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Processes of elite power and low-carbon pathways: Experimentation, financialisation, and dispossession

What is a low-carbon pathway? To many, it is a way of mitigating climate change. To others, it is about addressing market failure or capturing the co-benefits attached to low-carbon systems, such as jobs or improved health. To still others, it represents building adaptive capacity and resilience in the face of climate change. However, these interpretations can fail to acknowledge how pathways of low-carbon transitions can also become intertwined with processes and structures of inequality, exclusion and injustice. Using a critical lens that draws from a variety of disciplines, this article explores three ways through which responses to climate change can entrench, exacerbate or reconfigure the power of elites. As society attempts to create a low-carbon society, including for example via coastal protection efforts, disaster recovery, or climate change mitigation and renewable energy, these efforts intersect with at least three processes of elite power: experimentation, financialisation, and dispossession. Experimentation is when elites use the world as a laboratory to test or pilot low-carbon technologies or policy models, transferring risks yet not always sharing benefits. Financialisation refers to the expansion and proliferation of finance, capital, and financial markets in the global economy and many national economies, processes of which have recently extended to renewable energy. Dispossession is when elites use decarbonisation as a process through which to appropriate land, wealth, or other assets (and in the process make society more majoritarian and/or unequal). We explore these three themes using a variety of evidence across illustrative case studies, including hard and soft coastal protection measures (Bangladesh, Netherlands), climate risk insurance (Malawi), and renewable energy auctions and associated mechanisms of finance and investment (South Africa and Mexico).

Written by Benjamin K. Sovacool, Lucy Baker, Mari Martiskainen and Andrew Hook

Read the full article online

Dr Elena Verdolini explains decarbonising the energy sector

CMCC and EIEE senior researcher Elena Verdolini explains how the energy sector, the largest producer of greenhouse gases, is surprisingly one of the easiest areas to decarbonise.

Electrification is growing fast as it becomes increasingly low-carbon or carbon-free entirely. Dr Verdolini explains how variability is a major obstacle to increasing the use of renewables and goes on to talk about the best ways to tackle the increasingly difficult obstacles this sector faces.

Read the full article here.

 

Revolutions at sea – reflecting on the cost of offshore wind

The costs of offshore wind are falling dramatically. Several European countries have now agreed to buy power from offshore wind farms at costs which challenge the notion that renewable energy must be heavily subsidised to survive.

The UK government has recently awarded contracts to offshore wind projects scheduled for the early 2020s, at prices 50-60% lower than those it handed to offshore wind projects in 2014.  Germany and the Netherlands have recently announced contracts, also for expected delivery in the early 2020s, in which offshore wind developers have agreed to receive the market price only – zero subsidy contracts.

What has caused these rapid cost reductions? Can we expect the costs of offshore wind contracts to remain at these relatively low levels, or even to reduce further?

The cost reductions are likely to have had a few contributing factors, several of which can be seen optimistically as factors that will continue to keep costs low in the future.

One such factor is an innovation relating to policy design. The payment level received by offshore wind projects is now increasingly decided not by governments, but by requesting companies to bid in for the contract, declaring the price at which they would be prepared to deliver it. Such auction-based systems allow governments to choose the lowest cost of the now revealed bids. It seems plausible that the move towards auction-based allocation systems may have helped to drive down prices by introducing price competition into the bidding process.

Technological improvement is an important factor for enabling such cost reductions. There has been a clear trend towards larger and more efficient turbines which can deliver greater amounts of energy, increasing return on investment, thereby lowering costs. The trend is set to continue, with one major company expecting the turbines they will use in 2024 to be double the current size.

However, other factors that could explain the recent low bids may give a less clear grounds for optimism that the low prices are here to stay.

It is possible that companies may currently be bidding low for strategic reasons. For some companies, a lower return may be considered worthwhile, at the present time, for the benefit of maintaining their project supply chains. If subsidies in some previous rounds were overly generous, as some have suggested, it might be that this is currently enabling some flexibility on the balance sheet for low bids. If this is part of the explanation, such strategic bidding could not be maintained in the long run.

Auction design can also incentivise companies to put in bids lower than they would ideally accept, if they believe that another project will bid in higher and set the price received by all selected bids. However, if such a strategy backfires then a company could win a contract but at a price at which it is impossible to deliver the project – sometimes called “the winner’s curse”.

Another important factor likely to be lowering costs at the present time is the relatively low cost of financing. Investors have increased familiarity with offshore wind, and the long term contracts being issued by governments help to manage uncertainty, enabling lenders to lend at lower rates of interest. However, there are also important external conditions – interest rates in general are exceptionally low at the moment. As interest rates are likely to rise again in the future, it is possible that this could add to the cost of future projects.

Costs of projects are also strongly affected by site conditions, such as distance from shore and depth of water. There is a limited number of sites close to shore and in shallow water, and if future sites are in deeper water and further from shore this could drive up costs.

