced that not only the

Fig. 13 Growth dynamics with radical abatement regime

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F. Beckenbach, R. Briegel cost

time

Fig. 14 Costs of innovation in the incremental dynamic abatement regime

innovation dynamics is influencing the sectoral amount of emissions but also the intersectoral dynamics modifying the emission related ranking of the sectors as regards emission coefficients. This clear-cut picture of needing a radical abatement regime for innovating agents to comply with given social emission targets is modified if the implicit assumption so far that the abatement comes as a free joint product of innovation is given up. Picking up the case of incremental dynamic abatement again it is now additionally assumed that the costs of abatement are increasing linearly with the amount of reduced emissions (starting from the default level of 0.125 there is an increase of 0.005 in every regulation period; cf. Fig. 14). These costs are considered as a part of the innovation costs. What is obvious from Fig. 15 is firstly, that the frequency of innovations is reduced24 and therefore the growth of final demand is damped (cf. Fig. 15, upper left part). Secondly, the spreading of the innovation frequencies between sectors in t>40 is more distinct than in the case without cost increase (cf. Fig. 11, right upper part in comparison to Fig. 15, right upper part). Thirdly, the higher volatility of the behavioral innovation force (cf. above) opens up the possibility for synchronous jumps in innovation activities in different sectors (as it is the case in t>70) leading to a temporary abrupt reduction of emissions before the growth effect is dominating again (cf. Fig. 15, lower part). Here again the innovation dilemma mentioned above becomes obvious: it is only if the innovation dynamics is effectively damped by cost effects that the occurrence of the emission increasing rebound effect can be avoided. The simulation runs suggest that only a radical abatement regime with moderate additional costs is appropriate to meet emission targets as proposed in the debate on climate change. Looking at the reality of technological development on one side and of the slow dynamics of environmental policy on the other side one has to be skeptical about the technological as well as political feasibility of such a radical regime. In both cases the problem of path-dependency will be an important issue. Hence, a more realistic alternative seems to be either to face significant abatement costs (in economic as well as political terms) bearing the risk of letting the innovation process stagnate or to confine oneself to an incremental dynamic abatement regime being in danger of not meeting required emission targets. What is 24

The reason fort hat is that the increase of innovation costs is reducing the relative force toward innovation on the agent level (cf. above) Eq. 7.


339

Fig. 15 Growth dynamics with incremental abatement regime and increasing abatement costs

obvious here is a double regulation dilemma: Implementing innovation and generating growth are features of a self-organized economic process which cannot be predicted and influenced precisely; but if regulation does not prescribe ambitious emission reduction targets, innovation will imply growth which could overcompensate emission reductions associated with the single innovation project. Whatever the regulatory options are, the multi-agent model indicates that only imposing emission targets is not sufficient. Rather it is necessary to figure out abatement paths by taking into account the agents, the context they are operating in, and the time scale for regulations. Furthermore: because there are different paths for fulfilling (or missing) a target it is necessary to select a path, to update the achievements, and—if necessary—to adapt the path features to the new experience. In this sense policy should be conceptualized as a part of a broader complex adaptive system.

7 Conclusions Emissions are coupled to innovation and growth in a complicated manner. The direction of innovation, the velocity of diffusion and the dependencies between sectors have been shown as the main sources for this complication. For shedding light on these relations the economy was conceptualized a ‘complex adaptive system’ having diffusion, growth and emissions as ‘emergent properties’. To distinguish different but related levels of activities and especially to include an

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agent-based analysis of the dynamics on the micro-level are essential features of such an approach. By using such a framework it is possible to bring more conceptual realism into economic models without losing the required property of computability. In this contribution it is suggested to specify bounded rational agents by picking up insights of modern behavioral research. The agent’s ability to act is given in terms of different modes of action the selection of which depends on behavioral and competitive conditions the agents themselves are generating. Novelty creation (i.e. innovation and imitation) is one mode of action being triggered endogenously in the model. Hence, innovation and imitation are explained endogenously. This is the basis for reconstructing the dynamics of economic aggregates without referring to representative agencies and optimizing activities.

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Intergovernmenatal Panel on Climate Change (IPCC) (2007) Climate change 2007. Cambridge University Press, Cambridge Janssen M (1998) Use of complex adaptive systems for modeling global change. Ecosystems 1:457–463 Janssen M (ed) (2002) Complexity and ecosystem management: the theory and practice of multi-agent systems. Edward Elgar, Cheltenham Janssen M (2004) Agent-based models. In: Proops J, Safonov P (eds) Modelling in ecological economics. Edward Elgar, Cheltenham, pp 155–72 Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47:265–291 Kemp R, Zundel S (2007) Environmental innovation policy—is steering innovation processes possible? In: Lehmann-Waffenschmidt M (ed) Innovations towards sustainability. Physica, Heidelberg Kirman A, Vriend NJ (2001) Evolving market strucure: an ACE model of price dispersion and loyality. J Econ Dyn Control 25:459–502 Klos TB, Nooteboom B (2001) Agent-based computational transaction cost economics. J Econ Dyn Control 25:503–526 Lee FS, Keen S (2004) The Incoherent emperor: a heterodox critique of neoclassical microeconomic theory. Rev Soc Econ LXII(2):169–199 Leontief W (1991) The economy as a circular flow. Struct Chang Econ Dyn 2(1):181–212 Luna F, Stefansson B (2000) Economic simulations in swarm: agent-based modellling and object oriented programming. Kluwer, Dordrecht March JG, Simon H (1993) Organizations. Blackwell, Cambridge MASS McGuffie K, Henderson-Sellers A (1997) A climate modelling primer. Wiley, Chichester Nill J (2009) Ökologische Innovationspoltik: Eine evolutorisch-ökonomische Perspektive. Marburg, Metropolis Nordhaus WD (1992) An optimal transition path for controlling greenhouse gases. Science 258:1315– 1319 Nordhaus WD, Bojer J (2000) Warming the world. Economic models of global warming. MIT, Cambrindge Pan H (2006) Dynamic and endogenous change of input-output structure with specific layers of technology. Struct Chang Econ Dyn 17:200–223 Pielke R et al (2008) Dangerous assumptions. Nature 452:531–532 Prietula MJ et al (eds) (1998) Simulating organisations: computational models for institutions and groups. MIT Press, Cambridge Rayner S, Malone EL (eds) (1998) Human coice and climate change. Volume 1: the societal framework. Battelle Press, Columbus Rogers EM (1995) Diffusion of innovations. The Free Press, New York Romer PM (1990) Endogenous technological change. J Polit Econ 98(5):71–102 Russell S, Norvig P (1995) Artificial intelligence: A modern approach. Prentice Hall, London Simon HA (2000) Bounded rationality in social science: today and tomorrow. Mind Soc 1:25–39 Sorrell S (2007) The rebound effect: an assessment of the evidence for economy-wide energy savings from improved energy efficiency. UK Energy Research Center Sun R (2001) Cognitive science meets multi-agent systems: a prolegomenon. Philos Psychol 14:5–28 Sun R (ed) (2006). Cognition and multi-agent interaction: from cognitive modelling to social simulation. Cambridge University Press, Cambridge Tesfatsion L (2002) Agent-based computational economics: growing economies from the bottom up. Artif Life 8(1):55–82 Tesfatsion L, Judd KL (2006) Handbook of computational economics, vol 2. North-Holland, Amsterdam Vromen JJ (2001) The human agent in evolutionary economics. In: Laurent JN, Cheltenham J (eds) Darwinism and evolutionary economics. Edward Elgar, Cheltenham, pp 184–208 Walker B, Steffen W (1996) Global change and terrestrial ecosystems. Cambridge University Press, Cambridge Wilhite A (2001) Bilateral trade and ‘small world’ networks. Comput Econ 18:49–64 Windrum P et al (2007) Empirical calibration of agent-based models: alternatives and prospects. JASSS 10(2)


How to increase global resource productivity? Findings from modelling in the petrE project Christian Lutz


