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Ratcheting up policy stringency through sequencing

While in the EU the past decade can be characterized mostly by getting climate policies into place and refining them, the challenge ahead for the next decade is to substantially increase their stringency. In the first decade of this century, many of the policies considered to become the backbone for achieving these targets were developed and implemented. First of all the EU’s Emission Trading Scheme became operational in 2005, although with very weak reduction targets and primarily to achieve the Kyoto protocol obligations. In 2008 the EU adopted the 2020 climate & energy package, which entailed relatively modest targets for GHG emission reductions, renewable energy use, and energy efficiency. Around ten years later the ETS is expected to have overcome its long lasting “prices crisis” (in the wake of the 2018 reform), CO2 emission standards for cars and trucks are being tightened, and a new governance mechanisms for renewable support with complementary EU mechanisms has been agreed upon as part of the “Clean Energy for All Europeans” package.

Yet the targets of the next decades are considerably more ambitious and require even more stringent policies. For the EU Long Term Strategy, a number of scenarios were developed that project the achievement of the 2030 targets as agreed in June 2018, and aim at long-term emission reductions of at least 85% by 2050 (from 1990 levels). While these scenarios are underpinned by a range of assumed policies, it is by no means clear that these policies can be implemented and ratcheted up as needed. For instance, the current price in the EU ETS – even though it has quadrupled in the last two years – still seems to be far away from driving decarbonization in the power and industry sectors at the rate required. A core question is thus: how must policies be designed in order to allow for such ‘ratcheting’?

Climate policies as sequences that can overcome barriers to higher ambition
In recent work (Pahle et al) we examined how climate policy today may be effectively designed to lay the groundwork for more stringent climate policy in the future—what we call policy ‘sequencing’. Such advance thinking is essential, because as the Roman emperor and philosopher Marcus Aurelius put it: “the impediment to action advances action. What stands in the way becomes the way.”

The core mechanism is illustrated in the figure below: the effects of policies implemented at an initial stage (t1) remove or relax stringency barriers over time so that policymakers can ratchet up stringency at the subsequent stage (t2).

In this work we also identify at least four categories of barriers: costs (both due to the cost of new forms of decarbonization technology, and due to the economic costs of more or less efficient policy choices); distributional effects (the winners and losers of any specific climate policy choice); institutions and governance (where capacity limits and veto points might prevent the enactment of more stringent policy) and free-riding concerns (where some jurisdictions may not adopt climate policies in the hope of free-riding off of the climate policy achievements of other jurisdictions). After exploring ways in which those barriers might be reduced or eliminated, we finally draw on the cases of Germany and California to provide specific examples of how sequencing works.

Applying sequencing to strengthen the EU ETS.
The concept of sequencing is not only a useful approach for explaining what has enabled ratcheting in the past – it can also be used strategically to design current and future policies. In the following we apply the sequencing framework to the EU ETS to illustrate the concept and discuss implications for policy choices. A first aspect is that strong myopia of market participants could lead to persistently lower ETS price, which eventually might rise sharply towards the end of the next trading period (“hockey stick”). Such a sharp rise would face strong political opposition, possibly jeopardizing the ratcheting up of the policy. A remedy could be a minimum carbon price, which would balance prices over time as described for example by Flachsland et al.

Overcoming the waterbed effect
In a similar vein, the EU ETS has long been challenged by the problem of overlapping policies on the national level, which reduce demand for certificates, thus depressing ETS prices, and thereby inducing the ‘waterbed effect’ that other countries emit more. Again, a minimum carbon price could alleviate this problem, an EU-wide minimum price seems to be politically infeasible at least in the near future. Suitable policy sequencing could over time reduce this barrier. For example, recent work (Osorio et al) with a focus on the German coal phase out, examined how a coalition of ambitious countries could implement such a price floor to reduce the short-term waterbed effect. In order to prevent leakage to future trading periods, they would have to cancel allowances equivalent to the level of additional mitigation the price floor would induce – an option that was made more prominent in the last reform of the ETS,. Such a coalition could grow over time and eventually create a majority to also implement a carbon price floor in the full EU ETS.

Professor Benjamin K. Sovacool authors Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions

INNOPATHS consortium member, Professor Benjamin K. Sovacool has authored a recent book entitled, Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions, that uses INNOPATHS initial work and findings.