It is also important to recall that not all costs associated with offshore wind farms are necessarily accounted for in the costs paid for by project developers, and thus covered by the subsidies. Important additional costs are the costs of connections to power grids, and of balancing the system, for example in the event of too much power being injected on to the grid at the wrong time and wrong place. Because wind turbines have variable output dependent on wind conditions, they can exert significant costs on the system in this way. In some countries generators must pay for, or at least make a contribution towards these kinds of costs. In other countries, generators are not required to cover their own balancing and transmission costs, as these are met by the network operator. This is an important contributing factor towards the difference in costs between offshore wind projects in different European countries. Clearly, systems that do not target transmission and balancing costs at generators to some extent create favourable conditions for offshore wind, and they certainly make achieving zero-subsidy auctions more likely. However, if not paid by generators, transmission and balancing costs still have to be covered by system operators and are ultimately paid for by consumers. Thus, there is a strong argument that to herald a ‘zero-subsidy’ auction within a system that does not direct transmission and balancing costs at generators is misleading – especially if offshore wind exerts greater than average transmission and balancing costs – as the socialisation of transmission and balancing costs is a clear subsidy. Giving generators some kind of signal as to the costs their output imposes on the network is an important part of developing a well-balanced and efficient system. While shielding offshore wind generators from these costs may have attractions in the short term, it could lead to greater costs in the longer term, if it means the system develops in a way that is harder and more expensive to balance.

Of course, the news of extremely low prices for offshore wind contracts is to be welcomed. However, rather than becoming too focussed on zero-subsidy auctions as ends in themselves, we should continue to pay attention to making policies that look robust across all market conditions: long-term policy stability; careful attention to auction design; allocating transmission and balancing costs to support rational network development and incentivise innovations in storage and flexibility; and supporting and coordinating innovation chains.

INNOPATHS in the European Sustainable Energy Week #EUSEW18

This year, the EU Sustainable Energy Week celebrated its 13th anniversary and INNOPATHS was invited to present some of its early results in this important event. The EU Sustainable Energy Week, which took place in Brussels last week (June 4-8), is the annual flagship event in the EU in which sustainable energy policy is at the centre of the debates and discussions among stakeholders from the governmental, industrial, academic, and non-for-profit communities. The European Commission´s Directorate General for Energy (DG Energy) and the Executive Agency for Small and Medium-sized Enterprises (EASME) join forces by focusing the 2018  conference on the theme – “Lead the clean energy transition”.

The theme clearly resonated. The conference included 60 sessions and more than 2,500 participants. We found that discussions involving energy efficiency policies attracted special interest during last week. With the revised Energy Performance of Buildings Directive (EPBD) on the table, Ms. Mechthild Wörsdörfer, Director in charge of renewables, research and innovation, energy efficiency of the DG Energy of the European Commission, highlighted that energy efficiency will bring “multiple benefits, such as lower cost of the energy transition, reduced energy bills for the most vulnerable, a more lenient and competitive EU economy, higher quality of life and cleaner air and environment”.

Since INNOPATHS is an innovative project in substance and form aiming to generate new state-of-the-art low-carbon pathways for the European Union, we did not want to miss out on the opportunity to contribute to the discussion of policies to facilitate deep energy renovation in buildings.

I presented the work of the University of Cambridge (with Prof. Laura Diaz-Anadon), the Euro-Mediterranean Centre on Climate Change (CMCC) (Dr. Elena Verdolini) and the European University Institute (Dr. Stefano Verde) developing one of the four innovative online tools coming out of the project.  In particular, I provided some early results from the prototype of the online Policy Evaluation Tool, which we designed with Nice&Serious (N&S) (Peter Larkin and his team), to inform policy makers and other stakeholders on the impacts of different policies on a wide range of outcomes (including economic, environmental, and social) in a panel with Commission and other European project representatives.

I presented INNOPATHS insights on the main innovations of the project, the barriers encountered for deep renovation of the residential building stock in the EU, as well as policy recommendations to overcome those obstacles. Using a systematic review of research on Building Codes and White Certificates collected for the Policy Evaluation Tool prototype, we presented some of the barriers envisioned for deep renovation in buildings to improve energy efficiency, among others:

  1. A poor understanding of the causes of policy failures in the buildings sector
  2. Aged building stock in some EU jurisdictions
  3. Lack of evidence in or applicable to Southern European contexts
  4. Aversion towards more stringent regulatory policies
  5. Lack of trust in the realization of expected savings
  6. Non-negligible welfare impacts in low income households

I found that the introduction of the Policy Evaluation Tool received a warm welcome and interest from the many attendees to the session on Deep Energy Renovation.

In addition to the panel, the audience were able to contribute to the debate by answering the following question: “According to you, which are the most important barriers hampering wide-scale energy renovation in Europe”. With 43 answers, 44% of the respondents said that the lack of knowledge and interest of the building owners was the main barrier, followed by a 30% who highlighted the lack of convincing financing solutions and a 28% reporting that the main obstacle was an unfavourable regulatory environment, incoherent policies and support schemes. These barriers for deep renovation highlighted by the stakeholders are surprisingly aligned with the early findings from the Policy Evaluation Tool on how to overcome key barriers.

Of special interest was the agreement among participants regarding the need to guide EU and national level policies in the building sector towards: the remodelling and renovation of the existing stock of buildings, the important role of finance schemes to undertake such works and the digitalization of the sector. The latter resonates with the recent creation in the UK of the Centre for Digital Built Britain (CDBB). The importance of increasing the ambition of long-term targets for countries in terms of energy efficiency or energy savings, the provision of innovative financial schemes to support digitalisation in buildings, and the need to improve information in an accessible way for households’ owners and tenants to create a demand for green buildings were recurring themes.

All in all, it seems clear that projects such as INNOPATHs are crucial for informing policies in the building sector to continue working towards a sustainable, clean and fair future for everyone.

Christina Penasco @chrispenasco

Local and regional governments as pathfinders for the transition to a low-carbon economy

The energy transition required to mitigate against global warming is rightly regarded as a global, international challenge requiring macro-level shifts in environmental and economic policy, and the role of local and regional governments, be it in developing viable and replicable business models, acting as a lead customer in driving eco-innovative solutions, or using their economic leverage through procurement, can be easy to overlook.