Abstract The analysis in the chapter is based on the extensive and disaggregated global GINFORS model that contains 50 countries and two regions and their bilateral trade relations, energy balances, material, macro-economic and structural data. The model is applied in the petrE project to analyze the impacts of major environmental tax reforms (ETR) and the EU ETS to reach the EU GHG reduction targets until 2020. The ETR includes a carbon tax for all non-ETS sectors and a material tax. Scenarios look at unilateral EU action and at international cooperation by all OECD countries and the major emerging economies. The chapter presents some of the modelling results. A major ETR in Europe could significantly reduce environmental pressures in Europe while creating additional jobs. Small negative GDP impacts are within the range of results of other studies. The results clearly demonstrate that only global action with substantial carbon prices may lead to an emission path still in line with the 2° target. But even if a far-reaching global climate agreement is reached later in 2010, global resource extraction will continue to increase without additional international measures. Keywords Global modelling . Environmental tax reform . Global resource productivity JEL Classification C53 . C63 . Q47 . Q52 . Q54

Acknowledgements PetrE has been funded by the Anglo-German Foundation as part of its “Creating sustainable growth in Europe” research initiative. I would also like to thank two anonymous referees for helpful comments. C. Lutz (*) Institute for Economic Structures Research (GWS), Heinrichstr. 30, 49080 Osnabrueck, Germany e-mail: [email protected]

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1 Introduction This chapter presents results of the petrE (“Resource productivity, environmental tax reform and sustainable growth in Europe”) project that has been finished in June 2009 (Ekins and Speck 2010). PetrE is a three-year project, one of four funded by the AngloGerman Foundation as part of its “Creating sustainable growth in Europe” research initiative. The analysis is based on the extensive and disaggregated global GINFORS model that contains 50 countries and two regions and their bilateral trade relations, energy balances, macro-economic and structural data. The GINFORS model integrates material input models in nine aggregated material categories, which are based on a global material extraction dataset (www.materialflows.net). GINFORS is closed on the global level. In the petrE project, the GINFORS model is applied to analyze the impacts of major environmental tax reforms (ETR) and the EU Emissions Trading System (ETS) to reach the EU GHG reduction targets until 2020. The ETR includes a carbon tax for all non-ETS sectors and a material tax. Scenarios look at unilateral EU action and at international cooperation by all OECD countries and the major emerging economies. While the baseline scenario illustrates developments in the absence of policy measures, scenario S1H assumes certain policy measures in the EU (a tightened EU ETS cap, the introduction of a carbon tax on the non-ETS sector, and introduction of materials taxes), and scenario S3H also includes measures in the major OECD countries as well as a carbon tax in the five major emerging economies of China, India, Brazil, South Africa and Mexico (G5). The chapter builds on two detailed working papers, which present the results on the EU and national level (Lutz and Meyer 2009a) and on the global level (Giljum et al. 2010). The concept of ETR is discussed in Ekins and Speck (2010). Section 2 shortly presents the GINFORS model. The model is documented in Meyer et al. (2007), Meyer and Lutz (2007) and Lutz et al. (2010). Six scenarios that are outlined in Section 3 have been implemented in the course of the petrE project. The baseline is adjusted to the latest EU energy forecast (DG TREN 2008) and on the global level to the IEA (2008) world energy outlook. Other scenarios build on the GHG emission reduction targets of the EU until 2020. Section 5 contains an overview of the baseline development. In Section 6 simulation results are discussed: A major ETR in Europe could significantly reduce environmental pressures in Europe while creating additional jobs. Small negative GDP impacts are within the range of results of other studies. The results clearly demonstrate that only global action will be able to reach the 2° target. But even if a far-reaching global climate agreement is reached in 2010, global resource extraction will continue to increase without additional international measures. The necessary debate about limits of resource extraction on a global level will raise similar questions about international competitiveness and leakage, GDP effects and the need of international action as the climate change debate.

2 The GINFORS model The simulation instrument-the global model GINFORS (Global INterindustry FORecasting System)-describes the economic development, energy demand, CO2

How to increase global resource productivity?

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emissions and resource inputs for 50 countries, 2 regions, 41 product groups, 12 energy carriers and 9 resources. The regions are “OPEC” and “Rest of the World”. The explicitly modelled region “OPEC” and the 50 countries cover about 95% of world GDP and 95% of global CO2 emissions. The aggregated region “Rest of the World” is needed for the closure of the system. The model is documented in Meyer et al. (2007), Meyer and Lutz (2007) and Lutz et al. (2010). Current applications of the model can be found in Giljum et al. (2008a) and Lutz and Meyer (2009b). An update of the material models is provided in Lutz and Giljum (2009). The main difference to neoclassical CGE models is the representation of prices, which are determined due to the mark-up hypothesis by unit costs and not specified as long run competitive prices. But this does not mean that the model is demand side driven, as the use of input–output models might suggest. Even though demand determines production, all demand variables depend on relative prices that are given by unit costs of the firms using the mark-up hypothesis, which is typical for oligopolistic markets. CGE models assume polipolistic markets, where prices equal marginal costs, in contrast. The difference between CGE models and GINFORS can be found in the underlying market structure and not in the accentuation of either market side. Firms are setting the prices depending on their costs and on the prices of competing imports. Demand is reacting to price signals and thus determining production. Hence, the modeling of GINFORS includes both demand and supply elements. Allowance prices and carbon tax rates are endogenous to the model. To avoid long solving procedures, the prices are changed in an iterative process manually until the GHG reduction target is reached. Allowance prices increase the shadow prices of energy carriers and reduce energy demand according to the specific price elasticities. Different allocation methods therefore have no direct influence on energy demand and the emission levels in the model. Increasing profits of private companies in the case of grandfathering deliver other sector and macroeconomic impacts than government spending out of auctioning revenues, however. All parameters of the model are estimated econometrically, and different specifications of the functions are tested against each other, which gives the model an empirical validation. An additional confirmation of the model structure as a whole is given by the convergence property of the solution which has to be fulfilled year by year. The econometric estimations build on times series from OECD, IMF and IEA from 1980 to 2006. For a number of variables the data were only available for a shorter time period. The modelling philosophy of GINFORS is close to that of INFORUM type modelling (Almon 1991) and to that of the model E3ME from Cambridge Econometrics (Barker et al. 2007a). Common properties and minor differences between E3ME and GINFORS are discussed in Barker et al. (2007b).

3 Scenarios To investigate the impacts of an ETR for Europe six separate scenarios have been designed to understand a variety of tax reform options. Each scenario is identified by an acronym. The final letter indicates the baseline to which it is compared with L for low and H for high energy prices.

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The scenario analysis allows for an understanding of different revenue recycling methods and various scales of ETR in order to meet different greenhouse gas emissions targets. All scenarios were examined in both E3ME and GINFORS (see Ekins and Speck 2010). The scenarios are: & & & & & &

BL: Baseline (low energy prices), BH: Baseline sensitivity with high oil price (reference case), Scenario S1L: ETR with revenue recycling designed to meet unilateral EU 2020 GHG target, Scenario S1H: ETR with revenue recycling designed to meet unilateral EU 2020 GHG target (high oil price), Scenario S2H: ETR with revenue recycling designed to meet unilateral EU 2020 GHG target (high oil price), 10% of revenues are spent on eco-innovation measures, Scenario S3H: ETR with revenue recycling designed to meet cooperation EU 2020 GHG target (high oil price).

The baseline with low energy prices BL has been calibrated to the 2007 PRIMES baseline to 2030, published by the European Commission (DG TREN 2008). For the high oil price baseline (reference case BH) the effect of a higher oil price, particularly over the period 2008–10 is assumed. In this scenario coal and gas prices develop in line with the increases to the oil price. In this scenario energy prices are close to the assumptions in the current IEA World Energy Outlook (2008). Different oil price assumptions are shown in Fig. 1. Each of the ETR scenarios has the same key taxation components: & & &

a carbon tax rate is introduced to all non EU ETS sectors equal to the carbon price in the EU ETS that delivers an overall 20% reduction in greenhouse gas emissions by 2020, in the international cooperation scenario this is extended to 30%, aviation is included in the EU ETS at the end of Phase 2, power generation sector EU ETS permits are fully auctioned in Phase 3 of the EU ETS,

140 120 BL BH

100 80 60 40 20 0 1990

1995

2000

2005

2010

2015

2020

Fig. 1 International oil price in the low and high energy price scenarios in $2005/b


& &

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all other EU ETS permits are 50% auctioned in 2013 increasing to 100% in 2020, material taxes are introduced at 5% of total price in 2010 increasing to 15% by 2020, applying simple assumptions.

