Can Green Sustain Growth?

From the Religion to the Reality of Sustainable Prosperity

John Zysman, Mark Huberty

• Publisher: Stanford Business Books
• Year: 2013
• ISBN:
  9780804788571
• Edition: 1
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

Green growth has proven to be politically popular, but economically elusive. Can Green Sustain Growth? asks how we can move from theoretical support to implementation, and argues that this leap will require radical experimentation. But systemic change is costly, and a sweeping shift cannot be accomplished without political support, not to mention large-scale cooperation between business and government.

Insightful and timely, this book brings together eight original, international case studies to consider what we can learn from the implementation of green growth strategies to date. This analysis reveals that coalitions for green experimentation emerge and survive when they link climate solutions to specific problems with near-term benefits that appeal to both environmental and industrial interests. Based on these findings, the volume delivers concrete policy recommendations for the next steps in the necessary shift toward sustainable prosperity.

I.

FRAMING THE DEBATE: GREEN GROWTH AND THE TRANSFORMATION OF THE ENERGY SYSTEMS

1

FROM RELIGION TO REALITY

Energy Systems Transformation for Sustainable Prosperity

Mark Huberty and John Zysman

“Green growth” has arrived at a critical time. Progress on emissions reduction has lagged far behind our understanding of the damage potential of unchecked climate change, and this is unlikely to change anytime soon. International climate negotiations have faltered, and it remains unclear how a deal sufficiently ambitious to address the emissions problem can be enforced. Domestically, the 2008 financial crisis reduced nations’ willingness and ability to pay for emissions mitigation at home. With austerity in vogue, rich countries have also lost what little enthusiasm they had to pay for ambitious emissions reductions in emerging markets abroad. As the effects of the recession have slowly faded, emissions have resumed their upward trajectory, aided by rapid development in the emerging markets.

These difficulties make the newfound popularity of green growth unsurprising. The notion of green growth suggests that the investments required to mitigate the worst effects of climate change could become sources of sustained economic growth rather than burdens. Were green growth to become a reality, it would bypass the myriad problems of climate change mitigation: who should pay, how much, and when. If green growth were possible then, as with large-scale technological transformations of the past, the shift to a low-emissions economy might catalyze a wave of investment, innovation, and job creation that could sustain and pay for itself. Rich countries could base renewed economic competitiveness on an array of new “green” industries, while emerging markets could support their ongoing development on a foundation of new low-emissions technology.

Unfortunately, green growth today remains more “religion” than “reality.” Most arguments for green growth today take on faith the link between investment in low-emissions technology and the creation of durable economic growth. Moving green growth beyond faith, however, appears difficult. In isolation, the gains from any specific investment in green energy are likely to be limited and short term. Instead, with some exceptions, green growth has to date functioned largely as a justification for changes to energy systems we might want to take for other reasons, such as emissions reduction or energy security.

This book looks beyond near-term investment to long-term sources of growth. We believe that translating the array of isolated investments required for emissions reduction into sustained economic growth may occur only if those investments can catalyze systemic changes in the energy system itself. Such a low-emissions energy systems transformation may then reveal new sources of employment, goods, services, and productivity growth inaccessible in today’s fossil fuel–based, high-emissions energy systems.

We begin by asking two questions about the potential sources of green growth: first, where might this growth potential of low-emissions technologies come from, and second, what would allow economies to discover and maximize this potential. In this chapter and in Chapter 2, we argue that effective emissions reduction will require, in effect, a transformation of modern energy systems. That transformation will require parallel and complementary changes to the technological, economic, and political determinants of how we produce, distribute, and use energy in modern industrial societies. Most green growth arguments anticipate that this transformation will lead to durable economic growth. Inventing new energy technologies, deploying new energy infrastructure, and improving energy efficiency will, of course, require investment from, and generate employment in, sectors ranging from capital-intensive manufacturing to construction. The transition may provide, for the near term, new economic opportunities that can partially offset the cost of a transition necessary for mitigating climate change.

But whether that transition can support sustained economic growth is a separate and more difficult argument. Conceived solely in terms of jobs and investment from renewable energy, the scope and duration of opportunity are very narrow. As Chapter 3 shows, most low-emissions-related investment and employment will substitute for, rather than add to, employment in fossil fuel industries. Moreover, at least in the near future, low-emissions energy will probably cost more than equivalent fossil fuel capacity, potentially crowding out other potentially productive investment. Nor should we place broad hopes on export-led growth either. There will, of course, be countries that capture comparative advantage in green technologies and exploit those advantages to grow through exports abroad. But comparative advantage in green technologies will likely cluster in countries with specific industrial and innovative capacities that other countries will find expensive to replicate (Huberty and Zachmann 2011). Such green growth will thus not be widely shared. Of equal concern, the notion of export-led green growth threatens a new “green mercantilism” born of a perceived zero-sum game for control of green export markets.