As a global network of cities and regions working on both political advocacy and concrete projects relating to energy transition, ICLEI has established city networks aimed at uptake of renewable energy and setting of low-emissions targets, carrying out eco-innovative energy tenders, as well as community-owned energy projects and road-mapping projects for low-carbon heating and transport in cities.

Regional networks and eco-innovative tenders
The SPP Regions project, which concluded in March 2018, generated over 1000 GWh of renewable energy and achieved its carbon and energy savings targets through eco-innovative tenders carried out in the project’s 7 regional sustainable procurement networks.

Starting in 2015 and coordinated by ICLEI, the project has promoted the creation and expansion of European regional networks of municipalities working together on sustainable public procurement (SPP) and public procurement of innovation (PPI). As it approaches its conclusion, it has saved 395,000 tCO2/year and primary energy totaling 1,425 GWh/year, as well as procuring 1,015 GWh of renewable energy across 39 tenders in 7 countries, involving 31 contracting authorities. Additionally, the project recruited new partner networks in 8 other European regions and worked closely with the Procura+ European Sustainable Procurement Network.

The full list of tender models is available to download on the project website, where a savings calculation methodology used in the GPP2020 project demonstrates how the targets and achievements are quantified. The project has also produced a package of in-depth guidance and a series of ‘how-to’ videos on the implementation of various sustainable procurement practices such as market engagement and circular procurement, as well as the 3rd edition of the Procura+ Manual.

BuyZET – Mapping city’s transportation emissions footprints
Launched in November 2016, the BuyZET project is a partnership of cities aiming to achieve zero emission urban delivery of goods and services through procurement of innovation solutions and the development of city procurement plans.

The project has released a series of reports on the methods and results of the transportation footprint mapping exercise that identifies high priority procurement areas. These procurement areas have the potential, through improved processes and supplier solutions, to impact upon the transportation footprint of a public authority.

The first step in mapping the transportation footprint is to identify and include all activities performed by cities that involve transportation. Each city within the BuyZET project – Copenhagen, Oslo and Rotterdam – has studied the transportation impacts of different types of procurement activities following different methodologies developed within the project. The three reports from Copenhagen, Oslo and Rotterdam are available here, as well as a consolidated summary of the results of the three reports.

Heat Roadmap Europe
Heat Roadmap Europe, which studies heat demand accounting for approximately 85-90% of total heating and cooling in Europe, has issued a brochure which presents an overview of the current state of the energy demand for heating and cooling in the EU.

In March 2018, a workshop hosted by the EU Joint Research Centre and co-organised by Aalborg University and ICLEI, introduced participants to the project’s main mapping and modelling tools to develop national Heat Roadmaps: Forecast, Cost Curves, JRC-EU-TIMES and EnergyPLAN. Together the tools will allow for building technically possible and, socio-economically feasible, decarbonisation scenarios.

Campaigns and initiatives for a low-carbon economy
ICLEI convenes several collaborative initiatives involving energy and emissions targets at the European and global levels:

Cities for Climate Protection Campaign
Local Government Climate Roadmap
Procura+ European Sustainable Procurement Network
Global Lead City Network on Sustainable Procurement

Two main ingredients for a successful energy transition? A diverse financial system and the right policies

The discussion and action points for moving to an almost carbon-free energy supply have shifted from developing technologies towards a question of how to most effectively and efficiently implement the energy transition without compromising economic development and well-being [1,2]. Transforming our energy systems into more decentralized and renewable energy sources will require a vast deployment of innovations and, accordingly, huge investment. Estimates for the total investment begin at about USD 700 billion, which amounts to a mere 1% of global GDP [3]. There are two key levers to accomplish this task that are cited in almost every publication and report since the early 2000s. These are the use of private financial resources, and an appropriate policy framework. There has been a lively debate about what enabling elements are required for these elements to drive the transition and “shift the trillions” [4].

Financing energy technology innovation – the need for diversity

There is no doubt that the financial sector could, in principle, finance the transition. The financial system gives direction to the development of the real economy. Its traditional role is to mobilize and transform savings into productive investments. However over the last 20 years, driven by consolidation, the race for efficiency and deregulation and financial markets lost a lot of the diversity that is needed to finance innovation (see Figure 1). Many markets are dominated by just a few banks and institutional investors, which have been severely affected by the 2010 financial and subsequent regulation, driving a lot of risk carrying capacity out of banking and insurance markets, which turn provide financing risk-capital such as venture capitalists. The focus of the ecosystem for financing towards debt and later stages of the innovation cycle creates a bias towards calculable risks and, importantly, the maintenance and expansion of the existing capital stock in existing firms rather than new ventures. New forms of alternative finance innovations (such as crowdfunding or community-based credit unions) that could provide the necessary investments might be able to fill this gap, but their volumes are still (too) small. A very important ‘side-effect’ of increasing the diversity of players in financial markets is that the system as a whole becomes more resilient against shocks. Many different players with many different decision heuristics are less prone to making the same errors (Polzin et al. 2017).

Figure 1: Financial instruments to finance clean energy innovation (Source: Polzin et al. 2017)

Policy framework – clear directions and a choice of instruments

Given the current financial landscape we see two main strands of policy interventions to increase both attractiveness of low-carbon energy technologies and the diversity of sources of finance that can be mobilised.

