National Pathways to Low Carbon Emission Economies

Innovation Policies for Decarbonizing and Unlocking

Kurt Hübner

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429856754
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The science is clear: climate change is a fact and the probability is extremely high that it has been caused by humans. At the same time, policy responses are hesitant, rather lukewarm and differ substantially between nation-states. The question is, what drives and what blocks radical action? This book makes the case that institutional settings, path dependence and emerging change coalitions are critical in explaining climate policies across the global political economy.

Technological and social-political innovations are key drivers for dealing with climate change. This class of innovation is very much guided, or suppressed, by a national economy's established institutional settings. By anchoring national case studies in a version of the well established 'varieties of capitalism' approach, the chapters of this book show why some economies are policy leaders and others become policy followers, or even policy interlockers. Moreover, the case studies demonstrate the extent to which external events and institutional constraints from the international polity influence national innovation strategies. Taking a unique analytical approach, which combines insights from innovation policies and a variety of capitalism literature, the authors provide genuine comprehension of the interplay between institutional settings, political actors and climate policies.

National Pathways to Low Carbon Emission Economies offers a valuable examination of these issues on climate change that will be of interest to academics and postgraduates researching climate policy, economic policy and social movements. Furthermore, it is relevant for policy analysts and policy makers who are interested in learning from climate policies in the context of innovation strategies for a range of countries.

1Decarbonization and unlocking

National pathways to low carbon emission economies

Kurt Hübner

Carbon conundrums

The science is conclusive. Man-made greenhouse gas emissions are the main driving force for changes in the global climate. According to the most recent synthesis report by the IPCC (2014):

the period from 1983 to 2012 was very likely the warmest 30-year period of the last 800 years in the Northern Hemisphere, where such assessment is possible (high confidence) and likely the warmest 30-year period of the last 1,400 years (medium confidence).

Climate change is not an uncertain future but rather a contemporary reality, and a well established critical threat for the future. The increase in average global temperature is irreversible but, potentially, the rise can be managed and kept to a level that would avoid catastrophic outcomes. A turnaround of current trends however, requires pivotal changes in the pattern of production and consumption. Ultimately, a strict policy of decarbonization is needed at a global scale to keep worldwide temperatures to a non-catastrophic level. And yet, such a global policy project is out of reach. However, climate policies of and within nation-states are currently being enacted. These are moving along at differing speeds, and with differing depth and breadth. Today’s decarbonization policies will not result in an immediate transition to a zero carbon emission global economy, but efforts to create such an economy are under way, which indicates that a turnaround is a possibility. In 2016, global CO₂ emissions were approximately the same as in 2015 and 2014 (Jackson et al. 2016). What can be seen as a success still implies that the cumulative amount of CO₂ continues to rise. Also, the emissions stagnation was largely the result of lower economic growth in China rather than the outcome of policy induced emissions changes. A carbon budget perspective shows that the world has already used up two-thirds of its CO₂ emissions quota, presuming a target of a 2°C increase. What is more, the entire budget will be used up in about 30 years if emissions remain at 2016 levels. Action is required to prevent future abatement costs from rising beyond economic capacities.

Any such policy project requires a vision for the transition period, including the ways in which such a transition will be managed in economic, political and social terms. Decarbonization entails a fundamental change in the underlying socio-technical regime that guides current production and consumption patterns, and such a change is as much an opportunity as it is a threat. An opportunity in so far as it opens up new ways of producing and consuming. A threat in that it requires the deliberate obsolescence of established economic and social patterns. One crucial component for fundamental change is related to innovation, in both technological and social terms. Staying on the current growth path is not a viable option. As such, a change in course to a climate-compatible growth regime, with corresponding production and consumption patterns, is required. Such a change can be triggered via market processes and/or by political action.

Decarbonization will not happen overnight; rather it will be a time-consuming process that needs to be organized, by political as well as market-driven means. Moving from a high carbon emission path, to a low, or even zero, emission path is demanding on many levels. It is also risky in both economic and political terms. The chapters in this book analyze political efforts to unlock deeply entrenched growth paths and to move toward low carbon emission paths of economic and social development. We do this from a comparative institutional perspective that differentiates various types of capitalism when it comes to climate policies. These variations are critical for understanding emerging national pathways to low carbon emission economies and the reasons why they differ in so many respects. Rather than identifying one pathway, our analysis shows a broad variety of pathways that are guided by established institutional settings.