In scenarios S1L, S1H and S3H environmental tax revenues are recycled through reductions in income tax rates and social security contributions in each of the member states, such that there is no direct change in tax revenues. In scenario S2H 10% of the environmental tax revenues are recycled through spending on eco-innovation measures, the remaining 90% is recycled through the same measures as in the other scenarios. The eco-innovation spending is split across power generation and housing according to tax revenues from the corporate and household sector. In GINFORS the share of renewables in electricity production is increased due to the additional investment. The rest of additional investment goes to household energy efficiency spending. Investment needed for a certain amount of renewables increase or efficiency improvement is based on German and Austrian experience (Lehr et al. 2008, 2009; Grossmann et al. 2008; Lutz and Meyer 2008). This assumption is quite conservative as parameters for other countries can be assumed to be more positive. Less money will be needed for renewables installation or energy efficiency gains due to technical progress than in first mover countries. In scenarios S1L and S1H the 20% GHG target translates into a 15% reduction of energy-related carbon emissions against 1990 as other emissions such as methane and nitrous oxide already have been reduced above average. The target is reached by a tightened EU ETS cap and the introduction of a carbon tax on the non-ETS sector. The tax rate applied is equal to the carbon price in the EU ETS that will deliver 20% reduction in GHG by 2020. The carbon tax is levied on energy outputs, i.e. the final use of energy, and will be based on the carbon content of each fuel. Carbon prices are assumed to be fully passed on to consumers. All carbon taxes will be in addition to any existing unilateral carbon taxes and excise duties. The carbon reductions in the different EU Member States (MS) will be those that the same carbon tax increase across the EU produces. One hundred percent of the revenues, including EU ETS auctioning revenues, carbon tax revenues and material tax revenues will be recycled. The proportion of tax raised by industry will be recycled into a reduction in employers’ social security contributions, which will in turn reduce the cost of labour. Recycling will be additional to the existing ETRs in some member states. Revenues raised from households will be recycled through standard rate income tax reductions. Traditional energy tax revenues will be lower compared to the respective baseline, as the tax base (energy consumption) is reduced. So revenue-neutrality does not mean budgetneutrality of an ETR. Scenario S3H is used to investigate the effect that international cooperation would have on competitiveness and resources. In this scenario it is assumed that the rest of the world takes equivalent action towards reducing carbon emissions. International action is expected to reduce the loss of competitiveness the EU would face if it embarked on unilateral action. However, in this scenario, the tax levied is greater and

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is designed to reduce greenhouse gas emissions by 30% in 2020, rather than 20% in the preceding scenarios. Scenario S3H is leaned on scenario S1H but with higher targets in line with the EU’s stated policy objective of a 30% GHG reduction against 1990 until 2020. In GINFORS ETS and ETR is modelled in the major OECD countries. CO2 prices in these countries are equal to EU prices. Emerging economies will introduce a CO2 tax recycled via income tax reductions. CO2 tax rates will be 25% of EU (OECD) prices in 2020. Restricted participation of emerging economies takes into account common but differentiated responsibility (lower historic burden, lower GDP per capita). The relation of 25% is based on calculations in a post-Kyoto project for the German Ministry of Economy in 2007 (Lutz and Meyer 2009b). The 30% reduction will be in European emissions, without trying to take account of JI/CDM transactions that could be on top of the extra EU carbon reduction.

4 Baseline BL The reference scenario (baseline) BL bases population development, economic growth, energy consumption and emission development on national and international projections, in particular on the reference scenario of the PRIMES model (DG TREN 2008) and of the reference scenario of the World Energy Outlook 2008 published by the IEA (2008). According to this, the world population will increase to above 8 billion by 2030. The world economy will grow considerably driven by the economic development in the developing countries. Mitigation efforts are not increased world wide. The current economic crisis is not taken into account. If EU (and global) GDP are substantially lower in 2020 than expected in 2008, the carbon price and related economic impacts to reach fixed targets will also be lower. Global energy-related CO2 emissions increase by 50% until 2030 compared to 2005 without additional mitigation measures. Compared to the base year of the Kyoto Protocol, 1990, they almost double. The EU-27 will still produce about 10% of global emissions in 2030 (15% in 2004). The main increase of global emissions can be ascribed to developing and emerging countries-particularly to China, which already is the world’s biggest CO2 emitter-for which there are no emission reduction targets set in the Kyoto Protocol. But emissions will also increase substantially in the USA and Russia, and the rest of the world, particularly in the OPEC countries. Figure 2 clearly indicates that EU-27 is only a minor player in global emissions. Even if EU-27 and all developed countries together cut their emissions to zero in 2020, the 2° target cannot be reached without additional reductions in other parts of the world (see also IEA 2008, 2009). The shift in global material extraction and production patterns is underpinned by Fig. 3, which shows that shares of EU-25 and other OECD countries will decrease sharply after 2005 to less than 30% in 2030. At the same time the emerging BRICS countries and especially the rest of the world will raise their share in global extraction. Overall extraction will strongly increase in the next decades (Fig. 4).


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45,000 40,000 35,000

Rest of World G5 other developed countries EU-27

30,000 25,000 20,000 15,000 10,000 5,000 0 1990

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Fig. 2 Energy-related CO2 emissions in Mt CO2

5 Overview of modelling results This chapter summarizes detailed results for the EU level presented in Lutz and Meyer (2009a) for the EU part and in Giljum et al. (2010) for the global implications. The main results of the simulations are highlighted in Table 1. High energy price scenarios are in the centre of the discussion. They are close to medium and long-term price expectations of the IEA (2008). In the baseline scenario BH with high energy prices, EU-27 carbon emissions will be 7.2% below 1990 level in 2020. EU-15 has committed in the Kyoto protocol to reduce its GHG emissions 8% below 1990 levels in the period 2008–2012. As emissions in the new member states are substantially below their 1990 levels today, EU-27 will keep its emissions more or 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000

2005 EU-25

2010 Rest of OECD

Fig. 3 Global used material extraction for country groups

2020 BRICS

RoW

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Construction m inerals Indus trial minerals Non-ferrous m etals

100

Iron ores Natural Gas Crude Oil

80

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0 2000

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Fig. 4 Global used material extraction in billion tonnes

less constant over the coming decade. As in the PRIMES baseline an ETS price of 18 Euro/t CO2 in 2008 prices is assumed in 2020. In scenario S1H the ETS price and carbon tax rate has to be increased to 68 Euro2008/t of CO2 to reach the 20% GHG reduction target, which is equal to a 15% reduction of CO2 emissions against 1990 as other greenhouse gases (GHG) have already been reduced above average. Compared to the baseline, CO2 emissions are 8.4% lower in 2020 which means an additional 1% p.a. reduction in the period 2012 to 2020. GDP will be about 0.6% lower compared to the baseline in 2020. This means that annual average growth rates will be less than 0.1% below their baseline development. As the recycling mechanism reduces labour costs and the tax burden is shifted from labour-intensive to carbon-and material-intensive sectors employment will be 0.36% (or more than 800.000 jobs) higher than in the baseline. The ETR is not fully budget-neutral for the EU economies that can slightly increase their net savings. If this extra saving is spent, negative GDP impacts will be further reduced. Table 1 Main results in the different scenarios for 2020 Scenario