First, innovation policy such as grants for R&D, demonstration support, risk-sharing facilities, tax-credits or Feed-in Tariffs will attract the necessary early-stage investments for future generations of technologies needed for an energy transition (for example organic batteries or power to gas). To overcome the so-called ‘valley of death’ in the innovation chain, public loans or loan guarantees might be suitable, but the risk of over-funding rapidly growing firms should be taken into account. Governments could also invest directly to create a technology ‘track-record’, important for investors [5]. In the later stages of innovation, especially for renewable energy, depending on the design features, portfolio standards or recently popular capacity auctions, prove effective tools. All these efforts should be embedded in a clear and long-term policy strategy consistent with the commitments of the Paris Agreement to be credible to investors. Consistency, stringency and predictability to reduce deep uncertainty and policy risk are deemed especially crucial.

Second, equally important for achieving a mostly privately-financed energy transition are appropriate financial market conditions and regulations [3]. Unprecedented monetary policies in the Eurozone (Quantitative Easing) have driven the cost of debt finance to zero or below and flooded financial markets with cheap debt finance. Still, only very little of that monetary expansion finds its way into the real economy, let alone into clean energy. Framework conditions for either debt or equity-based instruments influence their contribution to a clean energy transition, as a developed capital market is needed to channel resources. In this regard, a fiscal preferential treatment of debt finance, which is widespread today, should be avoided. Typically, interest is deductable as costs, while dividend payments only occur after tax. Policy makers should try to level the playing field across sources of finance. Furthermore capital market regulation shapes investment mandates and risk models and thus ultimately determines the feasibility and viability of investments into clean energy. Regulation (for example Basel III, Solvency II), especially since the financial crisis, is almost exclusively geared towards stability and security. Hence institutional investors and their intermediaries are forced to stay away from risky asset classes such as venture capital. A no-regret solution would be to require financial intermediaries to lower their overall leverage ratio (debt to equity) and operate with more equity. With more ‘skin in the game’, banks and institutional investors can responsibly handle more risk and uncertainty on their balance sheets. New alternative finance such as equity and debt-based crowdfunding are also becoming more regulated in many countries. Regulators should abstain from clamping down on them, for example through a regulatory sandbox.

In sum, to effectively and efficiently mobilise private finance for innovation and diffusion of low-carbon energy technologies, it is paramount to increase diversity of financial sources available in the market and also, next to an adequate innovation policy, adjust financial market regulations and conditions. The INNOPATHS finance workstream, consisting of ETH Zurich, PIK, Allianz Climate Solutions and Utrecht University will further explore the dynamics finance-energy (innovation)-policy dynamics [see for example 5,6].

Resources:

[1] Mazzucato, M., Semieniuk, G., 2018. Financing renewable energy: Who is financing what and why it matters. Technol. Forecast. Soc. Change. 127, 8-22. https://doi.org/10.1016/j.techfore.2017.05.021

[2] Polzin, F., 2017. Mobilizing private finance for low-carbon innovation – A systematic review of barriers and solutions. Renew. Sustain. Energy Rev. https://doi.org/10.1016/j.rser.2017.04.007

[3] Polzin, F., Sanders, M., Täube, F., 2017. A diverse and resilient financial system for investments in the energy transition. Curr. Opin. Environ. Sustain. 28, 24–32. https://doi.org/10.1016/j.cosust.2017.07.004

[4] Germanwatch, 2017. Shifting the Trillions – The Role of the G20 in Making Financial Flows Consistent with Global Long-Term Climate Goals. https://germanwatch.org/en/13482

[5] Geddes, A., Schmidt, T.S., Steffen, B., 2018. The multiple roles of state investment banks in low-carbon energy finance: an analysis of Australia, the UK and Germany. Energy Policy 115, 158–170. https://doi.org/10.1016/j.enpol.2018.01.009

[6] Steffen, B., 2018. The importance of project finance for renewable energy projects. Energy Econ. 69, 280–294. https://doi.org/10.1016/j.eneco.2017.11.006

Latest papers published by INNOPATHS

INNOPATHS is a four year EU funded research project that aims to work with key economic and societal actors to generate new, state-of-the-art low-carbon pathways for the European Union. Below is a round-up of the latest research to come from INNOPATHS.

Anadón, L.D., Baker, E., Bosetti, V. (2017) Integrating uncertainty into public energy research and development decisions, Nature 2, Article number: 17071 Free access

Geddes, A., Schmidt, T., Steffen, B. (2018) The multiple roles of state investment banks in low-carbon energy finance: An analysis of Australia, the UK and Germany, Energy Policy 115, 158–170 Free access

Steffen, B. (2018). The importance of project finance for renewable energy projects, Energy Economics 69, 280-294 post-print manuscript

Verdolini, E, Anadon, LD, Baker, ED, Bosetti, V, Reis, L. (2018) The future of energy technologies: an overview of expert elicitations.’ Review of Environmental Economics and Policy Free access

