© 2008 Deutsches Institut für Entwicklungspolitik Industrial policy for low carbon development LAC-EU Economic Forum 2013 Santiago de Chile, 21 January 2013 Tilman Altenburg, DIE

© 2008 Deutsches Institut für Entwicklungspolitik2 Industrial policy debate converging towards “pragmatic heterodox strategies”  Focus no longer whether IP is needed, but how it should be implemented Growing consensus on:  developing “latent” comparative advantages (Lin);  subsidising search costs (Rodrik); Remaining dissent on  big push policies to overcome major coordination failures. Industrial policy debate in a nutshell

© 2008 Deutsches Institut für Entwicklungspolitik3 Why low carbon industrial policy is systematically different and particularly challenging

© 2008 Deutsches Institut für Entwicklungspolitik4 LCIP require stronger government intervention than “BAU industrial policy” => larger risks => additional demands on governance... due to: a.Mixed objectives: economic and environmental b.Unprecedented scale and urgency of low carbon transformation c.Additional and more severe market failure Extra challenges of Low Carbon Industrial Policy

© 2008 Deutsches Institut für Entwicklungspolitik5  LCIP pursues growth /employment AND environmental objectives  … may involve difficult trade-offs as well as win-win opportunities: (a) Mixed objectives

© 2008 Deutsches Institut für Entwicklungspolitik6 Policy trade-offs: 1.Stricter environmental regulations may reduce competitiveness … but they may also induce innovations that more than compensate for compliance costs ( Porter ); Mixed evidence: ++ wind turbines/Denmark, ++ flexfuel motors/Brazil: -- solar photovoltaics/Germany  Tough decisions whether to opt for early mover advantages or let others bear the costs of early experimentation 2.Local Content Requirements: useful to build local capabilities, but increase costs and reduce investment incentives (a) Mixed objectives

© 2008 Deutsches Institut für Entwicklungspolitik7.. and win-wins, even in emerging economies: 1.Growing markets: e.g. renewable energy/storage/energy efficiency market 2010: 313 bn €, 2025: 1060 bn. 2.Huge renewable energy potentials in the “South” 3.Successful catching up in the South, e.g. Chinese solar and wind, Indian wind industry, Brazilian biofuels (a) Mixed objectives

© 2008 Deutsches Institut für Entwicklungspolitik8  Urgency to act !!! To avoid > 2° C global warming, industrialised countries need to reduce emissions by % in 2050 relative to Cost of current rate of global warming in 2050: 14% GDP (OECD 2012) =>The first major industrial transformation that has a deadline !!  Current decoupling of growth from resource consumption far too slow, “rebound effects“ ! (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik 10.3% 15.0% 13.8% 16.3% 25.9% 26.2% 34.2% 43.7% 3.6% 4.6% 5.3% 7.9% 17.3% 18.3% 23.9% 30.7% 4.3% 4.6% 5.0% 5.4% 6.1% 6.9% 7.9% 9.2% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0% 0% 10% 20% 30% 40% 50% Renewable power capacity change as a % of global power capacity change (net) Renewable power generation change as a % of global power generation change (net) Renewable power as a % of global power capacity Renewable power as a % of global power generation 10.3% 15.0% 13.8% 16.3% 25.9% 26.2% 34.2% 43.7% 3.6% 4.6% 5.3% 7.9% 17.3% 18.3% 23.9% 30.7% 4.3% 4.6% 5.0% 5.4% 6.1% 6.9% 7.9% 9.2% 3.5% 3.6% 3.8% 4.0% 4.5% 5.1% 6.0% 0% 10% 20% 30% 40% 50% Renewable power capacity change as a % of global power capacity change (net) Renewable power generation change as a % of global power generation change (net) Renewable power as a % of global power capacity Renewable power as a % of global power generation Note: Renewable power excludes large hydro. Renewable capacity figures based on Bloomberg New Energy Finance global totals. Source: Moslener, based on UNEP, BNEF, FS (2012) Time lags: Rapid expansion of renewables investments – little change of global power mix (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik10 LCIP needs to change entire economic subsystems (energy, transport, land use …) …. and to accelerate transformation: –Adopt measures to phase out less sustainable incumbent technologies –Subsidize deployment of green alternatives:  Deployment an end in itself !! (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik Differential costs of renewable energy development for electric energy Differential costs (bn € (2009) / a) Scenario A: substantial in- crease of fossil energy costs Scenario B: moderate Scenario C: very low External costs internalized As-is state Source: DLR/IWES/IFNE (2011). The differential costs are based upon Scenario A (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik13  Need to mobilise upfront investments: bn US$ until 2030 to reduce global carbon emissions 25% below 2000 level (UNFCCC 2008);  Political capture may increase the cost substantially; several examples of distorted incentive schemes (European Emissions Trading, biofuel subsidies …) (Helm 2011)  Germany loses 7 bn € /a for unnecessary exemptions from ETS that are not needed to protect industry against international competition;  Importance of smart policy designs, periodic policy revisions, political checks and balances (b) Unprecedented scale and urgency

© 2008 Deutsches Institut für Entwicklungspolitik14 Change must be radical, systemic and fast... Against vested interests and lock-in effects:... But today’s markets do not provide the right incentives: –Environmental externalities –Coordination failure –Information failure –Capital market failure (c) Additional market failures

© 2008 Deutsches Institut für Entwicklungspolitik15 What can be done to accelerate low carbon technological change?

© 2008 Deutsches Institut für Entwicklungspolitik16  LCIP is essential. Postponing action boost costs for future generations  Internalize environmental costs: carbon price, water prices  Reduce number of exemptions  Phase out harmful subsidies (2010: 409 bn $ fossil energy subsidies. ( IEA 2011 )  Technology push policies (R&D, deployment subsidies, standards)  Ensure policy coherence (e.g. preferential FIT may reduce prices of emissions certificate = disincentive) Low carbon industrial policy implications

© 2008 Deutsches Institut für Entwicklungspolitik17  Mobilise finance: creation of policy rents and predictable long-term policy frameworks (guaranteed tariffs, soft loans, investment guarantees...). =>High demands on governments. Need to improve policy learning, minimize political capture Low carbon industrial policy implications

© 2008 Deutsches Institut für Entwicklungspolitik18 Good examples exist, including developing countries. E.g. India’s solar mission: 1.Mobilised investments: installed cap from 18 MW (2010) to 1000 MW (2012). 2.reverse bidding brought prices down from 24 to 11 cents/kWh within one year, 3.Target for retail grid parity revised down from 2022 to 2017 LCIP is necessary – and possible ! Low carbon industrial policy implications

© 2008 Deutsches Institut für Entwicklungspolitik19 Thank you for your attention !