Target

CO2 price in €2008

GDP against baseline in %

BH

–

18

–

S1H

20% GHG

68

−0.6

Employment against baseline in % – 0.36

CO2 reduction against 1990 in %

CO2 reduction against baseline in %

−7.2

0.0

−15.1

−8.4

S2H

20% GHG

61

−0.3

0.42

−15.2

−8.5

S3H

30% GHG

184

−1.9

0.77

−25.0

−19.1

BL

–

S1L

20% GHG

18

–

120

−3.0

– 0.02

2.8

10.9

−14.9

−17.2


351

In a world of low energy prices it will be much more difficult to reach the EU GHG target. The carbon price will have to reach 120 Euro2008/t in 2020 in scenario S1L. The GDP loss against the baseline with low energy prices will be 3%. Energy, material and carbon productivity increases will not much improve EU competitiveness on international markets, which is reduced as EU prices increase in relation to NON-EU competitors. The comparison of scenarios S1L and S1H to their respective baseline demonstrates the importance of international energy prices for fixed volume (emission) targets. If part of the revenues is used for investment in low-carbon technologies, the carbon price in scenario S2H can even be lower (61 Euro2008/t in 2020) and the GDP loss halved against scenario S1H to only 0.3%, as the investment in renewable energies is assumed to be additional. Employment impacts will be more positive than in scenario S1H. The 10% investment in low-carbon technologies will amount to more than 20 Bill. Euro in 2020. The EU-Commission (2008) impact assessment reports macroeconomic costs of 0.58% of EU GDP in 2020 to reach the GHG and RES targets in a cost-efficient scenario. A carbon price of 39 Euro/t and an additional renewable energy incentive of 4.5 Cent/kWh will be needed in a scenario of low energy prices. Employment impacts are slightly negative. In a sensitivity analysis of the impact assessment with higher energy prices, GDP reduction is only 0.4%. The higher carbon price in GINFORS compared to the EU impact assessment is mainly due to the scenario assumptions, that the carbon price is the only policy instrument, whereas the EU implicitly takes efficiency measures and explicitly additional fostering of renewables into account. If EU-27 wants to reach its 30% reduction target (i.e. a 25% carbon reduction against 1990) within an international agreement only by domestic measures, the carbon price in scenario S3H will have to be 184 Euro/t in 2020 (and 46 Euro/t in the major emerging economies). The E3ME model, also applied in the study, even reports a carbon price of 204 Euro/t for the same scenario. Again, these high prices result as the carbon price is the only policy instrument and reductions are completely in domestic emissions. Other studies not only with GINFORS suggest that EU will be better off, if it purchases part of the emission reductions on global carbon markets. The IEA (2008) reports a global price of carbon of 180 US-Dollar in 2030 to reach the 450 ppm stabilization, which is in line with scenario S3H. GDP reduction in the EU-27 against the baseline will be 1.9% in 2020, partly due to lower international trade and production in other parts of the world. Employment will be 0.77% higher than in the baseline. Scenario S2H clearly shows that a policy mix, including fostering of renewable energies and energy efficiency measures, could further decrease the negative impacts on production and jobs. Negative GDP impacts above average in NON-OECD countries as China and Russia underpin their demand for technology and financial transfers as part of a global post-Kyoto agreement. EU energy, carbon and material productivity will improve in scenarios S1H, S2H and S3H against the baseline (see Table 2). Labour productivity will decrease mainly due to the structural shift from energy-and carbon-intensive to labour-intensive industries. The increase in carbon productivity is higher than in energy productivity due to the shift towards low carbon energy carriers.

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Table 2 EU27 productivity: percentage deviations against respective baselines in 2020 Scenario

Material Productivity

Energy Productivity

Labour Productivity

Carbon Productivity

S1H

0.91

6.04

−0.93

8.59

S2H

0.84

7.15

−0.71

8.99

S3H

1.78

15.48

−2.61

21.35

S1L

1.97

12.21

−3.02

17.17

The scenarios do not take specific policy measures into account to reach the EU renewables target of a 20% renewables share in final energy consumption in 2020. But the share will increase from around 10% today to above 14% even in the baseline with low energy prices as instruments such as feed in tariffs and bio fuel quotas will continue. In scenario S1H the target will be missed with around 18% in 2020. Only in scenarios S2H (almost 20%) and S3H (22%), the target is met without explicit policy efforts. On the global level, EU action plays only a minor role. According to Fig. 5 the level of international energy prices on the one hand and the participation of the major emitters on the other hand is much more important for the global emission path. The EU can mainly give an example that a low-carbon society can be reached. An additional argument for mitigation efforts may be that even unilateral EU action could increase employment in the EU, although GDP and employment impacts will even be better in the case of international cooperation (Lutz and Meyer 2009b). Figure 6 illustrates that global material extraction continues to grow in all three scenarios. With less than 0.1% reduction, the world-wide effects of the measures implemented in scenario S1H are negligible. S3H measures lead to a decrease of 5.3% compared to the baseline, but overall levels of extraction still continue to grow. Throughout the scenarios, the group of emerging economies largely determines the overall growth trend. Brazil is expected to experience the strongest growth in

40 BL BH S1H S3H

36

32

28

24

20 1990

2005

2010

2015

Fig. 5 Global energy-related CO2 emissions in Mt CO2 in different scenarios

2020


353

90 BH S1H S3H

80

70

60

50 2000

2005

2010

2015

2020

Fig. 6 Global used material extraction in billion tonnes, three scenarios

material extraction, especially iron ore, due to large amounts of available resources, agricultural and forestry products and construction materials. Figure 7 highlights the GDP impacts of GHG emission reductions in the EU in relation to high and low energy prices. The impact of high energy prices on GDP (baseline BH against baseline with low energy prices BL) is about as important as the impact of GHG emissions reduction in scenario S1L (with low energy prices) against the respective baseline BL in 2020. In the case of high energy prices, the impact of GHG emission reduction (Scenario S1H against the baseline BH) is much lower. The macroeconomic costs of reaching emission reductions strongly depend on the future level of international energy prices, as the value of saved energy imports is determined by international energy prices. The positive impact of higher energy productivity on international competitiveness also depends on energy price levels. It is remarkable that the 20% GHG target in S1L in the case of low energy prices and unilateral EU action creates more negative GDP impacts than the 30% GHG reduction in the case of high energy prices and international cooperation. In contrast to production, employment increases in all scenarios. Due to the scenario design the structure of the EU economies is shifted from carbon-and 15,000 BH BL S1L S1H

14,500 14,000 13,500 13,000 12,500 12,000 11,500 11,000 2010

2015

2020

Fig. 7 GDP of EU-27 in Bill. US-Dollars (PPPs) in prices of 2005 in different scenarios

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material-intensive to labour-intensive sectors. The magnitude of the employment gain is influenced by the carbon price and the tax shift, the underlying energy prices and the production loss. The CO2 reduction is mainly reached by a reduction of energy consumption, as substitution options are limited in the medium term. Substitution accounts for about one quarter of the emission reduction until 2020. Especially in the power sector, but also in transport and energy-intensive industries as iron and steel substitution of energy carriers depends on long-term investment cycles and capital stock turnover. The IEA (2008, p.75) reports typical lifetimes of energy-related capital stock of up to two decades for passenger cars and about 50 years for nuclear and coal power plants. The share of substitution of energy carriers, especially towards zero-emission energy use, is expected to increase in the long-term after 2020. On sector level, highest reductions in energy consumption take place in scenario S1H in iron and steel, chemicals, non-metallic minerals and mining and quarrying.

6 Conclusions In the course of the petrE project the GINFORS model has been applied to assess economic and environmental impacts of ETS and ETR to reach the EU GHG targets in the EU in 2020. Results show positive employment effects and only small negative impacts on GDP. Economic impacts depend on the level of international energy prices, the recycling mechanism, country specifics such as carbon and energy intensity and structure of energy consumption. In comparison to the results of the E3ME model (Pollitt and Chewpreecha 2009) GINFORS is less optimistic on the economic results. One important reason is the explicit modelling of international trade. In the case of unilateral EU action, competitiveness of EU economies will decrease and other economies will not be interested in new low-carbon technologies. If international cooperation is reached later in 2010, international competitiveness could even be an advantage of EU companies. But as global GDP will be around 1% lower, in line with figures from the Stern (2007) review or the IPCC (2008), and transport costs will increase, overall EU exports will also be reduced. As every reform a major ETR in Europe will create winners and losers. On a sector level, carbon and material-intensive industries will have to face economic loss. On a country level, carbon-intensity but also the overall flexibility of economies is quite important. International cooperation will reduce economic pressure on countries and sectors, although structural change away from the carbon-intensive industries, together with technological change, is inherent to any successful climate mitigation policy. ETR and ETS, if allowances are fully auctioned, are additional sources of public revenues. The discussion on grandfathering vs. auctioning of ETS allowances should be directed more towards this point. Countries, which give allowances away for free, will lack money to ease structural change and invest in low-carbon technologies. Results should be carefully related to the EU policy debate. The project did not search for a cost-minimal strategy. In the model simulations the single carbon price


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is the only instrument to reach the EU 2020 GHG targets. Renewables and efficiency policies will also contribute to carbon reduction and have to be taken into account, when comparing the results (especially the high carbon prices) to other studies. There are different renewables and efficiency policies that could further improve the economic impacts of reaching the climate and energy targets. The results clearly indicate to intensify the discussion on market-based instruments, but in the end a policy mix will be needed to reach the EU GHG targets. Global material extraction and energy-related CO2 emissions continue to grow in all three scenarios analysed in GINFORS. This trend is largely led by the group of emerging economies. The worldwide effects of the unilateral ETR scenario (S1H) on the growth trend of used material extraction and energy-related CO2 emissions are negligible. For both impacts, the cooperation scenario (S3H) is more effective. It would decrease the global amount of materials extracted by 5.3% and the amount of CO2 emissions by 15.6% compared to the baseline scenario in 2020. Two main policy conclusions can be drawn from this investigation. First, combating climate change can only be successful through global cooperation and global climate treaties. Carbon prices may be significantly higher than in the current European debate or additional non-price measures have to be used. Secondly, since overall resource use is continuing to increase substantially, targets on CO2 emissions only are not sufficient in order to lessen the environmental impacts of economic activities. The just beginning debate about limits of resource extraction will raise similar questions about international competitiveness and leakage, GDP effects and the need of international action as the climate change debate. This calls for new research efforts especially on the global scale. Even though more and more internationally comparable data becomes available, the field clearly lacks fundamental data and research structures, that had been established for energy in the 1970s as a response two the first oil price crisis. New research in the field of externalities such as the EU FP 6 EXIOPOL project will deliver additional empirical data, that will further improve the analysis to more explicitly take capacity constraints into account. Combined with environmentally extended multi-regional input-output models such as GRAM (Giljum et al. 2008b), results can substantially improve the understanding of consumer and producer responsibility in the light of upcoming international agreements.

