Planetary Economics What role for global climate negotiations? Presentation to Climate Strategies – CDKN conference ‘ Less talk more agreement - How research can unblock a global climate deal’ Overseas Development Institute London, 7-8 May 2014 Michael Grubb [Designate – Professor of International Energy and Climate Policy, University College London] Editor-in-Chief, Climate Policy journal Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Planetary Economics Energy, climate change and the Three Domains of Sustainable Development Michael Grubb with Jean-Charles Hourcade and Karsten Neuhoff Routledge/Taylor & Frances, Published March 2014 Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Climate change – context • A mega-problem of risk management under deep uncertainty • “The perfect moral storm” • A “Super - Wicked” problem • … “The biggest market failure in history” (Stern ) If climate change is conceived as a problem of burden-sharing costs for the benefit of future global generations it is insoluble. Fortunately, that is not the real structure .. Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
An integrating approach to climate policy Three Domains and the Three Pillars of Sustainable Development • Some context • The Three Domains and Three Pillars of Policy • System key components • Pillar I: Standards and Engagement • Pillar II: Markets and Pricing • Pillar III: Strategic investment • Policy Integration • Joint Benefits • The Economics of Changing course Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Three Domains – an Economic Interpretation 1 st Domain 2 nd Domain 3 rd Domain “Satisficing” “Transforming” “Optimising” Resource Use / Energy & Emissions behaviour behaviour behaviour 1. Real-world individual 3. Innovation & and organisational evolution of decision-making complex systems Economic Output / Consumption Fig. 2 -3 b Resource trade-offs with the other two domains Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
The Three Domains rest on different fields of theory that apply at different scales Behavioural and T S I O organisational M C E I A Neoclassical and H L O welfare R S I C Z A O L Evolutionary and N E institutional Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Three realms of abatement opportunities - Global estimates for 2030 highlight first two .. 100 Estimates of Global Mitigation Costs and Potential by 2030 80 Advanced Economies Emerging Asia 60 Cost $USD/tonne of CO2e (in Millions) Rest of the World 40 Smarter Choices (Pillar I) 20 0 5 10 15 20 25 Annual abatement in 2030 GtCO2e -20 Choosing cleaner -40 products and processes Innovation and (Pillar II) Infrastructure -60 (Pillar III) Source: Planetary Economics , utilising McKinsey data from Pathways to a -80 Low Carbon Economy (2009) -100 Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Solutions need to harness corresponding policy pillars based on the three domains, to transform energy systems H Highest relevance Policy pillars M Medium relevance 1 2 3 L Lowest relevance Standards & Markets & Strategic Domain To deliver Engagement Prices Investment Smarter H L/M L Satisfice choices Cleaner Optimise M H M products & processes Innovation & Transform L L/M H infrastructure Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
In transforming energy systems globally, all three domains are • … approximately equally important – Cost curve data – Difference between in-country and international elasticities – Observed policies of the most successful countries – Suggestive evidence from economic Growth Accounting & individual pillar ‘bottom up’ evidence • .. and interdependent – The pillars are complementary, not competing – “Any pillar on its own will fail” But the relative importance of different measures varies across sectors and countries, and the nature of co- benefits are diverse Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Pillar II Conclusions • Too much ‘looking under the lamppost’ • The economics of carbon pricing are as much about design and strategic credibility than level • The politics of carbon pricing are driven by distributional impacts and the lack of clearly articulated positive narrative for either industry or consumers • Links to the other two domains are central to any ‘tangible’ positive narrative, drawing on ‘Bashmakov’s Constant of Energy Expenditure’ Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Cost differences between high and low carbon energy systems are minor compared to the structural differences Clustering of ‘low cost’ energy futures around higher and lower emissions, rather than in the middle, reflects divergent responses to depletion of ‘easy oil’ Global energy Annual costs We are global here emissions Time ‘ Green’ futures ‘Brown’ futures • Extended dependence on fossil fuels • Integrated energy system • Unconventional and synthetic oil in transport • Biomass and electricity in transport • Low capital costs… • Low-carbon electricity •…but high operating costs and a host of •High capital costs…. •……but low operating costs environmental issues beyond carbon Figure 10-6 : Two kinds of energy future – the carbon divide Source: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Energy & related sectors are ‘complex sociotechnical systems’, with big evolutionary & lock -in characteristics • Progress in clean energy industries impressive, but heavily dependent on public policy • .. and so far outweighed by ‘carbon entanglement’ • Consider response to oil price rises • .. and study the policy implications of evolutionary economics: – Niche accumulation – Hybridisation strategies • Industrial strategy is unavoidable • … with the potential positive side being macroeconomic version of “Porter’s kick” Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Planetary Economics An integrating approach to climate policy • Nature of the challenge • The Three Domains and Three Pillars of Policy • System key components • Pillar I: Standards and Engagement • Pillar II: Markets and Pricing • Pillar III: Strategic investment • Macroeconomics & Policy Integration • Joint Benefits • The Economics of Changing course Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Macro modelling : Global GDP in mid Century has little or nothing to do with global mitigation … 20 GtCO2 = halving of global CO2 emissions by mid Century Figure 11.4 Gross World Product in 2050 (excluding environmental benefits) from a wide range of models Source: Energy Modelling Forum (2009). MF22 Database: Climate Change Control Scenarios. Available from: http://emf.stanford.edu/events/emf_briefing_on_climate_policy_scenarios_us_domestic_and_international_policy_architectures/ Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
The Three Domains also link to debates about macroeconomic growth • Neoclassical economic growth models have consistently found a ‘residual’ accounting for typically half of observed economic growth that cannot be explained by resource and capital accumulation (Ch.11 the “Dark Matter” of growth ) • Economic research points two broad explanatory areas: – Reducing suboptimal performance of many economic actors and structures – Education, infrastructure and innovation • ie. First and Third domain processes are recognised as important for macroeconomic growth. Yet these remain – largely absent in global (or national) modelling – poorly charted in policy • Energy is a particularly strong candidate because – Pervasive input to numerous production sectors – Fossil fuel markets are intrinsically unstable – Exceptionally low rates of innovation particularly electricity & construction Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
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