Impact assessment of climate policy on Poland’s power sector

Abstract

This article addresses the impact of the European Union Emissions Trading System (EU ETS) on Polands conventional energy sector in 2008 – 2020 and further till 2050. Poland is a country with over 80% dependence on coal in the power sector being under political pressure of the European Unions (EU) ambitious climate policy. The impact of the increase of the European Emission Allowance (EUA) price on fossil fuel power sector has been modelled for different scenarios. The innovation of this article consists in proposing a methodology of estimation actual costs and benefits of power stations in a country with a heavily coal-dependent power sector in the process of transition to a low-carbon economy. Strong political and economic interdependence of coal and power sector has been demonstrated as well as the impact caused by the EU ETS participation in different technology groups of power plants. It has been shown that gas-fuelled combined heat and power units are less vulnerable to the EU ETS-related costs, whereas the hard coal-fired plants may lose their profitability soon after 2020. Lignite power plants, despite their high emissivity, may longer remain in operation owing to low operational costs. Additionally, the results of long-term, up to 2050, modelling of Polands energy sector supported an unavoidable need of deep decarbonisation of the power sector to meet the post-Paris climate objectives. It has been concluded that investing in coal- based power capacity may lead to a carbon lock-in of the power sector. Finally, the overall  costs of such a transformation have been discussed and confronted with the financial support offered by the EU. The whole consideration has been made in a wide context of changes ongoing globally in energy markets and compared with some other countries seeking trans-formation paths from coal. Poland’s case can serve as a lesson for all countries trying to reducecoal dependence in power generation. Reforms in the energy sector shall from the very beginning be an essential part of a sustainable transition of the whole nation’s economy. They must scale the power capacity to the future demand avoiding stranded costs. The reforms must be wide-ranging, based on a wide political consensus and not biased against the coal sector. Future energy mix and corresponding technologies shall be carefully designed, matched and should remain stable in the long-term perspective. Coal-based power capacity being near the end of its lifetime provides an economically viable option to commence a fuel switch and the following technology replacement. Real benefits and costs of the energy transition shall be fairly allocated to all stakeholders and communicated to the society. The social costs and implications in coal-dependent regions may be high, especially in the short-term perspective, but then the transformation will bring profits to the whole society.

Written by Tadeusz Skoczkowski, Sławomir Bielecki, Arkadiusz Węglarz, Magdalena Włodarczak and Piotr Gutowski

Read full publication online

Electric mobility and vehicle-to-grid integration: unexplored questions and benefits

Reducing energy demand in the transportation sector is one of the most difficult challenges we face to meet our CO2 emission reduction targets. Due to the sector’s dependence on fossil fuel energy sources and the monumental negative consequences for climate change, air pollution and other social impacts, countless researchers, policymakers and other stakeholders view a widespread transition to electric mobility as both feasible and socially desirable.

How do we go about making it happen? As researchers working on low carbon mobility we need to start looking beyond technical challenges and look at the role of consumer acceptance and driver behavior, as well as the role for policy coordination, to move forward. My colleagues and I have been looking at research on vehicle-to-grid (V2G) and vehicle-grid-integration (VGI) and found that the focus has been too narrow so far. To help make the transition to electric mobility happen, we need to understand the benefits of the technology and propose areas where research should expand.

How does V2G work?

V2G and VGI refers to efforts to link the electric power system and the transportation system in ways that can improve the sustainability and security of both. As our figure below illustrates, a V2G configuration means that personal automobiles have the opportunity to become not only vehicles, but mobile, self-contained resources that can manage power flow and displace the need for electric utility infrastructure. They could even begin to sell services back to the grid and/or store large amounts of energy from renewable and distributed sources of supply such as wind and solar.

Visual depiction of a Vehicle-to-Grid (V2G) or Vehicle-Grid-Integration (VGI) network

Source: Willett Kempton

What are the benefits of V2G integration?

A transition to V2G could enable vehicles to simultaneously improve the efficiency (and profitability) of electricity grids, reduce greenhouse gas emissions from transport, accommodate low-carbon sources of energy, and reap cost savings for vehicle owners, drivers, and other users.

The four main benefits of V2G integration are:

  • Turning unused equipment into useful services to the grid

A typical vehicle is on the road only 4–5% of the day, so 95% of the time, personal vehicles sit unused in parking lots or garages, typically near a building with electrical power.[1]

  • Using underutilised utility resources

Many utility resources go underused, which is an implication of the requirement that electricity generation and transmission capacity must be sufficient to meet the highest expected demand for power at any time. One study estimates that as of 2007, 84% of all light duty vehicles, if they were suddenly converted into plug-in electric vehicles (PEVs) in the United States, could be supported by the existing electric infrastructure if they drew power from the grid at off-peak times[2].

  • Financial and economic benefits

Automobiles in a VGI configuration could provide additional revenue to owners that wish to sell power or grid services back to electric utilities.  Some studies suggest that some types of vehicle fleets could earn even more revenue than passenger vehicles, especially fleets with predictable driving patterns.[3]

  • Reduced air pollution and climate change, and increased integration and penetration of renewable sources of energy. PNNL projected that pollution from total volatile organic compounds and carbon monoxide emissions would decrease by 93% and 98%, respectively, under a scenario of VGI penetration and total NOx emissions would also be reduced by 31%. [4]  A VGI system can further accrue environmental benefits by providing storage support for intermittent renewable-energy generators.[5]

The unexplored questions

The vast majority of studies looking at VGI simply assume that consumers will go along and behave as the system tells them to. We need to better understand people, what cars they want to buy, and what it would take for them to be comfortable in letting someone else control the charging of their electric vehicle.

Furthermore, we need to understand how the societal benefits of the technology are distributed, especially among vulnerable groups. A transition to low carbon mobility needs to be just and equitable too.

V2G clearly has the potential to provide a wide variety of benefits to society.  However, research needs to broaden its focus and consider the following aspects:

  • Environmental performance of V2G in particular, rather than electric vehicles more generally;
  • Financing and business models, especially for new actors such as aggregators who may sit between vehicle owners and electric utilities;
  • User behavior, especially differing classes of those who may want to adopt electric vehicles and offer V2G services, and those who may not;
  • Natural resource use, including rare earth minerals and toxics needed for batteries and lifecycle components;
  • Visions and narratives, in particular cycles of hype and disappointment;
  • Social justice concerns, notably those cutting across vulnerable groups;
  • Gender norms and practices; and
  • Urban resilience in the face of intensifying climate change and consequent natural disasters.