References Almon C (1991) The INFORUM approach to interindustry modelling. Econ Syst Res 3:1–7 Barker T, Junankar S, Pollitt H, Summerton P (2007a) Carbon leakage from unilateral environmental tax reforms in Europe, 1995–2005. Energy Policy 35:6281–6292. doi:10.1016/j.enpol.2007.06.021 Barker T, Meyer B, Pollitt H, Lutz C (2007b) Modelling environmental tax reform in Germany and the United Kingdom with E3ME and GINFORS, Petre Working Paper, Cambridge and Osnabrueck. http://www.petre.org.uk/papers.htm DG TREN (2008) European energy and transport. Trends to 2030-Update 2007. Luxembourg Ekins P, Speck S (2010) Environmental tax reform (ETR), resolving the conflict between economic growth and the environment. Oxford University Press, Oxford EU-Commission (2008) Joint impact assessment on the package of implementation measures for the EU’s objectives on climate change and renewable energy for 2020. COM (2008) 16, 17 und 18, Brussels

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Giljum S, Behrens A, Hinterberger F, Lutz C, Meyer B (2008a) Modelling scenarios towards a sustainable use of natural resources in Europe. Env Sci Policy 11:204–216. doi:10.1016/j.envsci.2007.07.005 Giljum S, Lutz C, Jungnitz A, Bruckner M, Hinterberger M (2008b) Global dimensions of European natural resource use. First results from the global resource accounting model (GRAM). SERI Working Paper 7, Vienna Giljum S, Lutz C, Polzin C (2010) Global dimensions of ETR in Europe. petrE Working Paper & SERI Working Paper 10, Vienna Grossmann A, Lehr U, Lutz C, Wolter MI (2008) Gesamtwirtschaftliche Effekte der Umsetzung der EU Ziele im Bereich Erneuerbare Energien und Gebäudeeffizienz in Österreich bis 2020. Studie im Auftrag des Lebensministeriums, Wien 05/08 International Energy Agency [IEA] (2008) World energy outlook 2008. Paris International Energy Agency [IEA] (2009) World energy outlook 2009. Paris IPCC (2008) Climate change 2007-mitigation of climate change. Working Group III contribution to the fourth assessment Report of the IPCC, Intergovernmental panel on climate change, Cambridge Economic Press Lehr U, Nitsch J, Krazat M, Lutz C, Edler D (2008) Renewable energy and employment in Germany. Energy Policy 36:108–117. doi:10.1016/j.enpol.2007.09.004 Lehr U, Wolter MI, Grossmann A (2009) Economic impacts of RES obligations in Austria-an application of the macro-econometric Model e3.at. GWS Discussion Paper 2009/1, Osnabrueck Lutz C, Giljum S (2009) Global resource use in a business as usual world until 2030. Updated results from the GINFORS model. In: Bleischwitz R, Welfens P, Zhang Z (eds.) Sustainable growth and resource productivity-economic and global policy issues. Greenleaf Publishers, Sheffield, pp 30–41 Lutz C, Meyer B (2008) Beschäftigungseffekte des Klimaschutzes in Deutschland. Untersuchungen zu gesamtwirtschaftlichen Auswirkungen ausgewählter Maßnahmen des Energie-und Klimapakets. Forschungsbericht 205 46 434, Dessau-Roßlau Lutz C, Meyer B (2009a) Scenario results from GINFORS. petrE Working Paper. Osnabrueck Lutz C, Meyer B (2009b) Environmental and economic effects of Post-Kyoto carbon regimes. Results of simulations with the global model GINFORS. Energy Policy 37:1758–1766. doi:10.1016/j. enpol.2009.01.015 Lutz C, Meyer B, Wolter MI (2010) The Global Multisector/Multicountry 3-E Model GINFORS. A description of the model and a baseline forecast for global energy demand and CO2 emissions. J Sust Dev 10:25–45 Meyer B, Lutz C (2007) The GINFORS Model. Model overview and evaluation. petrE Working Paper, Osnabrueck Meyer B, Lutz C, Schnur P, Zika G (2007) Economic policy simulations with global interdependencies: a sensitivity analysis for Germany. Econ Syst Res 19:37–55 Pollitt H, Chewpreecha U (2009) Modelling results from E3ME. petrE Working Paper, Cambridge Stern NH (2007) The economics of climate change: the Stern review. Cambridge University Press, Cambridge

Int Econ Econ Policy (2010) 7:357–370 DOI 10.1007/s10368-010-0171-y O R I G I N A L PA P E R

Eco-innovation for enabling resource efficiency and green growth: development of an analytical framework and preliminary analysis of industry and policy practices Tomoo Machiba Published online: 30 June 2010 # Springer-Verlag 2010

Abstract In order to meet great environmental challenges including climate change, more attention needs to be paid to innovation as a way to develop and realise sustainable solutions. This paper reviews the existing understanding of “eco-innovation” and proposes a framework that defines this concept from three aspects—target, mechanism and impact. The proposed framework is also applied to understand the evolution of corporate activities for sustainable production and analyse some good practices. Ecoinnovation activities are very diverse and are occurring at different levels and scales. Although the primary focus of corporate practices tends to be on technological advances, some advanced industry players have adopted complementary organisational or institutional changes such as new business models and alternative modes of provision. It is therefore essential to capture both incremental and systemic (or radical) types of eco-innovation unlike most empirical research in this area. 1 Introduction: green growth emerged as new policy crossroads In June 2009, the OECD Council Meeting at Ministerial Level (MCM) adopted a Declaration on Green Growth (OECD 2009a). The declaration invited the OECD to develop a Green Growth Strategy to achieve economic recovery and environmentally and socially sustainable economic growth.1 The MCM Declaration broadly defines “green growth policies” as policies encouraging green investment in order to simultaneously contribute to economic recovery in the short term and help to build the environmentally friendly infrastructure required for a green economy in the long term. In terms of resource economics, such policies firstly need to guide industry to delink environmental degradation from economic or sales growth by reducing resource use per unit of value added (relative decoupling). At the same time, it would be essential to aim at further efforts towards achieving absolute reductions in the use of energy and materials to a sustainable level (absolute decoupling). 1

For the latest development on the OECD Green Growth Strategy, see www.oecd.org/greengrowth.