This book examines the visions, fantasies, frames, discourses, imaginaries, and expectations associated with six state-of-the-art energy systems—nuclear power, hydrogen fuel cells, shale gas, clean coal, smart meters, and electric vehicles—playing a key role in current deliberations about low-carbon energy supply and use.

Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions unveils what the future of energy systems could look like, and how their meanings are produced, often alongside moments of contestation.

Read more about it here.

INNOPATHS initial findings presented at the 24th Conference of the Parties

Dr Elena Verdolini from the RFF-CMCC European Institute on Economics and the Environment and INNOPATHS Work Package Leader, presented initial results from the INNOPATHS project, explaining how this project aims to work with key economic and societal actors to generate new, state-of-the-art low-carbon pathways for the European Union. This presentation was part of a side event on ‘energy decarbonisation & coal phase out: financial, technological and policy drivers’ at the COP24 in conjunction with Carbon Tracker, WWF Poland and CEE Bankwatch Network.

This presentation was structured around three key INNOPATHS outputs. First, the “Technology Matrix”, an online database presenting information on the cost of low-carbon technologies and their performance, including both historic and current data, and future estimates. The key feature of this database is the collection of a wide variety of data from different data sources, and the computation of metrics to measure the uncertainty around values. The matrix will thus contribute to mapping technological improvements (and associated uncertainty) in key economic sectors, including energy, buildings and industry. It will show that many low-carbon technologies options are available in certain sectors, but also the specific technological gaps characterizing many hard-to-decarbonize sectors, including aviation, or energy-intensive manufacturing sectors such as chemicals and heavy metals. For these technologies, additional and dedicated Research, Development, Demonstration and Deployment funding will need to be a priority.

The second key output is the “Policy Evaluation Tool”; an online repository of evidence on the effect of policy interventions against key metrics, such as environmental impact (i.e. emission reductions), labour market and competitiveness outcomes. The tool will become a repository of evidence on what approaches and policy instruments work, or do not work, helping policy makers to understand how best to achieve various goals related to the energy transition.

The third key output are insights from INNOPATHS researchers focusing on the financing of the decarbonization process. First, similarly to the process of industrial production, financing costs benefit from “learning-by-financing”, as lenders develop in-house abilities and experience in the selection of renewable energy projects. Second, researchers focus on the importance that public investments can play in signaling change and promoting a shift of investments away from fossil and towards low- and zero-carbon technologies. In this respect, public banks are crucial actors, which can act as catalysts for private investments.

Find out more about the conference here.

Dr Elena Verdolini explains decarbonising the energy sector

CMCC and EIEE senior researcher Elena Verdolini explains how the energy sector, the largest producer of greenhouse gases, is surprisingly one of the easiest areas to decarbonise.

Electrification is growing fast as it becomes increasingly low-carbon or carbon-free entirely. Dr Verdolini explains how variability is a major obstacle to increasing the use of renewables and goes on to talk about the best ways to tackle the increasingly difficult obstacles this sector faces.

Read the full article here.

 

Promoting the energy transition through innovation

With the striking exception of the USA, countries around the world are committed to the implementation of stringent targets on anthropogenic carbon emissions, as agreed in the Paris Climate Agreement. Indeed, for better or for worse, the transition towards decarbonization is a collective endeavour, with the main challenge being a technological one. The path from a fossil-based to a sustainable and low-carbon economy needs to be paved through the development and deployment of low-carbon energy technologies which will allow to sustain economic growth while cutting carbon emissions.

Unfortunately, not all countries have access to the technologies which are necessary for this challenging transition. This in turn casts serious doubts on the possibility to achieve deep decarbonisation. Developed countries accumulated significant know-how in green technologies in the last decades, but most of developing and emerging countries do not have strong competences in this specific field. Yet, it is in these latter countries that energy demand, and hence carbon emissions, will increase dramatically in the years to come. The issue at stake is how to reconcile the need for a global commitment to the energy transition with the reality of largely unequal country-level technological competences.