Although the optimal mix is hard to discern, the share of V2G and VGI studies that focus on technical matters and rely on technical methods seems too large and imbalanced—as demonstrated by the many socially relevant research questions that remain unexplored.

Ultimately, these gaps in research need to be addressed to achieve the societal transition V2G advocates hope for.

 

Further reading:

This blog is based on two studies – “The Future Promise of Vehicle-to-Grid (V2G) Integration: A Sociotechnical Review and Research Agenda” and “The neglected social dimensions to a vehicle-to-grid (V2G) transition: A critical and systematic review”—are available in the October Volume of Annual Review of Environment and Resources and Environmental Research Letters.

Read more about CIED’s research on urban transport and smart freight mobility.

Citations:

Sovacool, BK, L Noel, J Axsen, and W Kempton. “The neglected social dimensions to a vehicle-to-grid (V2G) transition: A critical and systematic review,” Environmental Research Letters 13(1) (January, 2018), 013001, pp. 1-18.

Sovacool, BK, J Axsen, and W Kempton. “The Future Promise of Vehicle-to-Grid (V2G) Integration: A Sociotechnical Review and Research Agenda,” Annual Review of Environment and Resources 42 (October, 2017), pp. 377-406.

References:

[1] G. Pasaoglu et al., Travel patterns and the potential use of electric cars – Results from a direct survey in six European countries, Technological Forecasting & Social Change Volume 87, September 2014, Pages 51–59

[2] Michael K. Hidrue, George R. Parsons, Is there a near-term market for vehicle-to-grid electric vehicles?, Applied Energy 151 (2015) 67–76

[3] Michael K. Hidrue, George R. Parsons, Is there a near-term market for vehicle-to-grid electric vehicles?, Applied Energy 151 (2015) 67–76

[4] Kintner-Meyer, Michael, Kevin Schneider, and Robert Pratt. 2007. “Impacts Assessment of Plug-In Hybrid Vehicles on Electric Utilities and Regional U.S. Power Grids Part 1: Technical Analysis,” Pacific Northwest National Laboratory Report, available at http://www.pnl.gov/energy/eed/etd/pdfs/phev_feasibility_analysis_combined.pdf.

[5] Okan Arslan, Oya Ekin Karasan, Cost and emission impacts of virtual power plant formation in plug-in hybrid electric vehicle penetrated networks, Energy 60 (2013) 116-124

Is climate policy a constraint or an opportunity for job creation?

  1. Context

Do climate policies represent a constraint or an opportunity for job creation and employment growth? Two theses are recurrently put forward in the political debate. The first emphasizes the cost increase, especially the pass-through on energy prices for polluting industries, which would threaten international competitiveness and thus employment. The other stresses positive long-term effects that, besides reducing emissions, will boost innovation and thus long-term competitiveness.

A rigorous evaluation of climate policies, such as carbon taxes, must of course account for the expected decrease in pollutant emissions and energy consumption. However, to be complete, this evaluation must study broader indirect effects on industrial competitiveness and employment – the very ones that are likely to have a primary impact on the well-being of people involved in carbon intensive productions (Smith, 2015).

The concern of an immediate loss of competitiveness is felt particularly in France. This concern comes first and foremost from the fact that the recent Energy Transition Law caused a strong increase in the carbon tax (€ 22 in 2016, € 56 in 2020, € 100 in 2030). This is the argument that industrial lobbies claim to curb overly ambitious environmental policies, especially in a context of non-binding international agreements, such as those initiated by COP21. Also, unions are worried that unilateral policy may lead to the relocation of more polluting activities and thus jobs to countries that implement a less ambitious carbon pricing schedule, or an opportunistic strategy of non-intervention. The main argument of the US administration against international agreements on climate change has always been that, in absence of a well-designed enforcement mechanism, ‘carbon leakage’ —a lose-lose outcome in terms of job losses and higher emissions—becomes a real possibility. For instance, a border carbon tax adjustment has been proposed as an amendment to the World Trade Organization rules to make the enforcement of international agreements on climate change credible.

An alternative view on the effect of climate policies emphasizes the positive consequences for innovation and the creation of a comparative advantage in new sectors where demand is expected to increase rapidly. These green innovative activities would use relatively more skilled labor than polluting activities, and this could have a large multiplier effect on employment for local communities. To turn climate policies into an opportunity, governments could also consider using the revenues from the carbon tax to reduce the tax burden on labor. A drop in taxation on labor could lead to a substitution effect leading to net job creation.

The purpose of this policy brief is to provide a preliminary empirical answer to the question of whether climate policies are an impediment or, on the contrary, an opportunity for employment growth. In doing so, we compare the performance of France, a country for which we have detailed micro-data to test the effects of climate policies, with those of its main economic partners, Spain, Italy and especially Germany.

 

  1. Employment dynamics and energy prices in energy-intensive industries

With regards to the situation of France compared with that of the three major European countries, Germany, Spain and Italy, it is first necessary to look at the extent to which climate policies have changed in these four countries.