T. Machiba (*) Senior Policy Analyst, Green Growth & Eco-innovation, Directorate for Science, Technology and Industry, OECD, 2 rue André-Pascal, Paris, 75775 Cedex 16, France

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While industries are showing greater interest in sustainable production and are undertaking a number of corporate social responsibility (CSR) initiatives during the last decade, progress falls far short of meeting the pressing global challenges such as climate change, energy security and depletion of natural resources. Moreover, improvements in efficiency have often been offset by increasing consumption and outsourcing, while efficiency gains in some areas are outpaced by scale effects. Without new policy action, recent OECD analysis suggests that global greenhouse gas (GHG) emissions are likely to increase by 70% by 2050, whilst the G8 leaders agreed to aim for halving global emissions during the same period (OECD 2009b). The political and economic challenges for OECD countries are daunting. Incremental improvement is not enough to meet such challenges. Industry must be restructured and existing and breakthrough technologies must be more innovatively applied to realise green growth. The OECD Directorate for Science, Technology and Industry (DSTI) is thus aiming to contribute to the development of the OECD Green Growth Strategy from a viewpoint of promoting the role of innovation for realising green growth and has been conducting a project on Green Growth and Eco-innovation since 2008.2 Raising efficiency in resource and energy use and engaging in a broad range of innovations to improve environmental performance will help to create new industries and jobs in coming years. The current economic crisis and negotiations to tackle climate change should be seen as an opportunity to shift to a greener economy. This paper presents part of the outcomes from the first phase of this OECD project, which took stock of the existing research and industry and policy practices and attempted to develop a conceptual framework for common understanding and further analysis. Firstly, the paper reviews the existing understanding of ecoinnovation and propose a framework that defines the concept from three aspects. Secondly, the framework is applied to understand the evolution of corporate activities for sustainable production and analyse some good practices. Lastly, the paper envisions the potential of diverse approaches of eco-innovation captured by the framework with a particular emphasis on the role of systemic or radical innovation, and concludes by outlining the next phase of the OECD project that is planned for further in-depth understanding an advanced policy support.

2 Defining the role of eco-innovation for green growth Much attention has recently been paid to innovation as a way for industry and policy makers to achieve more radical improvements in corporate environmental practices and performance. Many companies have started to use eco-innovation or similar terms to describe their contributions to sustainable development. A few governments are also promoting the concept as a way to meet sustainable development targets while keeping industry and the economy competitive. However, while the promotion of eco-innovation by industry and government involves the pursuit of both economic and environmental sustainability, the scope and application of the concept tend to differ. 2

For more details on the OECD project on Green Growth and Eco-innovation, see www.oecd.org/sti/ innovation/sustainablemanufacturing.

Eco-innovation for enabling resource efficiency and green growth

359

In the European Union (EU), eco-innovation is considered to support the wider objectives of its Lisbon Strategy for competitiveness and economic growth. The concept is promoted primarily through the Environmental Technology Action Plan (ETAP), which defines eco-innovation as “the production, assimilation or exploitation of a novelty in products, production processes, services or in management and business methods, which aims, throughout its lifecycle, to prevent or substantially reduce environmental risk, pollution and other negative impacts of resource use (including energy)”.3 Environmental technologies are also considered to have promise for improving environmental conditions without impeding economic growth in the United States, where they are promoted through various public-private partnership programmes and tax credits (OECD 2008). To date, the promotion of eco-innovation has focused mainly on environmental technologies, but there is a tendency to broaden the scope of the concept. In Japan, the government’s Industrial Science Technology Policy Committee defined eco-innovation as “a new field of techno-social innovations [that] focuses less on products’ functions and more on [the] environment and people” (METI 2007). Eco-innovation is thus seen as an overarching concept which provides direction and vision for pursuing the overall societal changes needed to achieve sustainable development (Fig. 1). The OECD is primarily studying innovation based on the OECD/Eurostat Oslo Manual for the collection and interpretation of innovation data. This manual describes innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (OECD and Eurostat 2005, p. 46). This provides a good overview on where innovation occurs beyond technology spheres but does not shed enough lights on how it occurs and what it is developed for, which are essential to understand the nature of eco-innovation as it particularly concerns the scope of changes and the impact the changes can create for improving environmental conditions. Charter and Clark (2007, p. 10) provides an alternative useful classification of eco-innovation based on the levels of making differences from the existing state as below: & & & &

Level 1 (incremental): Incremental or small, progressive improvements to existing products Level 2 (re-design or ‘green limits’): Major re-design of existing products (but limited the level of improvement that is technically feasible) Level 3 (functional or ‘product alternatives’): New product or service concepts to satisfy the same functional need, e.g. teleconferencing as an alternative to travel Level 4 (systems): Design for a sustainable society

In addition to the above two aspects, the concept of eco-innovation entails two other significant, distinguishing characteristics from that of ordinary innovation: & 3

Eco-innovation includes both environmentally motivated innovations and unintended environmental innovations. The environmental benefits of an

The EU is discussing the renewal of the ETAP as the Eco-Innovation Action Plan from 2011. The new plan will reflect the extension of the eco-innovation concept by embracing non-technological aspects of eco-innovation such as innovation in business models and increasing attention to the diffusion and commercialisation stages of eco-innovation on top of research and development.

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Industry

Target Field

Manufacturing •Sustainable manufacturing

Technology

Social infrastructure Energy

Transportation / urban

•Innovative R&D •renewable energy, batteries·

•Innovative R&D (intelligent transport systems)

•Superconducting transmission

• Green automobiles

Service •Innovative R&D •Building Energy Management System•

•Innovative R&D (energy saving, etc.) •Green ICT •Rare metal recycling •Green procurement •including BtoB•

Business model

•LCA

• Maglev

•Green certification

•Modal shift •Cool biz

•Environmental rating/green finance

•Environmental labeling system

Societal system (institution)

•Heat pump

•Green procurement •Energy services

•Green servicizing •EMA

Personal lifestyle

•Starmark •Green investment

•Green finance

•Top Runner Programme •PRS Act (Renewables Portfolio Standard)

•Green tax for automobiles

•Telework, telecommuting

•Next-generation vehicle and fuel initiative (METI)

•Work-life balance

Source: Ministry of Economy, Trade and Industry (METI), Japan.

Fig. 1 The scope of Japan’s eco-innovation concept

innovation may be a side effect of other goals such as reducing costs for production or waste management (MERIT et al. 2008). In short, eco-innovation is essentially innovation that reflects the concept’s explicit emphasis on a reduction of environmental impact, whether such an effect is intended or not. &

Eco-innovation should not be limited to innovation in products, processes, marketing methods and organisational methods, but also includes innovation in social and institutional structures (Rennings 2000; Reid and Miedzinski 2008). Eco-innovation and its environmental benefits go beyond the conventional organisational boundaries of the innovator to enter the broader societal context through changes in social norms, cultural values and institutional structures.

Synthesising the above considerations, the OECD project proposes that ecoinnovation can be understood and analysed from three dimensions, namely in terms of an innovation’s 1) target, 2) mechanism and 3) impact. Figure 2 presents an overview of eco-innovation and its typology: 1) Target refers to the basic focus of eco-innovation. Following the OECD/ Eurostat Oslo Manual, the target of an eco-innovation may be: a. Products, involving both goods and services. b. Processes, such as a production method or procedure. c. Marketing methods, for the promotion and pricing of products, and other market-oriented strategies.


Eco-innovation targets

Institutions

Primarily

Organisations & Marketing methods

non-technological change

361

Higher potential environmental benefits… …but more difficult to co-ordinate

Processes

Primarily

& Products

technological change Modification

Redesign Alternatives Eco-innovation mechanisms

Creation

Fig. 2 A proposed framework of eco-innovation

d. Organisations, such as the structure of management and the distribution of responsibilities. e. Institutions, which include the broader societal area beyond a single organisation’s control, such as institutional arrangements, social norms and cultural values. The target of the eco-innovation can be technological or non-technological in nature. Eco-innovation in products and processes tends to rely heavily on technological development; eco-innovation in marketing, organisations and institutions relies more on non-technological changes (OECD 2007). 2) Mechanism relates to the method by which the change in the eco-innovation target takes place or is introduced. It is also associated with the underlying nature of the eco-innovation—whether the change is of a technological or nontechnological character. Four basic mechanisms are identified: a. Modification, such as small, progressive product and process adjustments. b. Re-design, referring to significant changes in existing products, processes, organisational structures, etc. c. Alternatives, such as the introduction of goods and services that can fulfil the same functional need and operate as substitutes for other products. d. Creation, the design and introduction of entirely new products, processes, procedures, organisations and institutions. 3) Impact refers to the eco-innovation’s effect on the environment, across its lifecycle or some other focus area. Potential environmental impacts stem from the eco-innovation’s target and mechanism and their interplay with its sociotechnical surroundings. Given a specific target, the potential magnitude of the environmental benefit tends to depend on the eco-innovation’s mechanism, as more systemic changes, such as alternatives and creation, generally embody higher potential benefits than modification and re-design.

