Governments must intervene to shape markets for new clean energy technologies in order to drive the rapid change necessary to meet international climate targets, finds a report launched at COP26 by leading international economists and policy experts, including academics from the Global Sustainability Institute at Anglia Ruskin University (ARU).
Government action can make a difference - report
It shows how targeted policy support and investment has led to dramatic cost reductions and huge market growth in wind and solar power and LED lighting, and it calls on governments to adopt the same approach to accelerate new low-carbon industries, such as electric vehicles and steelmaking.
It says market-shaping policies can play a key role in supporting global ambitions to accelerate new clean energy technologies, encouraging international collaboration to drive rapid innovation and scale this decade – a central pillar of the COP26 conference.
The New Economics of Innovation and Transition: Evaluating Opportunities and Risks, finds that policy support and government-led investment in clean technologies shapes the growth of markets, unlocks further private sector investment, and can rapidly drive down costs. With the right policies in place, clean technology markets have grown and costs fallen much faster than most people expected.
Analysis of the growth of the wind, solar and LED industries shows that market shaping policies are at least as important as R&D in accelerating innovation. Yet these policies are often not supported by the cost benefit analysis commonly used by governments to appraise public policy. Some of the policies most critical to success were implemented despite, not because of, the predominant economic advice.
The report findings show that governments should be more aware of the potential for policy-driven innovation to drive economic growth as well as to meet the net zero commitments that now cover 75% of global GDP. It offers a new framework for government leaders and policy makers to guide decisions on how to stimulate clean energy innovation, considering not just costs and benefits, but also opportunities and risks. It also warns that while carbon pricing can be helpful in the right circumstances, it will not be enough on its own, and other policies may be more effective in bringing new clean technologies to market and driving innovation, investment and cost reduction.
Investment into clean energy sectors, including power generation, electricity grids, road transport, steelmaking and hydrogen, could support 65 million jobs and $26 trillion of benefits by 2030. The markets expected to grow most quickly and attract most investment will be those with clear, ambitious and supportive policies.
Michael Grubb, Professor of Energy and Climate Change at University College, London, and co-author of the report said: “The policies that drove major breakthroughs in low-carbon technologies like wind and solar, were challenged by traditional economic advice, which ignored the role of innovation, framing climate policy as costly. We need to learn from these successes that delivering ‘net zero’ will require more sophisticated economic understanding of innovation and transition, more widely applied.
“This report provides a new framework to better assess new technology opportunities and the risks of inaction to inform smarter government interventions.”
The report is from the Economics of Energy Innovation and System Transition (EEIST) Project, a partnership between world-leading research institutions in the UK, EU, Brazil, China, and India, funded by the UK Government and the Children's Investment Fund Foundation. EEIST is a three-year project using new economic approaches to support better decision making on policy relevant to low carbon transitions in high emission, fast growing emerging economies, with a focus on China, India and Brazil, which are home to more than half of the world’s population.
The report says that the greatest successes in the clean energy transition so far have come from government policies to shape markets – often through policies that the economic analysis at the time generally did not recommend:
Since 2010, wind energy has grown from supplying less than 1% to 10% of electricity in Brazil, 15% in Europe, and 24% in the UK. Costs have plummeted; onshore wind is now less expensive than fossil fuels and offshore wind – once seen as impossibly complex and expensive – is increasingly competitive with fossil fuel alternatives.
Solar PV – described as “the most expensive way of reducing carbon emissions” as recently as 2014 – has expanded to similar levels globally as costs have plummeted by 85% over the past decade, to become competitive with fossil fuel alternatives. In China alone, solar has grown from just 0.3 gigawatts of generation in 2008 to 253 gigawatts in 2020.
Low energy LED lighting in India has seen prices fall more than 90% since 2010, moving from the most expensive to the cheapest technology on offer.
These historic transitions were driven by a strategic mix of policies that shaped new markets and led to rapid cost declines and accelerated deployment. They targeted resources directly at the deployment of specific technologies, providing investment support, cheap finance, and public procurement. For example, government policy mobilised investment to support wind in the UK and Brazil and solar PV in Germany and China, with the growth of low cost Chinese manufacturing accelerating cost reductions. Energy policies, such as contracts and pricing under the UK’s Electricity Market Reforms in 2013, incentivised clean energy at the expense of fossil fuels. In India, bulk government programmes for affordable energy access drove rapid cost reductions in LED lighting.