Obtaining the technologies required for a low-emissions energy systems transformation poses equally difficult problems. Virtually no one disputes the idea that such a transformation will require an array of innovation in new and existing technologies and their widespread commercial adoption. Who will make the investments in developing these technologies remains controversial. Venture capital has been entangled with and supported other technological systems transformations, most notably the Silicon Valley brand of information technology. Countries around the world, and particularly the United States, have perhaps understandably hoped that venture capital could drive the creation of green energy technologies.

But as Kenney and Hargadon argue in Chapter 4, venture capital will likely fall short of repeating its earlier success. Energy technologies for the most part lack the rapid growth, high turnover, and low capital costs that underpinned the huge returns enjoyed by venture capital investments in ICT. Rather, the energy sector remains focused on capital-intensive, highly reliable technologies capable of integrating with preexisting, complex, economically vital systems. These characteristics run contrary to the needs of successful venture capital–financed green industry. Historically, venture capital has made an array of small investments in fast-growing sectors in the hope that one will become a massive payoff like Google. Here, however, they must make a series of much larger investments in slow-moving, capital-intensive industries, with the knowledge that more than one might become a Solyndra—a massive loss with little upside spillover. Given these incentives, the venture capital model is unlikely, on its own, to drive the innovations required for low-emissions energy systems transformation.

In light of these difficulties, we argue that enduring green growth will have to come from the potential created by a low-carbon energy systems transformation for the economy at large. Past transformations—whether in energy, as in the electrification of cities and factories in the early nineteenth century, or elsewhere, as in the ICT revolution—of course generated investment and employment in their own narrow sectors. But the explosive growth we associate with those earlier transformations derived mostly from how they changed what was possible in the broader economy. The impact of computers went well beyond replacing adding machines, and that of electrification went well beyond simply replacing gaslight. They initiated, among other changes, the radical restructuring of assembly lines and the long-distance transmission of information. These transformations became sources of growth and productivity with far greater scope and impact than the narrow electrical or semiconductor sectors themselves.

We cannot know, of course, whether the low-emissions technology revolution will deliver a similar array of changes. But we emphasize that the growth opportunities of earlier transformations were not always obvious either. History is replete with failed prognostication by even the most sophisticated technologists, often about their own technologies.

Instead, moving green growth from religion to reality will require creating the economic and market space in which firms and consumers can discover the growth potential in this transformation. That, we argue, suggests a role for governments that goes beyond the limited role of setting emissions prices and supporting basic research and development. Indeed, earlier transformations demonstrated that the state has regularly played a more expansive role, even in revolutions that, like ICT, have since been heralded as triumphs of free-market innovation. Determining, then, how to repeat these past successes while avoiding the obvious risks of distortion and capture—either by today’s fossil fuel industry or tomorrow’s clean-technology sector—remains the primary challenge for green growth policy makers.

Transforming the energy system will, though, require making difficult choices amidst serious political conflicts. The transition we consider in the first part of the book requires a process of technical, economic, and regulatory experimentation. The experimentation, in turn requires sustained political support to survive the inevitable failures, setbacks, and misdirection. But the process of energy systems transformation will create numerous opportunities for conflict and endless reformulation of the policy environment. Even accepting the common threat of climate change, the transformation of today’s fossil fuel–based economies will force difficult choices. Even if one can imagine that an energy systems transformation might be able to support green growth, it will invariably benefit some and impose costs on others. Abandoning otherwise functional fossil fuel–based energy assets will of course bring opposition from their owners, who will undoubtedly claim they made their investments in good faith to satisfy an energy-hungry society.

Rebuilding the systems of energy transmission and distribution will require state interventions in land use planning, capital investment, and regulation of monopolistic markets. Transforming energy efficiency will touch every business and household. Each of these goals, moreover, will be weighed against an array of other priorities for investment dollars. The political task of managing the conflicts about how we structure the transition and manage its costs and benefits thus becomes as important as the economic task of structuring a smooth, efficient, and cost-effective transformation. The second half of the book examines how a variety of countries—from small, rich states in Northern Europe, to giant emerging markets in Asia—have approached these technical and political challenges.

Green growth simultaneously represents enormous promise and real challenges. A low-emissions energy systems transformation that delivers broad economic growth would remove many of the roadblocks to effective climate change mitigation. But, as we endeavor to show in this book, the obvious sources of that growth are limited and finite, and the sources of transformative growth are unclear. At present, then, green growth provides a valuable creed for policy makers who desire to make progress on climate change in times of austerity. But sustaining progress over the long term will require moving green growth from political religion to economic reality.

A FIRST STEP TOWARD REALITY: GREEN GROWTH AND ENERGY SYSTEMS TRANSFORMATION

The discussion of green growth first requires that we clearly define the terms used in the book. We define green growth as the use of climate policy to create economic opportunity.¹ This definition, however, departs from those implied in today’s debate. That debate covers at least three different concepts of green growth, all shorthand for myriad policies with diverse, and at times contradictory, goals:

1. The use of climate change mitigation policy to create jobs and other forms of economic opportunity

2. The changes required to make economic growth compatible with environmental sustainability

3. The restructuring of capitalist production to resolve both perceived inherent instability and social and ecological injustices in the system

We also depart from most analysts in how we identify the sources of growth and the tasks required to achieve it. Contrary to most green growth arguments, we find little reason to believe that the jobs and investment required for emissions reduction alone can generate significant long-term economic growth. Rather, we argue, growth can only come, if at all, through what a low-emissions energy system makes possible for the broader economy.