Public R&D investments play an important role in the diffusion and deployment of low-carbon technologies. Public investment in research is the oldest way by which countries have supported renewable energy technologies. For instance, following the two oil crises of the 1970s, the United States invested a significant amount of public resources in research and development on wind and solar technologies, with a subsequent increase of innovation activities in these fields. The same pattern can be observed in the last two decades in Europe, where solar, wind and other low carbon technologies have been supported by public money. But innovation policies and R&D investments are only one of the possible ways in which governments can stimulate low-carbon innovation.

Environmental policies are another way to stimulate clean innovation, which comes as an additional pay-off of emissions reduction. Usually, governments rely on two different types of environmental policy instruments: command-and-control policies, such as emission or efficiency standards, and market-based policies, such as carbon taxies or pollution permits. The former put a limit on the quantity of pollutant that firms and consumers can emit. The latter essentially work by putting an explicit price on pollution. Both types of instruments have the direct effect of lowering carbon emission in the short term. In the longer term, they also have the indirect effect of promoting low-carbon innovation. This is because they make it worth for firms to bring to the market new, improved technologies. Over the past decades, countries have implemented different low-carbon policy portfolios, namely a combination of different policy instruments to foster the development and deployment of low-carbon technologies. The combination of R&D, command-and-control and market-based policies varies greatly across countries.

A crucial question often debated in the literature is: which policy instrument is more effective in promoting innovation in renewable technologies vis-à-vis innovation in efficient fossil-based technologies? Importantly, low-carbon innovation can refer either to renewable technologies, which effectively eliminate carbon emissions from production processes, or to more efficient fossil-based technologies, which decrease the content of carbon per unit of production. Favouring the former type of innovation over the latter is strategically important in the long-run: renewable technologies allow to completely decouple economic growth from carbon emissions. Conversely, fossil-based technologies may give rise to rebound effects, namely increase in overall energy demand (and possibly also in overall emissions) because they make it cheaper to use fossil inputs.

A recent study by Nesta et al. (2018) shows that certain combinations of research and environmental policy instruments are more effective in promoting renewable energy innovation than others. More specifically, there is no ‘one-fits-all’ solution when it comes to choosing the optimal combination of market-based or command-and-control environmental policies. Au contraire, to be effective in promoting renewable innovation, policy portfolios need to be tailored to the specific capability of each country. The study relies on data on innovation in low-carbon and fossil-based technologies in OECD countries and large emerging economies (Brazil, Russia, India, China, South Africa and Indonesia, BRIICS) over the years 1990-2015. The authors apply an empirical methodology that allows to test how effective each “policy mix” is in promoting innovation, depending on the level of specialization of each country in terms of green innovation.

The analysis shows that there are three different regimes of low-carbon specialization. The first one characterizes those countries with extremely low competences in green technologies as compared to fossil-based technologies. This accounts for about half of the observations in the study, including the BRICS countries. In this case, the research suggests, the only effective way to promote the redirection of technological expertise towards green technologies is through direct investment in low carbon R&D.

The second regime does come into play until a country shows enough specialization in green technologies. In this regime, environmental policies start to become effective in further consolidating the green technological specialization. The successful innovation strategy in this case is that which combines command-and-control policy instruments – which lower the incentives associated with fossil innovation – with market-based policies – which increase the incentives associated with green innovation.

The third regime is characterized by a substantial specialization in green know-how. This regime includes only 12 percent of the observations in the study. In this last case, market-based instruments alone are effective in sustaining green innovation vis-à-vis innovation in fossil technologies.

Countries which tailor their policy portfolio based on their level of competencies will be more successful in promoting renewable innovation. A clear example of the dynamics behind this finding is illustrated by Denmark. In the pre-Kyoto period, Denmark had not yet reached the required level of expertise in renewable energy. The country continued to invested heavily in building such expertise through significant investments in renewable research and innovation. As a result, Denmark moved to the second regime. At that point, the country strengthened both command and control and market-based policy instruments, further promoting renewable innovation vis-à-vis innovation in fossil-based technologies. This resulted in an even higher level of competencies in renewables, bringing Denmark to the third regime. The country was then in a position to switch away from command-and-control instruments and simply rely on market-based instruments to promote renewable innovation.