After the publication of the Stern Review (Stern 2006) the debate among economists focused on the proposition that the earlier a profound climate policy is initiated, the lower the marginal turnaround costs will be. Critics of such a view made the point that the discount rate chosen was too low, which meant that future costs were calculated as being too high (Nordhaus 2007; Pindyck 2013).¹ Indeed, if one takes an opportunity cost-based discount rate, then the resulting future costs of climate change would be much lower, and thus the urgency to take action now would be less pressing. However, such a view takes the future as an extrapolation of the past and thus excludes the non-linear dynamics that govern global climate. With these non-linear dynamics, tipping points are a real possibility, even though they cannot be predicted. It may be a fair assumption to see the ‘tail’ of climate change as a literal fat tail, and thus as a process that may come with high social and economic costs (Weitzman 2014). Consequently, the discount rate should be relatively low. The actual development of CO₂ emissions confirms a non-linear perspective. The Stern Report, as well as similar benchmark studies, all calculate economic costs on the basis of emissions doubling from pre-industrial levels. However, the most recent IPCC, business as usual scenario, indicates at least a tripling, and maybe even quadrupling, of accumulated emissions (see IMF 2008). Such an increase hints at much higher economic costs than initially calculated. Given these characteristics of climate change, economic and political actors with a sufficiently long time-horizon should act today, since procrastinating is associated with higher costs tomorrow. Still, political and economic actors discount the future according to their own short-term preferences. These are influenced by their particular interests, which are enshrined in specific national institutional settings. Also, choosing an appropriate discount rate is not as evident as is often assumed, mainly due to the high level of uncertainty that comes with the aforementioned unknown tipping points for events related to climate change. As a result of this uncertainty, economic and political actors chose to stay on a path that favors exploiting the still available parts of the global carbon budget. And yet, as our case studies demonstrate, change is under way. Relevant countries have started to engage in climate policies that have the potential for path change. However, change occurs very unevenly, both concerning the way it is generated and with respect to the varying speed and depth with which policies are being enacted.

The relations between carbon emissions and economic institutions are complex. In an ideal world of market capitalism this should not be the case. Markets would generate prices that fully cover the social costs of production and consumption, and thus guide actors to optimum outcomes where private and social costs are identical. Yet, markets are not complete and do not automatically include the social costs of production and consumption. Even if markets have – through political action – internalized social costs to deal with this shortcoming, this may not be sufficient to generate a low carbon emission path. This is partly due to the fact that not all economic activities are organized via markets and thus some activities are not subject to market pricing. It is also a result of the fact that sectoral shifts from high to low emission activities have the potential to meet harsh political and social opposition from certain economic agents. These are actors that would lose out with a significant change in direction and thus oppose market-induced shifts.

In analytical terms, the argument that the decarbonization of market economies becomes relatively cheaper if it is started earlier rather than later is well established. And yet, it neglects the fact that the envisioned path change generates immediate economic and social burdens, whereas the benefits may only occur later. This time inconsistency has wide-ranging implications. High carbon emission activities will have to shrink permanently at the inception of a sectoral shift. It is to be expected that such actions will provoke resistance from affected sectors. Thus, it is no surprise if otherwise unlikely coalitions between employers and employees form when their interests are challenged. Moreover, time horizons diverge for winners and losers of a path shift. Economic sectors that will be closed down, or at least drastically shrunk, experience immediate costs. Potential winners of a path change may only reap their gains in the distant future. The question then is, from a political point of view, how can both interests be reconciled? Moving from a high carbon to a low carbon emission path requires a substantial reallocation of resources, compensatory measures, and a fundamental change in market economies’ institutional settings, to help guide the decisions and actions of critical actors. It also requires adequate infrastructure and private investment to support and grow low carbon activities. Technological innovations can be important drivers in any unlocking and path changing strategy, in addition to their role in expanding markets and stimulating employment opportunities. To achieve all of these outcomes, or any mixture of them, is quite a feat. It therefore seems only rational to assume that an innovation-led path change comes with substantial political and social change, which may in turn result in social and political conflicts that delay adequate action. The Fukushima accident triggered a German case of an Energiewende (energy transformation) as a striking example of a purportedly quick political move away from atomic energy, toward renewables, and potentially toward a low carbon emission path. It should satisfy Germany’s 2020 target of a 40 percent carbon emission reduction compared to 1990 levels. This goal also implies unlocking from fossil fuels, and thus a decision by the German government to take the oldest and most carbon-intensive coal power stations immediately off the grid. Energy experts make the argument that such a policy would be possible without creating electricity bottlenecks or an increase in electricity prices (Oei et al. 2014). And yet, a powerful coalition of energy sector-trade unions and a Social Democratic Party with a key voting bloc in what can be labeled coal-land, undermined such a policy change.² Rather than continuing its position as a climate policy leader, the Merkel-Gabriel coalition decided to dilute its climate target by stretching the transition period and offering side-payments to energy incumbents (see Chapter 5, Ebner).

