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Innovation in low carbon technologies: theory and policy

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Title: Innovation in low carbon technologies: theory and policy


1
Innovation in low carbon technologies theory and
policy
  • Dr Tim Foxon
  • Cambridge Centre for Climate Change Mitigation
    (4CMR),
  • University of Cambridge
  • Presentation at ICE, University of Bath, 17 April
    2007

2
Outline
  • Drivers of UK energy policy
  • Climate change and energy security
  • Technological and institutional change in energy
    systems
  • Systems failures in low carbon innovation
  • Carbon lock-in
  • Towards improved policy processes for low carbon
    innovation
  • Transition to a low carbon economy

3
UK energy policy
  • 1980s and 1990s
  • Privatisation, liberalisation of energy markets
  • Dash for gas in electricity generation
  • 1997-2003
  • Reform of electricity trading, NETA
  • Introduction of Renewables Obligation
  • Energy White Paper Low Carbon Economy
  • 2005-present
  • Energy security issues come to the fore
  • New Energy White Paper, May 2007

4
2003 Energy White Paper
  • Four goals for UK energy policy
  • Reducing CO2 emissions by 60 by 2050
  • Maintain reliability of energy supplies
  • Promote competitive markets, to improve economic
    growth and UK productivity
  • Adequate and affordable home heating
  • Aim to achieve goals together
  • Market framework and policy instruments should
    reinforce each other to achieve goals

5
2006 Energy Review
  • Increasing concerns about energy security
  • Energy gap, as most current nuclear and many
    coal-fired power stations close by 2020
  • Dependence on imported gas supplies
  • Increasing oil price
  • Review progress towards four policy goals
  • Examine what further measures are needed
  • Focus on framework relating to nuclear new build

6
Stern Review Economics of Climate Change
  • Risk management framework
  • Risks of extremely damaging phenomena if mean
    global temperature rise exceeds 2C
  • Estimated economic and social costs of impacts
    are 5-20 of Gross World Product
  • This implies the need to stabilise atmospheric
    concentrations at between 450 and 550 ppm
    CO2equivalent (400-500 ppm CO2)
  • Economic and social costs of stabilisation are
    around 1 of Gross World Product

7
Costs of climate change mitigation
  • Two methods for estimating the costs of
    mitigation both give around 1 of GWP
  • Bottom-up technology modelling
  • Wide range of technology options
  • Annual abatement cost by 2050 1 2.5
  • Top-down macroeconomic modelling
  • Meta-analysis of models, comparing BAU to
    stabilisation scenarios
  • Reduction in GWP 1 3
  • Higher costs at lower end of stabilisation range

8
Stern Review Policy conclusions
  • Putting a price on carbon through taxes or
    trading schemes - necessary not sufficient
  • credibility of future carbon price
  • uncertainties, risks of options and timescales
  • under-investment due to spillover effects
  • Acclerating technological innovation (Ch16)
  • support for energy RD (needs to double)
  • creating markets and driving deployment (should
    increase two to five times globally)
  • Overcoming institutional and non-market barriers
    to adoption

9
Other energy policy drivers
  • Maintaining energy security
  • Concerns over rising dependence on imported gas
  • Levels of investment needed
  • 900 bn in European electricity generation over
    next 25 years
  • European energy policy
  • Sustainability, security, competitiveness
  • Unilateral reduction in GHG emissions by 20 by
    2020 (up to 30 with international agreement)

10
Range of technology options
  • Improvements in efficiency of provision of energy
    services
  • Buildings, industry, vehicles
  • Low carbon primary energy
  • Renewables, biomass, nuclear
  • Coal or gas with carbon capture and storage
  • Transport
  • Biofuels, hydrogen from sustainable sources
  • Fuel cells, lightweight materials

11
Understanding innovation
  • Innovation is a dynamic, systemic, non-linear
    process
  • Technology push or market pull can be reinforced
    or inhibited by
  • feedbacks between stages of technology
    development
  • influence of framework conditions, e.g.
    government policy, availability of risk capital

12
Think about stages, but also about actors
And about flows and feedbacks
13
Innovation Systems
  • Innovation systems
  • Range of actors and interactions (both market and
    non-market) leading to production, diffusion and
    use of new, and economically useful, knowledge
  • Actors exhibit bounded rationality, uncertainty
    about future
  • Processes of learning and expectations about
    future markets and technological improvements
  • Institutional factors (social rule systems)
    create drivers or barriers to innovation

14
UK innovation systems for renewables
  • ICEPT/E4Tech Report for DTI Renewables Innovation
    Review 2003/04
  • Key technologies and actors
  • wind, marine, solar PV, biomass, hydrogen from
    renewables, district and micro-CHP
  • Flows of knowledge, influence and funding -
    stakeholder interviews
  • Framework conditions

15
Identifying systems failures in UK renewables
innovation systems
  • From demonstration ? pre-commercial
  • little support for scaling up
  • market pull from RO still too weak
  • need for niche market support?
  • From pre-commercial ? (supported) commercial
  • multiple risks technology, market, regulatory,
    systems
  • need to improve risk/reward ratio?