Countries which fail to tailor their policy portfolio are not successful in promoting renewable energy innovation. For instance, France represents a case of failure, as illustrated by our results. The lack of an adequate market-based support for renewables in the nineties led to the full dissipation of the French early advantage in these technologies. Indeed, France was the only country that is in the third regime in the first period and was then in an ideal position to implement ambitious policies before other countries, thus keeping its relative technological advantage. Instead, the country chose to fully specialize in nuclear energy. This eroded France’s capability in renewable energy innovation. This implies that France cannot simply rely on market-based instruments to successfully promote renewable innovation nowadays.

These results are of interest for emerging economies, and suggest that countries like Brazil, Russia, India, Indonesia, China and South Africa should be less timid in strengthening the stringency of both types of policy instruments, because they are well positioned to fully benefit from the innovation incentives. Fast-developing countries desperately need to build innovative capacity in renewable energy technologies and promote their diffusion. Apart from India and, to a lesser extent, Indonesia, all countries have built a satisfactory level of expertise in renewables. This calls for the implementation of both market-based and command-and-control policy instruments as means to embark on a virtuous renewable innovation circle. China stands out due to a high level of expertise in green technologies. Overall, their level of expertise in renewables is such that they would be in the position to fully benefit from the innovation incentives associated with more stringent mitigation policies in support of the energy transition.

 

INNOPATHS consortium holds second all-partner meeting

The second all-partner meeting of the INNOPATHS consortium was held on 3rd – 5th September, hosted by the University of Cambridge. The meeting brought together representatives from all project partners from 8 European countries for three days of intensive, constructive discussions on progress within the project so far, and the future direction of the research. This included a review and demonstration of prototypes of the four original ‘interactive online tools’ – the Technology Matrix, the Policy Evaluation Tool, Interactive Decarbonisation Simulator, and Low Carbon Pathways Platform – each of which will channel different collections of results from the project research, and will seek to serve different purposes for their intended users.

 

In order to ensure that the research and the online tools (along with other research and their associated outputs) will best serve the needs of policy makers, civil servants, business and civil society, the second meeting of both the INNOPATHS External Advisory Board and the INNOPATHS Innovation and Exploitation Advisory Group also took place. Members of these respective bodies, drawn from the spectrum of stakeholder groups, provided insightful advice and guidance to the research team to maintain momentum and maximise policy relevance and we head towards the second half of the INNOPATHS research programme.

Dismissive and deceptive car dealerships create barriers to electric vehicle adoption at the point of sale

As most consumers do not have pre-existing knowledge of electric vehicles (EVs), and current market conditions favour petrol and diesel vehicles, car dealership experiences may strongly influence EV purchasing decisions. Here, we show that car dealer- ships pose a significant barrier at the point of sale due to a perceived lack of business case viability in relation to petrol and diesel vehicles. In 126 shopping experiences at 82 car dealerships across Denmark, Finland, Iceland, Norway and Sweden, wfind that dealers were dismissive of EVs, misinformed shoppers on vehicle specifications, omitted EVs from the sales conversation and strongly oriented customers towards petrol and diesel vehicle options. Dealers’ technological orientation, willingness to sell and displayed knowledge of EVs were the main contributors to likely purchase intentions. These findings combined with expert interviews suggest that government and industry signalling affect sales strategies and purchasing trends. Policy and business strategies that address barriers at the point of sale are needed to accelerate EV adoption.
Written by Gerarado Zarazua de Rubens, Lance Noel and Benjamin K. Sovacool

Read the full publication online

Energy Performance of Buildings Directive Revisions: What to Know.

The following is a guest blog by Anthony Gilbert, specialist in real estate and real estate marketing, and owner of The RealFX Group. Improving the energy efficiency of Europe’s buildings is a key element of a successful low-carbon transition. An important focus of the work of INNOPATHS is an examination of the barriers to achieving this objective, and how to overcome them. The blog focusses on the recent revisions to the EU’s Energy Performance of Buildings Directive (EPBD), which currently sits at the heart of European policy to encourage energy efficiency in buildings.


The EU has recently changed its Energy Performance of Buildings code to encourage the efficiency of older buildings in the union. This move is just one of eight different proposals that seek to reduce the amount of energy used in EU structures. Right now, the building sector accounts for 40% of all energy use in the EU. With 75% of all buildings in Europe described as energy inefficient, these new proposals seek to renovate buildings in an effort to lower energy consumption by up to 6% and COemissions by up to 5%.