Admittedly, climate policies are multidimensional and therefore their effective stringency is difficult to compare. However, it is possible to use differences in energy prices for gas and electricity (the two main energy sources for these four countries) to proxy the effect of carbon pricing. Indeed, while the European Emission Trading System (EU ETS) sets, in principle, a single carbon price, national-level instruments have been introduced to subsidize renewable energies in all four countries. This has thus created a certain heterogeneity in policy stringency across these countries. In France, for example, the Social Contribution of Electricity Generation (CSPE) was introduced to finance EDF’s purchases of electricity produced with renewable energies. The impact of the CSPE has increased over time in a very clear way: 0.003 euro per kw/h in 2003, or 5% of the price of electricity for a medium-sized industrial consumer in 2003, compared with 0.019 euro per kw/h in 2015, or 31.6% of the price of electricity for a medium-sized industrial consumer in 2015.

Let’s first look at the evolution of electricity prices (Figure 1) and gas prices (Figure 2) for an average industrial consumer, in the four countries, between 2000 and 2015.[1] In all countries both prices are rising sharply. In France, the price of electricity increases slightly less than in other countries and the price level remains below the average price in other countries. Since the gas market is global, the price variation across countries is much lower than in the case of electricity. There is therefore a stronger tendency for price convergence for gas than for electricity. It should also be noted that the impact of the price of natural gas (and the highly correlated oil price) is much higher in Italy, Germany and Spain than in France, where electricity is produced mainly by means of nuclear power. Thus, France’s effective exposure to energy price shocks, either because of climate policies or because of rising gas and oil prices, is lower than in the other three countries.

Now let’s look at how employment has evolved in the industries most exposed to rising energy prices. Using the average energy intensity across countries, we define two groups of industries: one with high exposure and the other with medium exposure to price changes.[2] Since in France the price of energy has increased relatively less than in other countries, a smaller impact on employment should be expected. Figure 3 and 4 show exactly the opposite for the period 2000-2011. In fact, while employment in polluting sectors declined in all four countries, the decline is more pronounced in France than in Italy and Germany. Moreover, the level of activity in highly polluting sectors (Figure 3) and moderately polluting (Figure 4) is significantly lower in France (7% of total employment in 2011) than in Italy (13.1 % of total employment in 2011) or in Germany (10% of total employment in 2011). Obviously, these are only correlations and such a result may be ascribed to other structural factors, such as the degree of specialization in these industries or the innovativeness in clean technologies.

 

3. Electricity prices and employment in French firms

Because employment in polluting industries reacts more to energy prices in France than in other countries, we examine in greater details what happened to French companies using firm-level data. This allows us to formally test whether these job losses can be ascribed to the increase in energy prices rather than to other structural factors. A recent INNOPATHS study (Marin and Vona, 2017) estimates the elasticity of employment of French manufacturing firms following a change in the price of energy.[3]

Table 1 shows the main results of this analysis, which uses the historical experience of price increases in the 2000s to extrapolate the effects of the carbon tax provided for in the energy transition law. They are, in a way, not surprising. Rising energy prices (measured as a weighted average of the prices of different energy sources) effectively reduce employment in French manufacturing. The effects are significant: a 10% increase in prices reduces employment by 2.6%. Unsurprisingly, these effects are stronger in the more energy-intensive industries (3.4% job loss) and more exposed to international competition (3.1% job loss). To put these results in context, it should be noted that, according to this calculation, a carbon tax of € 56 per tonne of CO2 will lead to an average increase in energy prices of 20% and, therefore, these elasticities should be doubled. However, unreported results also show that these employment effects are upper bounds, at least for multi-plant firms that can use their internal labour market to mitigate the negative effect of the shock.

This negative employment effect should also be weighed against positive effects in terms of a decrease in the energy demand and reduction of emissions. Table 2 shows that these effects go in the right direction. A 10% increase in energy prices reduces demand by more than 6%, and reduces greenhouse gas emissions by more than 11%. These quite considerable effects offset the social cost generated by the decrease in jobs. However, further research is required to understand the extent to which this decrease in emissions is just a reflection of an increase in emissions embedded in the country’s import. Such analysis as well as an analysis distinguishing between short-term and long-term effects would clearly allow us to shed more light on the net benefits of a carbon tax.

Overall, these large job losses raise the more general question of the change in comparative advantage induced by climate policies in international markets. At a first glance, it seems clear that, unlike Germany, France has not been able to turn the challenge of the energy transition into an opportunity to develop a new comparative advantage. To corroborate this conclusion, the next section will turn back to aggregate data on green exports and the size of the green economy in these two countries.

 

4. The energy transition: an opportunity for creating green jobs

Previous results only consider effects on energy-intensive industries. Keeping constant the industry structure, they do not consider the positive effects of job creation in the new green sectors. The destruction of jobs in energy-intensive industries can be more than offset by job creation in green industries. From this perspective, the energy transition may contribute to reignite sluggish economic growth. The scale of this counterbalancing effects remains difficult to establish: green industries follow different growth patterns from energy-intensive industries as they are usually more exposed to trade and are upstream in the value chain.