If we follow established science, wherein greenhouse gas emissions are the result of economic activities, and if we further assume that these activities are organized via markets, then climate change can be interpreted as an externality which results in market failure. The discipline of Environmental Economics is full of examples of this kind of market failure, as well as of analyses of how to overcome this institutional incapacity. Generally speaking, markets need an adequate social-political embedding to avoid such failures. Most prominent is the proposal for the internalization of externalities, the best-known variety of which is the so-called Pigovian tax, named after Arthur Pigou who made the case that the existence of market externalities justifies corrective interventions by the state (Pigou 1920). Such a tax addresses the social component of overall costs and adds this critical element to the market-determined private costs of production. Other ways to internalize carbon emission costs include cap-and-trade regimes where carbon emissions receive a market price that is charged to the emitting source. By including (the ‘true’) social costs of private production (and therefore of consumption), market prices would reflect ‘true costs’ and provide an effective incentive for a more climate-friendly allocation of resources. Such a regime could run into cost competitiveness problems for producers however, if only one or a small number of nation-states opt for such a tool of cost internalization. In this case, companies located in a jurisdiction with a ‘Pigovian tax’ would have higher costs then companies located in a jurisdiction that does not levy such a tax. Hence, embedding environmental costs in markets may be seen as a necessary condition for a change toward a carbon-reducing regime, but not as a sufficient condition, since the reality that polluters want to avoid such a tax cannot be ignored. At a minimum, these first-movers would need to safeguard their domestic producers and consumers from carbon leakage by introducing carbon-oriented border adjustments, such as taxes and tariffs. As long as not all (relevant) national jurisdictions are following the same internalization of external costs, such a protective policy seems reasonable.³ At least from an analytical perspective, not participating in a global climate policy treaty would result in a border duty by participating countries so that they can internalize the costs to the level set by the treaty. In such a case, imports would be taxed at a rate that either equals the respective domestic carbon price of the import economy times the amount of carbon embedded in the particular good, or the domestic carbon allowance of a similar domestic producer in the case of a cap-and-trade regime. Either way, imports of non-participating economies would become more expensive.⁴ Still, some of our case studies indicate that individually implemented national approaches can work quite smoothly, even in the absence of border adjustment. This is possible either due to a relatively low carbon tax rate and/or due to the installation of cost compensation policies that shelter private businesses from cost disadvantages. In both cases, the chosen level of internalization of social costs is suboptimal in order to protect national interests.

One of the paradoxes of climate change is the large gap between established knowledge about the detrimental economic and social effects of rising temperatures on the one side, and effective political action on the other. Procrastination and half-hearted actions are the preferred way to go when it comes to political responses. Usually, the literature explains this gap through the global public good (bad) character of climate change that induces free riding; actors receive the benefits of particular actions without contributing to the costs of the action. Given that greenhouse gases do not stop at national borders and the fact that cause (production of greenhouse gas) and effect (change of climate) are decoupled, political and economic actors tend engage in free riding. Climate policy deniers, such as the USA under President Trump for example, have used the argument that international agreements are not worth the paper they are written on, as long as the largest global emitters are not fully on board or enjoy privileged treatment. Consequently, inaction by others is used as an argument to defend their own inaction. Rather than becoming politically invested in measures dealing with the increase in carbon emissions, governments passively enjoy the climate initiatives of others, while simultaneously refusing to enact serious climate policies at home. Such a political argument (concerning the futility of independent climate action) becomes progressively more difficult to make, the more countries are willing to contribute to the production of a global public good. Moreover, in cases where inaction is the preferred route on the federal political level, there are still critical policy actions taken on the sub-federal level (see Harrison and Schreurs in Chapters 2, 4 and 7) that can show positive effects. Still, if we assume that managing climate change, either on the ‘effect side’ or on the ‘cause side’ comes with immediate tangible economic costs, then it is only fair to assume that economic and political actors have strong incentives to avoid, or at least minimize, such costs. Free riding is facilitated by the ‘Westphalian dilemma’ (Nordhaus 2015: 1340). The 1648 Treaty of Westphalia established the sovereignty of nations, gave them the right to self-determination, declared all states as legally equal, and set the principle that all nations can manage their internal affairs without outside interference. In legal terms, states have the right to abstain from climate policies. The result of non-action could be a global tragedy of the commons. Such a bleak outcome is not inevitable though. The less ingrained the principle of sovereignty in this domain is, the more incentives are in place for climate policy leadership that has the potential to create benefits in the medium term. One incentive can be, as we demonstrate in some of our case studies, that national actors are eager to reap first-mover advantages and to conquer emerging markets when it comes to climate-friendly goods, services and technologies.

The proposition is that the global character of climate change requires coordinated global action that results in a global climate regime. Such a regime not only needs to put in place provisions that allow for the successful management of the effects of climate change, but also has to deal with the production and maintenance costs of such a regime, including a cost distribution mechanism that makes membership of such a ...

Table of contents

• Cover
• Half Title
• Series Title
• Title Page
• Copyright
• Contents
• List of contributors
• Preface
• 1 Decarbonization and unlocking: national pathways to low carbon emission economies
• 2 The challenge of transition in liberal market economies: the United States and Canada
• 3 Transition to a low carbon economy in the United Kingdom: a case of liberal capitalism?
• 4 Climate change politics in Japan in the aftermath of the Fukushima nuclear crisis
• 5 The transition to a low carbon economy in Germany’s coordinated capitalism
• 6 Norway’s low carbon strategy: internal and external drivers
• 7 China: greening China’s state-led growth regime
• 8 Climate policies in dependent market economies: the cases of Poland, Hungary and the Czech Republic
• Bibliography
• Index