Primary Objectives 

These revisions state that smart technology is to be implemented whenever possible to inefficient buildings. Ultimately, this translates to more automation and better control systems. The larger goal for the EU is to hit 0% emissions by the year 2050. Professionals are instructed to use readiness indicators to determine how easy it will be to integrate the new technology into the building.

Ideally, they’ll be able to piece the resulting data together to determine the best renovation strategies for future structures. The EU is trying to capitalize on just how adaptable technology can be. They see these methods as a chance to stabilize the electricity and to drive the union away from the use of fossil fuels and carbon emissions.

The Role of Member States 

The directives of these revisions are deliberately vague to account for the many anomalies and incongruities of renovation and retrofitting. Member States are given the freedom to accomplish these objectives as they see fit. Each neighborhood is allowed to decide the best way to implement the changes based on not only the physical infrastructure but also the environmental obstacles that may stand in the way of ideal working conditions. The larger EU bureaucracy will only interfere if they feel that Member States are not honoring the revisions or otherwise failing to promote sustainability. As they begin promoting more renovations, homeowners and tenants should start to see their energy bills fall.

A Rise in Jobs

The rate of renovation in the EU is currently between .4 – 1.2%, so there’s a lot of room for growth when it comes to installing smarter energy systems. The construction industry in Europe puts 18 million people to work and is responsible for 9% of Europe’s GDP. These new directives give experts in renovations and retrofits more opportunities to put their knowledge to good work, and it gives novices a chance to learn on the job and transform themselves into the energy protectors of tomorrow. These types of radical turnarounds tend to boost jobs in related sectors. The rise in competition usually results in better products and services, which is truly a win-win for both people and the planet.

Improved Lifestyles

Building inefficiency doesn’t just hurt the environment, it can also hurt the people who reside in the buildings. Humidity, dust, and pollutants can hang in the air of a building that lacks the necessary components to circulate it. Vulnerable groups like children and the elderly are particularly susceptible to illness after repeated exposure. The smarter a building is, the more breathable the air will be and the more comfortable the residents will feel. Ultimately, the EU wants everyone to start taking their energy consumption seriously. By starting with the buildings people live and work in, they hope to spur a larger movement that makes it easy to hit their greenhouse gas goals.

Future Goals 

The EU fully understands that is has a long way to go if they’re hoping to stamp out energy inefficiency in a sector as large as the building industry. However, these revisions are truly a step in the right direction. By encouraging Member States to put their energy into smarter building, they inadvertently create demand for green building. As homeowners, building owners, and tenants start to see their health improve and their energy bills become much more affordable, it will create a new standard of living. Leaders believe that this strategy will help them achieve global leadership in promoting renewable energy.

Every country is responsible for promoting their own version of energy efficiency, but the EU seems to have the right idea by dreaming big. Benefits like job creation, better health, and lower utility bills are developments that everyone can support, regardless of their personal views about our responsibility to preserve the planet for future generations.

Anthony Gilbert is the owner of The RealFX Group. Anthony specializes in real estate and real estate marketing, and likes to follow and promote advancements in accessible and efficient technology for homeowners.

Local and regional governments as pathfinders for the transition to a low-carbon economy

The energy transition required to mitigate against global warming is rightly regarded as a global, international challenge requiring macro-level shifts in environmental and economic policy, and the role of local and regional governments, be it in developing viable and replicable business models, acting as a lead customer in driving eco-innovative solutions, or using their economic leverage through procurement, can be easy to overlook.

As a global network of cities and regions working on both political advocacy and concrete projects relating to energy transition, ICLEI has established city networks aimed at uptake of renewable energy and setting of low-emissions targets, carrying out eco-innovative energy tenders, as well as community-owned energy projects and road-mapping projects for low-carbon heating and transport in cities.

Regional networks and eco-innovative tenders
The SPP Regions project, which concluded in March 2018, generated over 1000 GWh of renewable energy and achieved its carbon and energy savings targets through eco-innovative tenders carried out in the project’s 7 regional sustainable procurement networks.