Making green growth a reality will therefore require exploiting the opportunities of a broad shift from today’s high-emissions energy systems to low-emissions alternatives. Assessing whether this is possible requires that we first consider the unique challenges posed by this transformation. As Chapter 2 discusses at length, widespread adoption of renewable energy will introduce energy sources with fundamentally different physical characteristics from today’s fossil fuels. Maintaining the reliability of a system built around the behavior of fossil fuels will thus require a range of technological changes that go well beyond just switching energy sources.

Physically, fossil fuels offer energy-dense, geographically centralized, constant supplies of power. Each successive generation of fossil fuels—coal, oil, and gas—provided denser, more easily stored, and more easily transported fuel sources. The ability to store ever-larger amounts of energy in the same place has encouraged more concentrated, centralized electricity generation. These highly centralized production systems serve diffuse households and businesses via a distribution grid designed to move geographically dense production to diffuse consumers. Finally, the system permits precise control of power generation as long as fossil fuel supplies are available. This precise control permits the system to supply consumers, who operate in markets that provide little information and few incentives for flexibility, with highly reliable power.

A switch to renewable energy sources, which deliver little or no net emissions over their entire life cycle, poses at least three technical challenges. First, the geographic dispersion of renewable energy sources will require downstream changes to best incorporate low-emissions energy into the power system. The best locations for wind, sun, geothermal, and other renewable energy sources are often located far from existing power plants, and they have far lower generation capacity per unit area. Widespread adoption of renewable energy will therefore require significant changes to a power grid designed to move power from centralized, concentrated producers to diffuse consumers. Instead, the grid will need to evolve to concentrate and redistribute power from low-density, dispersed renewable energy generation. This constitutes a major restructuring of critical infrastructure.

These changes to the grid must also confront a second challenge: intermittency. Renewable energy sources—particularly wind and solar electricity—depend on flows of sun and wind that vary minute by minute, seasonally, and over a period of many years. This variation leads to intermittency: fluctuations in the power available from renewable energy sources. This intermittency stands opposed to the assumption of constant and precisely controlled power supplies that underpins the stability of the rest of the energy system. Consequently, at sufficiently high shares of renewable energy,² this intermittency can destabilize the balance of supply and demand critical to the operation of the electric grid. Maintaining the stability of the energy system in the face of intermittency will require substantial changes to systems of energy transmission and distribution. Expanding the grid’s geographic coverage can help level out the peaks and valleys of power supply across regions. Energy storage can provide similar services by capturing excess power at peak production periods for use during supply lulls. Demand-smoothing innovations can help support these supply-smoothing changes. “Intelligent” grids may be able to prioritize and adjust energy consumption in parallel with supply fluctuations, enabling significantly more efficient energy consumption. Regardless of which of these options proves feasible, though, any of them will require an array of new innovations and substantial capital investment to adapt the power transmission and distribution system to the new properties of energy supply. The transformation thus goes well beyond the simple adoption of renewable energy.

Third and finally, accommodating variable generation will become much easier if energy users can understand and respond to fluctuations in energy supply. Today, however, both the markets for energy and the technologies that consume it bury that information and inhibit consumer responsiveness. Improving this situation will necessitate a series of innovations that permit more efficient and responsive use of energy. The reach of these innovations promises to be very wide—from relatively centralized solutions like smart meters to diverse changes in appliances and consumer electronics.

These technological transformations must go hand in hand with a set of structural changes in the markets, business models, and regulatory structures that provide the framework in which these technical systems operate. As the country cases and the discussion of EU energy policy in particular make clear, the regulatory and market structures that worked for highly centralized and vertically integrated electricity markets will likely prove suboptimal for more decentralized and responsive low-emissions markets. Bringing an array of new energy technologies into the network may require changes in ownership and in control of networks, as well as the obligations of network operators. Demand-response pricing of energy will require significant changes to the pricing structures used in many energy systems, where users have come to expect constant prices over time. Funding the investments required for a new energy system will require changes to electric utilities’ rate and capital investment structures. Finally, new “smart” grids will bring with them an array of new concerns about the use of the information derived from grid intelligence. Each of these changes will challenge firms and policy ...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• Dedication
• Contents
• Preface: The Argument in Brief
• Acknowledgments
• Part I. Framing the Debate: Green Growth and the Transformation of the Energy Systems
• Part II. Framing the Debate: The “Green Spiral” and the Politics of the Energy System Transformation
• Part III. Conclusion
• Notes
• References
• Contributors
• Index