With particular reference to the situation in Europe, the available data allows for a comparison only between Germany and France and for a time span limited to the financial crisis period (2008-2014). We compare these two countries on four dimensions: employment in the green sector (Figure 5), green sector exports (Figure 6), value-added in the green industry (Figure 7), and investment in green technologies (Figure 8). It appears that the number of green jobs is roughly the same in both countries, albeit with faster growth in Germany, but also that exports of green products are 3.8 times higher in Germany than in France. Green value added is almost twice as high in Germany, and investments in green technologies almost 3 times higher. Germany is therefore more competitive than France in green industries, probably because its capacity for industrial development and therefore growth of activity and employment, in this sector as in the others, is higher. A possible answer to this divergence between France and Germany comes from a recent study on the drivers of green employment in US regions (Vona et al., 2017). According to this study, green jobs require more qualifications than jobs removed from polluting industries, mainly in terms of technical skills and engineering. Local technological expertise, as measured by the number of patent applicants in the region and by the presence of a national research lab, is also positively associated with the creation of green employment. Given the well-established comparative advantage of Germany in engineering services and machinery industries, the evidence on US regions can contribute to explain the difference between Germany and France in the capacity to turn climate policies into an opportunity. In Germany, the capital goods industry plays a key role in the design of green production processes. Recent work, based on patents, shows that Germany has a comparative advantage today and future much stronger than France in three of the four key green technologies: wind turbines, batteries and photovoltaic panels (Zachmann, 2016). 5. Concluding remarks It is very likely that the energy transition will negatively affect industrial competitiveness in the short term and therefore employment in a proportion that is greater if the companies concerned already suffer from a competitiveness deficit, like in France. This evidence argues for a phased and gradual transition, which must take into account both the time required to build a comparative advantage in the green sector, and the immediate negative effects on the polluting sectors in an already negative economic situation. The use of border carbon tax adjustment, as suggested by, among the others, Helm et al. (2012), represents a way to slow down the carbon and job leakage, giving more time to the affected industries in developed countries to adjust. On the other hand, it is no less obvious that such a transition may bring with it the creation of skilled jobs and growth. As the evidence of US regions tell us, these offsetting effects on job creation are more likely to occur if climate policies are combined with industrial policies and R&D investments on low carbon technologies. 

 

References

Greenstone, M. (2002), ‘The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures.’ Journal of Political Economy 110(6), 1175-1219.

Helm, D., Hepburn, C., Ruta, G., (2012), ‘Trade, climate change, and the political game theory of border carbon adjustments.’ Oxford Review of Economic Policy 28(2), 368-394.

Kahn, M., and Mansur, E. (2013) ‘Do local energy prices and regulation affect the geographic concentration of employment?.’ Journal of Public Economics 101, 105–114.

Marin, G., Vona, F., (2017), ‘The Impact of Energy Prices on Environmental and Socio-Economic Performance: Evidence for France Manufacturing Establishments.’ OFCE working paper.

Martin, R., Muûls, M., de Preux, L., Wagner, U., (2014), ‘Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme.’ American Economic Review 104(8), 2482-2508.

Smith, V. K. (2015). ‘Should benefit–cost methods take account of high unemployment? Symposium introduction.’ Review of Environmental Economics and Policy 9(2), 165-178.

Vona, F., Marin, G., Consoli, D., (2017), ‘Measures, Drivers and Effects of Green Employment: evidence from US metropolitan and non-metropolitan areas, 2006-2014.’ SPRU working paper.

Walker, W. (2013), ‘The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce.’ Quarterly Journal of Economics 128(4), 1787-1835.

Zachmann, G. (2016), ‘An approach to identify the sources of low-carbon growth for Europe,’ Bruegel policy contribution n.16.

 

Tables and Figures

Table 1. Effects on employment of 10% increase of energy prices

Sector D% Employment
All Manufacturing Sectors -2.6%
Energy Intensive Sectors -3.4%
Non-energy Intensive Sectors -0.9%
Sectors exposed also to international competition -3.1%
Sectors not exposed to international competition -1.6%

Sources. Marin and Vona (2017).

 

Table 2. Effects on Energy Demand and CO2 Emissions

Sector D% of Energy Demand D% CO2 Emissions
All Manufacturing Sectors -6.4% -11.2%
Energy Intensive Sectors -6.6% -11.5%
Non-energy Intensive Sectors -5.3% -10.9%
Sectors exposed also to international competition -7.9% -11.4%
Sectors not exposed to international competition -5.4% -11%

Sources. Marin and Vona (2017).

 

Figure 1: Electricity Prices, industrial consumers

Figure 2: Gas Prices, industrial consumers

Figure 3: Share Employment High Energy Intensive

Figure 4: Share Employment Mid Energy Intensive

Figure 5: Green Employment

Figure 6: Green Value Added

Figure 7: Green Exports

 

Figure 8: Investments In Cleaner Tech

[1] Source Eurostat, http://ec.europa.eu/eurostat/data/database.

[2] Source EU-KLEMS, http://euklems.net/. The groups are rather standard in the literature and coincide with the more energy intensive industries. Highly polluting industries are: Chemistry, Metals, Manufacturing of other non-metallic mineral products, Coke and Oil Refining, Mining. Moderately polluting industries are: Food and Beverages, Leather and Footwear, Rubber and Plastics, Textile, Wood and Wood Products, Other Manufacturing Sectors including Recycling.

[3] This study is based on data from establishments in the manufacturing sectors in France during the period 1997-2011. Three databases are merged: the DADS database (to have a measure of employment, by type of qualification, in each establishment), the FICUS database (to build a measure of enterprise productivity, unreported in this note but available in the paper) and the ECAI database (to obtain measurements of the energy mix used and energy prices paid by a sample of French establishments in the manufacturing industry). The national price of different energy sources is used, weighted by the initial energy mix of the establishments, as an instrumental variable to isolate exogenous changes in energy prices unrelated to quantity-discounts. Our estimates are conditioned to a rich set of control including sector- and region-specific trends and establishment fixed effects. We also take into account the effects of European policy to set a carbon price, the ETS (Emission Trading Scheme). The employment effects of ETS are low, consistent with the low effective severity of this policy which has provided generous exemptions for more energy-intensive industries exposed to international competition (see: Martin et al. 2014).