Starting in 2015 and coordinated by ICLEI, the project has promoted the creation and expansion of European regional networks of municipalities working together on sustainable public procurement (SPP) and public procurement of innovation (PPI). As it approaches its conclusion, it has saved 395,000 tCO2/year and primary energy totaling 1,425 GWh/year, as well as procuring 1,015 GWh of renewable energy across 39 tenders in 7 countries, involving 31 contracting authorities. Additionally, the project recruited new partner networks in 8 other European regions and worked closely with the Procura+ European Sustainable Procurement Network.

The full list of tender models is available to download on the project website, where a savings calculation methodology used in the GPP2020 project demonstrates how the targets and achievements are quantified. The project has also produced a package of in-depth guidance and a series of ‘how-to’ videos on the implementation of various sustainable procurement practices such as market engagement and circular procurement, as well as the 3rd edition of the Procura+ Manual.

BuyZET – Mapping city’s transportation emissions footprints
Launched in November 2016, the BuyZET project is a partnership of cities aiming to achieve zero emission urban delivery of goods and services through procurement of innovation solutions and the development of city procurement plans.

The project has released a series of reports on the methods and results of the transportation footprint mapping exercise that identifies high priority procurement areas. These procurement areas have the potential, through improved processes and supplier solutions, to impact upon the transportation footprint of a public authority.

The first step in mapping the transportation footprint is to identify and include all activities performed by cities that involve transportation. Each city within the BuyZET project – Copenhagen, Oslo and Rotterdam – has studied the transportation impacts of different types of procurement activities following different methodologies developed within the project. The three reports from Copenhagen, Oslo and Rotterdam are available here, as well as a consolidated summary of the results of the three reports.

Heat Roadmap Europe
Heat Roadmap Europe, which studies heat demand accounting for approximately 85-90% of total heating and cooling in Europe, has issued a brochure which presents an overview of the current state of the energy demand for heating and cooling in the EU.

In March 2018, a workshop hosted by the EU Joint Research Centre and co-organised by Aalborg University and ICLEI, introduced participants to the project’s main mapping and modelling tools to develop national Heat Roadmaps: Forecast, Cost Curves, JRC-EU-TIMES and EnergyPLAN. Together the tools will allow for building technically possible and, socio-economically feasible, decarbonisation scenarios.

Campaigns and initiatives for a low-carbon economy
ICLEI convenes several collaborative initiatives involving energy and emissions targets at the European and global levels:

Cities for Climate Protection Campaign
Local Government Climate Roadmap
Procura+ European Sustainable Procurement Network
Global Lead City Network on Sustainable Procurement

Two main ingredients for a successful energy transition? A diverse financial system and the right policies

The discussion and action points for moving to an almost carbon-free energy supply have shifted from developing technologies towards a question of how to most effectively and efficiently implement the energy transition without compromising economic development and well-being [1,2]. Transforming our energy systems into more decentralized and renewable energy sources will require a vast deployment of innovations and, accordingly, huge investment. Estimates for the total investment begin at about USD 700 billion, which amounts to a mere 1% of global GDP [3]. There are two key levers to accomplish this task that are cited in almost every publication and report since the early 2000s. These are the use of private financial resources, and an appropriate policy framework. There has been a lively debate about what enabling elements are required for these elements to drive the transition and “shift the trillions” [4].

Financing energy technology innovation – the need for diversity

There is no doubt that the financial sector could, in principle, finance the transition. The financial system gives direction to the development of the real economy. Its traditional role is to mobilize and transform savings into productive investments. However over the last 20 years, driven by consolidation, the race for efficiency and deregulation and financial markets lost a lot of the diversity that is needed to finance innovation (see Figure 1). Many markets are dominated by just a few banks and institutional investors, which have been severely affected by the 2010 financial and subsequent regulation, driving a lot of risk carrying capacity out of banking and insurance markets, which turn provide financing risk-capital such as venture capitalists. The focus of the ecosystem for financing towards debt and later stages of the innovation cycle creates a bias towards calculable risks and, importantly, the maintenance and expansion of the existing capital stock in existing firms rather than new ventures. New forms of alternative finance innovations (such as crowdfunding or community-based credit unions) that could provide the necessary investments might be able to fill this gap, but their volumes are still (too) small. A very important ‘side-effect’ of increasing the diversity of players in financial markets is that the system as a whole becomes more resilient against shocks. Many different players with many different decision heuristics are less prone to making the same errors (Polzin et al. 2017).