16
Technological lock-in
  • Path dependence of development
  • specific sequences of events
  • specific timing of outcome-shaping events
  • similar starting conditions leading to a wide
    range of possible outcomes
  • small events that can have large consequences
  • Lock-in
  • increasing returns to adoption (positive
    feedback) can lead to lock-in of incumbent
    technologies

17
Increasing returns to adoption of technologies
(Arthur)
  • Scale economies
  • spread fixed costs over increasing volume
  • Learning effects
  • experience gained reduces unit costs
  • Adaptive expectations
  • adoption reduces uncertainty, as users gain
    confidence in quality, performance, longevity
  • Network or co-ordination effects
  • network benefits increase with more users

18
Institutions
  • Institutions are social rule systems
  • Formal social rules
  • legislation
  • economic rules
  • contracts
  • Informal constraints
  • social conventions
  • rules of behaviour

19
Increasing returns for institutions (North)
  • High set-up or fixed costs
  • Learning effects for organisations
  • Co-ordination effects
  • formal constraints, such as contracts
  • informal constraints, e.g shared knowledge
  • Adaptive expectations
  • institutional framework reduces uncertainties

20
Lock-in of political institutions (Pierson)
  • Collective action
  • highly dependent on actions of others
  • High density of institutions
  • learning, co-ordination and expectations
  • Asymmetries of power
  • reinforcing current power structures
  • Complexity and opacity of politics
  • mistakes difficult to rectify

21
Co-evolution of technological and institutional
systems
  • Lock-in of technological and institutional
    systems
  • Interacting increasing returns to adoption of
    technologies and institutions
  • Techno-institutional system or complex becomes
    locked-in
  • Example of current carbon-based energy system
    (Unruh)

22
Electricity generation techno-institutional system
Source Unruh (2000)
23
Electricity generation techno-institutional system
  • Institutional factors
  • satisfy increasing demand
  • reduce unit price
  • liberalise markets in 1990s
  • Feed back into technological system
  • dash for gas, rapid expansion of gas-fired
    generation
  • Reinforces institutional drivers
  • Lobbying to reduce interference in markets

24
Policy drivers and barriers for sustainable
innovation
  • Project in ESRC Sustainable Technologies
    Programme, Oct 2002 - March 2005
  • Foxon, Pearson, Makuch and Mata, Imperial College
  • www.sustainabletechnologies.ac.uk/Projects/policy.
    htm
  • 4 Stakeholder workshops
  • policy-makers, business, NGOs academics
  • Case studies of UK low carbon innovation systems
    and EU environmental regulation

25
Towards improved policy processes for sustainable
innovation policy
  • (1) Sustainable Innovation policy regime,
    bringing together innovation, energy and
    environmental policy regimes
  • (2) Apply systems thinking and practice
  • (3) Advance procedural and institutional basis
    for policy delivery
  • (4) Develop a more coherent and integrated mix of
    policy instruments to promote SI
  • (5) Incorporate policy learning and review

26
(1) Long-term strategic framework
  • Create stable and consistent policy framework
  • encourage investment in low carbon innovation for
    the long term
  • Strategic Energy Agency
  • Lessons from Dutch Transition approach
  • Framework of long-term vision, strategic goals,
    transition paths and key steps
  • Now being applied to innovation in energy policy
    by Ministry of Economic Affairs

27
Dutch Transition Approach
28
(2) Apply systems thinking
  • Address systems failures
  • Create niche markets to support early stage
    technologies at pre-commercial stage, e.g. Marine
    Renewables Deployment Fund
  • Use techno-economic and policy windows of
    opportunity
  • Instruments relevant to stages of innovation
    process
  • Promote diversity of options to overcome
    lock-in of current systems
  • Positive economic value of diverse options

29
Incorporating systems thinking into UK low carbon
innovation policy
  • System failures in bringing through early-stage
    renewable technologies
  • Favours technologies that are not disruptive of
    current system
  • Needs to be complemented by knowledge networks
    and skills base development
  • Long-term thinking in principle, but political
    aspirations not regarded as sufficiently
    bankable by investment community