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3 Understanding sustainable manufacturing practices from the eco-innovation perspective Industries have traditionally addressed pollution concerns at the point of discharge. Since this end-of-pipe approach is often costly and ineffective, industry has increasingly adopted cleaner production by reducing the amount of energy and materials used in the production process. Many firms are now considering the environmental impact throughout the product’s lifecycle and are integrating environmental strategies and practices into their own management systems. Some pioneers have been working to establish a closed-loop production system that eliminates final disposal by recovering wastes and turning them into new resources for production, as exemplified in remanufacturing practices and eco-industrial parks. This evolution of such sustainable manufacturing initiatives can be viewed as facilitated by eco-innovation and classified according to the dimensions proposed in the previous section. Figure 3 provides a simple illustration of the general conceptual relations between sustainable manufacturing and eco-innovation. The steps in sustainable manufacturing are depicted in terms of their primary association with respect to eco-innovation facets. While more integrated sustainable manufacturing initiatives such as closed-loop production can potentially yield higher environmental improvements in the medium to long term, they can only be realised through a combination of a wider range of innovation targets and mechanisms and therefore cover a larger area of this figure. For instance, an eco-industrial park cannot be successfully established simply by locating manufacturing plants in the same space in the absence of technologies or procedures for exchanging resources. In fact, process modification, product design, alternative business models and the creation of new procedures and organisational arrangements need to go hand in hand to leverage the economic and environmental benefits of such initiatives. This implies that as sustainable manufacturing initiatives advance, the nature of the eco-innovation process becomes increasingly complex and more difficult to co-ordinate.

Fig. 3 Conceptual relationships between sustainable manufacturing and eco-innovation


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Table 1 Eco-innovation examples examined through the eco-innovation framework Industry and company/association

Eco-innovation example

Automotive and transport industry The BMW group

Improving energy efficiency of automobiles

Toyota

Sustainable plants

Michelin

Energy saving tyres

Velib’

Self-service bike sharing system

Iron and steel industry Siemens VAI, etc.

Alternative iron-making processes

ULSAB-AVC

Advances high-strength steel for automobiles

Electronics industry IBM

Energy efficiency in data centres

Yokogawa Electric

Energy-saving controller for air conditioning water pumps

Sharp

Enhancing recycling of electronic appliances

Xerox

Managed print services

OECD 2010

These complex, advanced eco-innovation processes can power possible “system innovation”—i.e. innovation characterised by fundamental shifts in how society functions and how its needs are met (Geels 2005). Although system innovation may have its source in technological advances, technology alone cannot make a great difference. It has to be associated with organisational and social structures and with human nature and cultural values. While this may indicate the difficulty of achieving large-scale environmental improvements, it also hints at the need for manufacturing industries to adopt an approach that aims to integrate the various elements of the eco-innovation process so as to leverage the maximum environmental benefits. The feasibility of their eco-innovative approach would depend on the organisation’s ability to engage in such complex processes.

4 Applying the eco-innovation framework for good practices To better understand current applications of eco-innovation in manufacturing industries, a small sample of sector-specific examples were reviewed in light of the above framework. Examples from three sectors chosen for this preliminary review: a) the automotive and transport industry; b) the iron and steel industry; and c) the electronics industry. The examples draw mainly on the interaction with industry practitioners made during the first phase of the OECD project (Table 1). The examples are not meant to represent “best practices” but were selected to illustrate the diversity of eco-innovation, its processes and the different contexts of its realisation.4 Following is an overview of the examination of each sector’s general practices and examples according to the proposed eco-innovation framework. A few notable examples are illustrated in boxes. 4

For detailed information on each example, see OECD (2010).

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The automotive and transport industry is taking steps to reduce CO2 emissions and other environmental impacts, notably those associated with fossil fuel combustion. Combined with the growing demand for mobility, particularly in developing economies, many eco-innovation initiatives have focused on increasing the overall energy efficiency of automobiles and transport, while heightening automobile safety. Eco-innovations have, for the most part, been realised through technological advances, typically in the form of product or process modification and re-design, such as more efficient fuel injection technologies, better power management systems, energy-saving tyres and optimisation of painting processes. Yet, there are indications that the understanding of eco-innovation in this sector is broadening. Alternative business models and modes of transport such as the bicycle– sharing scheme in Paris (Box 1) are being explored, as are new ways of dealing with pollutants from manufacturing processes of automobiles. The iron and steel industry has in recent years substantially increased its environmental performance through a number of energy-saving modifications and the re-design of various production processes. These have often been driven by

In an attempt to reduce traffic congestion and improve air quality, the City of Paris introduced a selfservice bicycle-sharing system Vélib’ in the summer of 2007. The system consists of some 1 750 stations located in conjunction with metro and bus stations and open 24 hours a day year round, each containing 20 or more bike spaces. This amounts to about one station every 300 metres throughout the inner city, with a total of 23 900 bicycles and 40 000 bicycle racks. Each station is equipped with an automatic rental terminal at which people can hire a bicycle through different subscription options. Subscriptions can be purchased for a small fee by the day, week or year and can be linked to the “swipe and enter” Navigo card used for the city’s metro and bus system. A subscription allows the user to pick up a bicycle from any station in the city and use it at no charge for 30 minutes. After that a charge is incurred for additional time in periods of 30 minutes. The payment scheme was designed to keep bicycles in constant circulation and increase intensity of use. To facilitate circulation, bicycles are redistributed every night to stations which have particularly high demand. Real-time data on bicycle availability at every station is provided through the Internet and is also accessible via mobile phones. The start-up financing for the Vélib’ project, as well as full-time operation for 10 years and associated costs, was undertaken entirely by the JC Decaux advertising company. In return, the City of Paris transferred full control of a substantial portion of the city’s advertising billboards to this company. The Vélib’ system has been considered as a great success and taking bicycles is also becoming fashionable. Part of this success is due to the system’s design, with its strong focus on flexibility, availability and, not least, ease of use. By October 2009, the number of annual subscribers has reached 147 000, and between 65 000 and 150 000 trips are being made each day. The system was extended to 30 neighbour boroughs in the suburbs by the summer 2009. Building on this success, the city is now planning to expand the project with about 4 000 self-service electric hire cars (named Autolib’) by the beginning of 2011.

Box 1 Vélib’: Self-service bicycle-sharing system in Paris


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strong external pressures to reduce pollution and by increases in the prices and scarcity of raw materials. While most of the industry’s eco-innovative initiatives have focused on technological product and process advances, the industry’s engagement in various institutional arrangements has laid the foundation for many of these developments. For example, the development of advanced high-strength steel was made possible through an international collaborative arrangement between vehicle designers and steel makers and enabled the production of stronger steel for the manufacturing of lighter and more energy-efficient automobiles (Box 2). The electronics industry has so far mostly been concerned with eco-innovation in terms of the energy consumption of its products. However, as consumption of electronic equipment continues to grow, companies are also seeking more efficient ways to deal with the disposal of their products. As in the other two sectors, most eco-innovations in this industry have focused on technological advances in the form of product or process modification and re-design. Similarly, developments in these areas have been built upon eco-innovative organisational and institutional arrangements (see Box 3). Some of these arrangements have also been, perhaps unsurprisingly, among the most innovative and forward-looking. A notable example is the use of large-scale Internet discussion groups, dubbed “innovation jams” by IBM, to harness the innovative ideas and knowledge of thousands of people. Alternative business models, such as product-service solutions rather than merely selling physical products, have also been applied, as exemplified by new services in the form of energy management in data centres (IBM) and optimisation of printing and copying infrastructures (Xerox). To sum up, the primary focus of current eco-innovation in manufacturing industries tends to rely on technological advances, typically with products or processes as eco-innovation targets, and with modification or re-design as principal mechanisms (Fig. 4). Nevertheless, even with a strong focus on technology, a

The introduction of new legislative requirements for motor vehicle emissions in the United States in 1993 intensified pressures on the automotive industry to reduce the environmental impact from the use of automobiles. In response, a number of steelmakers from around the world joined together to create the Ultra-Light Steel Auto Body (ULSAB) initiative to develop stronger and lighter auto bodies. From this venture, the ULSAB Advanced Vehicles Concept (ULSAB-AVC) emerged. The first proofof-concept project for applying advanced high-strength steel (AHSS) to automobiles was conducted in 1999. By optimising the car body with AHSS at little additional cost compared to conventional steel, the overall weight saving could reach nearly 9% of the total weight of a typical five-passenger family car. It is estimated that for every 10% reduction in vehicle weight, the fuel economy is improved by 1.98.2% (World Steel Association, 2008). At the same time, the reduced weight makes it possible to downsize the vehicle’s power train without any loss in performance, thus leading to additional fuel savings. Owing to their high- and ultra-high-strength steel components, such vehicles rank high in terms of crash safety and require less steel for construction. The iron and steel industry’s continuing R&D efforts in this area also stem from its attempt to strengthen steel’s competitive advantage over alternatives such as aluminium. The Future Steel Vehicle (FSV) is the latest in the series of auto steel research initiatives. It combines global steelmakers with a major automotive engineering partner in order to realise safe, lightweight steel bodies for vehicles and reduce GHG emissions over the lifecycle of the vehicle.