Figure 1: Financial instruments to finance clean energy innovation (Source: Polzin et al. 2017)

Policy framework – clear directions and a choice of instruments

Given the current financial landscape we see two main strands of policy interventions to increase both attractiveness of low-carbon energy technologies and the diversity of sources of finance that can be mobilised.

First, innovation policy such as grants for R&D, demonstration support, risk-sharing facilities, tax-credits or Feed-in Tariffs will attract the necessary early-stage investments for future generations of technologies needed for an energy transition (for example organic batteries or power to gas). To overcome the so-called ‘valley of death’ in the innovation chain, public loans or loan guarantees might be suitable, but the risk of over-funding rapidly growing firms should be taken into account. Governments could also invest directly to create a technology ‘track-record’, important for investors [5]. In the later stages of innovation, especially for renewable energy, depending on the design features, portfolio standards or recently popular capacity auctions, prove effective tools. All these efforts should be embedded in a clear and long-term policy strategy consistent with the commitments of the Paris Agreement to be credible to investors. Consistency, stringency and predictability to reduce deep uncertainty and policy risk are deemed especially crucial.

Second, equally important for achieving a mostly privately-financed energy transition are appropriate financial market conditions and regulations [3]. Unprecedented monetary policies in the Eurozone (Quantitative Easing) have driven the cost of debt finance to zero or below and flooded financial markets with cheap debt finance. Still, only very little of that monetary expansion finds its way into the real economy, let alone into clean energy. Framework conditions for either debt or equity-based instruments influence their contribution to a clean energy transition, as a developed capital market is needed to channel resources. In this regard, a fiscal preferential treatment of debt finance, which is widespread today, should be avoided. Typically, interest is deductable as costs, while dividend payments only occur after tax. Policy makers should try to level the playing field across sources of finance. Furthermore capital market regulation shapes investment mandates and risk models and thus ultimately determines the feasibility and viability of investments into clean energy. Regulation (for example Basel III, Solvency II), especially since the financial crisis, is almost exclusively geared towards stability and security. Hence institutional investors and their intermediaries are forced to stay away from risky asset classes such as venture capital. A no-regret solution would be to require financial intermediaries to lower their overall leverage ratio (debt to equity) and operate with more equity. With more ‘skin in the game’, banks and institutional investors can responsibly handle more risk and uncertainty on their balance sheets. New alternative finance such as equity and debt-based crowdfunding are also becoming more regulated in many countries. Regulators should abstain from clamping down on them, for example through a regulatory sandbox.

In sum, to effectively and efficiently mobilise private finance for innovation and diffusion of low-carbon energy technologies, it is paramount to increase diversity of financial sources available in the market and also, next to an adequate innovation policy, adjust financial market regulations and conditions. The INNOPATHS finance workstream, consisting of ETH Zurich, PIK, Allianz Climate Solutions and Utrecht University will further explore the dynamics finance-energy (innovation)-policy dynamics [see for example 5,6].

Resources:

[1] Mazzucato, M., Semieniuk, G., 2018. Financing renewable energy: Who is financing what and why it matters. Technol. Forecast. Soc. Change. 127, 8-22. https://doi.org/10.1016/j.techfore.2017.05.021

[2] Polzin, F., 2017. Mobilizing private finance for low-carbon innovation – A systematic review of barriers and solutions. Renew. Sustain. Energy Rev. https://doi.org/10.1016/j.rser.2017.04.007

[3] Polzin, F., Sanders, M., Täube, F., 2017. A diverse and resilient financial system for investments in the energy transition. Curr. Opin. Environ. Sustain. 28, 24–32. https://doi.org/10.1016/j.cosust.2017.07.004

[4] Germanwatch, 2017. Shifting the Trillions – The Role of the G20 in Making Financial Flows Consistent with Global Long-Term Climate Goals. https://germanwatch.org/en/13482

[5] Geddes, A., Schmidt, T.S., Steffen, B., 2018. The multiple roles of state investment banks in low-carbon energy finance: an analysis of Australia, the UK and Germany. Energy Policy 115, 158–170. https://doi.org/10.1016/j.enpol.2018.01.009

[6] Steffen, B., 2018. The importance of project finance for renewable energy projects. Energy Econ. 69, 280–294. https://doi.org/10.1016/j.eneco.2017.11.006