30
(3) Advance procedural/institutional basis for SI
policy delivery
  • Improve public-private institutional basis
  • Stimulate and engage low carbon innovation
    incubators
  • Clusters of innovators
  • e.g. UK Carbon Trust
  • Engage broader stakeholder participation
  • Particularly from innovation constituency, rather
    than just big business

31
(4) Develop more coherent and integrated mix of
policy instruments
  • Market-based instruments are important
  • getting the prices right through taxes or
    tradable permits
  • But they are not sufficient
  • fail to address other influences on innovation
  • often watered down in design/implementation
  • Other innovation-supporting instruments
  • market development policies, support for RD and
    demonstration, information measures

32
(5) Undertake policy learning
  • Not possible to achieve an optimal mix of
    policies
  • Because of uncertainties, path dependence,
    bounded rationality etc.
  • Improve policy learning processes
  • Monitor and evaluate policy implementation
  • Review policy impacts on SI processes
  • Improve learning and policy processes, e.g. SEPN

33
Improving UK low carbon innovation policy
processes
  • Emphasis on market led approach
  • Rejection of calls for banding of technologies
    (now being reconsidered)
  • Little integration with other policy development,
    particularly NETA
  • Leading to problems, particularly for smaller
    renewable and CHP generators
  • Lack of formal inclusion of policy learning
  • Ad hoc responses to practical difficulties

34
Innovation for a Low Carbon Economy (Edward
Elgar, 2007)
  • 2 Workshops at UKERC in Oxford
  • Economic approaches
  • Endogenous technological change
  • Learning curves
  • Institutional approaches
  • Functions of innovation systems
  • Evolutionary dynamics
  • Management approaches
  • Firms strategies

35
Transition to a low carbon economy two
frameworks
  • Understanding transitions in socio-technical
    systems
  • Three-level framework landscape, socio-technical
    regime, niches (Rip and Kemp)
  • Analyse past transitions interactions between
    technological and institutional factors (Geels)
  • Analyse transition paths how niches develop and
    coalesce to challenge existing socio-technical
    regimes

36
Dynamic multi-level perspective on technological
transitions
Source Geels (2002)
37
Co-evolution of Firms, Technologies and
Institutions
  • Co-evolutionary framework
  • History of industrial development (Murmann)
  • Institutions, e.g. university research, patents,
    influence technology development
  • Firms seek to influence institutional structures
  • Links to evolutionary economics
  • Contributions of technological and institutional
    changes in energy systems to economic growth and
    productivity (Nelson, Schurr)

38
European electricity systems
  • Study of European electricity systems
  • Co-evolution of technologies, institutions and
    firms strategies (Stenzel, Pearson, Foxon)
  • Case studies of UK, Germany and Spain
  • Incumbent firms follow a dual-track strategy of
    undertaking low carbon innovation, and lobbying
    to weaken implementation of policies

39
Proposed new research
  • Transitions in UK energy systems
  • Proposed EPSRC/E.ON research with Imperial, Bath,
    Strathclyde, UEA, Loughborough, PSI
  • Link historical analysis of transitions and
    whole systems thinking with detailed
    engineering modelling to assess feasibility of
    different transition paths

40
References
  • Stenzel, T, Pearson, P and Foxon T J (2007),
    Corporate Strategy in the Electricity Sector An
    Approach to integrating Individual Agency into
    the Systemic Analysis of Innovation, submitted
    to Industrial and Corporate Change
  • Foxon, T J, and Pearson, P (2007), ' Towards
    Improved Policy Processes for Promoting
    Innovation in Renewable Electricity Technologies
    in the UK Energy Policy Vol 35, No.3, pp
    1539-1550
  • Foxon, T J (2007), Technological lock-in and the
    role of innovation, in Handbook of Sustainable
    Development, G. Atkinson, S. Dietz and E.
    Neumayer (eds.), Edward Elgar
  • Foxon, T J, Gross, R, Chase, A, Howes, J, Arnall,
    A and Anderson, D (2005), The UK innovation
    systems for new and renewable energy
    technologies, Energy Policy Vol 33, No.16, pp
    2123-2137
  • Foxon, T J, Gross, R and Anderson, D (2003),
    Innovation in long-term renewables options in the
    UK Overcoming barriers and system failures,
    Report for the Department of Trade and Industry
    (DTI), London, November 2003,
  • http//www.dti.gov.uk/files/file22072.pdf
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