The scale of these transitions has exceeded all expectations. They are now among the cheapest ways to generate electricity, and light, across much of the world. Almost two-thirds of wind and solar projects built globally last year will generate cheaper electricity than even the world’s cheapest new coal plants.
The report says that delivering the Paris climate targets now requires unprecedented, policy-led transformations in multiple technologies and sectors, and governments and policy makers should learn lessons from the past to support better policy decisions. Market-shaping policies can have a profound impact on the development of new cost-effective technologies in every sector of the global economy which emits greenhouse gases. They support new supply chains, business models, markets and jobs, accelerating innovation and driving down costs.
For example, zero-emission vehicle mandates could be a highly cost-effective intervention to drive the mass uptake of electric vehicles. This would encourage investment in new technology, enhance economies of scale, create new jobs, improve performance and cut costs. In turn, this would stimulate consumer demand and development of the necessary infrastructure (such as charging). This could be far more effective than just pricing the carbon dioxide emitted by petrol and diesel vehicles, which does not address the structural challenges of creating demand for and supply of EVs and associated infrastructure.
International collaboration to drive such interventions can shape new global markets, create faster innovation, larger economies of scale, and level playing fields where they are needed. This can accelerate progress towards tipping points where clean solutions become the most affordable, accessible and attractive options worldwide.
Ulka Kelkar, Director, Climate programme, WRI India, said: “For developing countries like India, upfront capital costs can make new technologies unaffordable, even if their eventual benefits outweigh the initial investment. But we have seen technologies like solar power and LED lighting rapidly become cheaper, and may see the same with batteries, EVs and hydrogen electrolyzers. With early investments and sound policies, we can benefit from advances in low carbon technologies and avoid expensive shifts later.”
The report warns that the focus on immediate costs and benefits used by many analysts around the world to assess policy interventions can create a bias towards inaction. This is because they cannot predict with confidence the benefits of low-carbon innovation, and may therefore underestimate or even exclude them, and fail to capture the positive impact that market shaping policies can have. In contrast, risk opportunity analysis can lead to better decision making when dealing with transformational change, by considering how policy affects processes of innovation and transformation.
Using such an approach could have supported investment in the deployment of wind, solar and LED lighting technologies, even when their costs were high.
At Anglia Ruskin University (ARU), Dr Chris Foulds, Dr Sarah Royston, Dr Roberto Pasqualino and Professor Aled Jones of ARU’s Global Sustainability Institute are responsible for internal independent reviews of new models developed by the EEIST consortia in China, India, Brazil, and the UK, as well as leading EEIST’s outreach with modellers, policy makers and thinks tanks within the EU.
Professor Aled Jones, Director of ARU’s Global Sustainability Institute, said: “When governments met in Copenhagen in 2009 for COP15 the world had done little to tackle climate change and leaders struggled to agree ambitious targets that would lead to the solutions needed. However, since then targeted policy support has led to the emergence of new global industries with massive growth in renewables such as solar and wind, as well as low carbon technologies like LED lighting and electric vehicles. This unlocking of innovation has led to the growth of jobs and new markets in many countries around the world.
“Policy development must now recognise that innovation can indeed lead to sustainable transformations as it has led to the transformation of energy, transport, and IT systems over the past 200 years. We need to move beyond assuming that our economy is as efficient as it can be and recognise that over the next 30 years it will be on a completely new trajectory which will bring new opportunities and rewards that don’t fit into traditional economic policy assessments.
“The science-policy interface needs to embrace as many different tools and models as it can to truly explore the different futures that are possible. Without fully grasping the scale of change and the innovation that this can unlock, governments run the risk of missing out on the returns on investment that will come through tackling climate change.
“Within our region we have some of the most innovative companies and universities in the world. There is a huge opportunity for us to play an important leadership role in designing and deploying the technology of the future. We also, as researchers, need to develop our understanding of how quickly innovation can create the transformation that we need to tackle climate change and work with policy makers to better design the frameworks that will underpin this change.”
The New Economics of Innovation and Transition: Evaluating Opportunities and Risks report can be downloaded from the Economics of Energy Innovation and System Transition (EEIST) website.
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