Box 2 The development of advanced high-strength steel for automobiles

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Air conditioners function by driving hot or cold water through piping to units located on each level of the building. The amount of cold water varies according to the desired temperature relative to the outside temperature. However, conventional air conditioners operate at the pressure required for maximum heating and cooling demands. Based on research revealing that in Japan air conditioning consumes half of a building’s total energy, Yokogawa Electric, a Japanese manufacturer, sought to create a simple, inexpensive and low-risk control mechanism that would eliminate wasteful use of energy. The resulting product, Econo-Pilot, can control the pumping pressure of air conditioning systems in a sophisticated way and can reduce annual pump power consumption by up to 90%. It can be installed easily and inexpensively, precluding the need to buy new cooling equipment. The technology has been successfully applied in equipment factories, hospitals, hotels, supermarkets and office buildings.

Image: Yokogawa Electric Corporation

Econo-Pilot is based on the technology devised by Yokogawa jointly with Asahi Industries Co. and First Energy Service Company. It was developed and demonstrated through a joint research project with the New Energy and Industrial Technology Development Organization (NEDO), a public organisation established by the Japanese government to co-ordinate R&D activities of industry, academia and the government. NEDO researches the development of new energy and energyconservation technologies, and works on validation and inauguration of new technologies. After the demonstration and piloting of this technology, various functions were incorporated in the final product.

Box 3 Energy-saving controller for air conditioning water pumps

Institutions

Vélib’ bicycle sharing

Xerox - managed print services

Organisations &

IBM - energy management service

Marketing methods

Processes & Products

Yokogawa Econo-Pilot

The BMW Group product improvements by Efficient Dynamics

Sharp recycling of LCDs

Michelin Energy saving Advanced high tyres strength steel

Loremo Structurally redesigned car

Toyota photocatalytic paint at plants Corex/Finex - direct smelting reduction BMW/Toyota Hybrid propulsion

Target Mechanism

Modification

Re-design

Alternatives

Creation

Note: This map only indicates primary targets and mechanisms that facilitated the listed eco-innovation examples. Each example also involved other innovation processes with different targets and mechanisms.

Fig. 4 Mapping primary focuses of eco-innovation examples


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number of complementary changes have functioned as key drivers for these developments. In many of the examples, the changes have been either organisational or institutional in nature, such as the establishment of separate environmental divisions for improving environmental performance and directing R&D, or the setting up of inter-sectoral or multi-stakeholder collaborative research networks. Some industry players have also started exploring more systemic eco-innovation through new business models and alternative modes of provision. The heart of an eco-innovation cannot necessarily be represented adequately by a single set of target and mechanism characteristics. Instead, eco-innovation seems best examined and developed using an array of characteristics ranging from modifications to creations across products, processes, organisations and institutions. The characteristics of a particular eco-innovation furthermore depend on the observer’s perspective. The analytical framework can be considered a first step towards more systematic analysis of eco-innovation.5

5 Guiding towards systemic changes The above framework of eco-innovation implies diverse approaches to help realise resource efficiency and green growth through accelerating innovation, including both technological and non-technological changes. The approaches can be roughly categorised into incremental innovation and systemic (or radical) innovation. Incremental innovation primarily contributes to the relative decoupling of environmental impacts from economic growth, while the latter tends to have larger potential for helping to make absolute decoupling possible. Facing the great challenges of climate change and environmental degradation, it has to be clear to government and industry alike that incremental improvement is not enough to fulfil their long-term commitment. Deliberate policy interventions could bring a new opportunity to create new entrepreneurs, industries and jobs, but existing industries must be restructured and existing and breakthrough technologies must be more innovatively applied to secure long-term competitiveness and economic growth. In parallel to investing in easy short-term win-wins such as subsidising eco-friendly vehicles, today’s economic stimulus packages could also stimulate investments in technologies and infrastructures that help innovation and enable changes in the way we produce and consume goods and services in the long term. Clear benefits of more systemic innovation have been well exemplified in the areas of general-purpose technologies. While the information and communication technologies (ICTs) urgently need to raise energy efficiency in existing products which are responsible for around 2% of global GHG emissions, one estimate indicates that the transformation of the way people live and businesses operate through the smart application of ICTs could reduce global emissions by 15% by 2015 (The Climate Group 2008). Biotechnology and nanotechnology could create environmental benefits mainly through the unique application in different sectors or 5

A combination of this eco-innovation framework with the frameworks of system transition developed by some scholars (e.g. Geels 2005; Loorbach 2007; Carrillo-Hermosilla et al. 2009; Bleischwitz 2007) could further help understand the dynamic nature of radical changes created by eco-innovations.

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Table 2 Application of technologies in different types of innovation Incremental innovation

Systemic innovation

Existing (but improved) technologies in existing application

Existing technologies in new application

New technologies in existing application

New technologies in new application

the convergence with existing technologies. Table 2 highlights the basic distinction (though there is not clear line) between incremental and systemic eco-innovation based on the way which existing or new, breakthrough technologies are applied. Figure 5 provides the other way to highlight the distinction based on the evolution of manufacturing processes and products and services towards sustainable production which was explored in Section 3. Needless to say, there are many barriers to enabling systemic innovation. Policy makers and industry are increasingly facing difficulties in investing in long-term future due to short political cycles and pressure from shareholders. Sector or technology-based approaches in conventional environmental policies may fail to take into account the full innovation cycle of environmental technologies and undermine opportunities for cross-sectoral application of new technologies. The market-based “getting prices right” measures such as carbon taxes and emissions trading schemes may not be enough to guide investment in promising technologies with high initial cost and much-needed green infrastructures.

6 Conclusions: agenda for the future eco-innovation analysis In order to meet great environmental challenges such as climate change, much attention has been paid to innovation as a way to develop sustainable solutions. The concepts of eco-innovation are increasingly adopted by industry and policy makers as a way to facilitate more radical improvement in production processes and

Fig. 5 Conceptual distinction between incremental and systemic eco-innovations


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products and in corporate environmental performance. Eco-innovation can be understood in terms of its target, mechanism and impact. From the perspective of eco-innovation, the primary focus of sustainable manufacturing practices tends to be on technological advances for the modification and re-design of products or processes. However, some advanced industry players have adopted complementary organisational or institutional changes such as new business models or alternative modes of provision, for example, offering productservice solutions rather than selling physical products. As such, it is essential to capture both incremental and systemic (or radical) types of eco-innovation unlike the conventional economic and empirical research in this area. The former type of innovation mainly supports realising relative decoupling in the relatively short term, while the latter has potential for enabling absolute decoupling in the long term. Although improvements in eco-efficiency through incremental innovations have led to substantial environmental progress, the gains have often been offset by increasing consumption or outpaced by scale effects. In order for OECD countries to fulfil a potential post-Kyoto target of GHG emissions reduction, they will therefore need to engage in a broader range of ecoinnovations. Probably most needed for government is knowledge and competence to set balanced priorities between taking short-term “low-hanging fruit” and investing in long-term sustainable changes. The potential economic and environmental benefits of systemic innovation need to be identified, particularly where applications of new technologies can have highest benefits. To guide the processes of system transition and industry restructuring, visions and scenarios for further societal systems should be collectively developed and shared in different areas such as transport, housing and nutrition. In this context, the OECD project on Green Growth and Eco-innovation moved to its second phase in 2010 and works in three fronts: a) case studies of new business approaches to eco-innovation; b) analysis and case studies of policies to drive ecoinnovation; and c) empirical analysis of eco-innovation and the transition in industrial structures required to realise green growth. The first element is particularly relevant to the further development of the eco-innovation concept and framework as it will explore the potential of radical and systemic eco-innovation and learn how successes can be further extended and accelerated. This will be done by analysing the innovation processes of specific cases to be collected from member countries, including diverse aspects such as the source of the original idea, the business model, the role of partnerships and collaboration, the impact of policies in facilitating the innovation, the sources of funding and the potential economic and environmental benefits.

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