THINK.CHANGE.DO

1. Green Innovation as a Climate Change Mitigation Strategy Professor Natalie Stoianoff Faculty of Law, University of Technology, Sydney & Associate Professor Karen Bubna-Litic Faculty of Law, University of South Australia IUCNAEL 2014 Tarragona THINK.CHANGE.DO Stoianoff & Bubna-Litic

2. Introduction • The Project • Strategies for mitigating emissions • Theoretical landscape for market based instruments • Statistics • Brief Comparison of the suite of initiatives utilised by: Australia, UK, and Canada. • OECD - Taxation, Innovation and the Environment Stoianoff & Bubna-Litic

3. The Project • Does carbon pricing support green innovation? • A comparison between Australian, British and Canadian carbon pricing policies • Green innovation investment • Evaluation of renewable energy patent statistics as a measure of innovation in the energy sector • The innovation process • What can we learn? Stoianoff & Bubna-Litic

4. Strategies for Mitigation of Emissions • Educational or informational • Voluntary agreements • Command and control regulation • Market based instruments Stoianoff & Bubna-Litic

5. Educational strategies • Long term strategy • Information leading to change of behaviour: eg product labelling of energy efficiency • Supplementary to other strategies in that it paves the way for greater acceptance and effective implementation of those strategies Stoianoff & Bubna-Litic

6. Voluntary agreements • Government – industry voluntarily determined emissions target schemes – usually with high rate of compliance but low standards. • Industry self-regulation • Australian example of voluntary agreements for biodiversity protection (eg SA) but often back-up with concessions or benefits. Stoianoff & Bubna-Litic

7. Command and control regulations • Much more familiar strategy for dealing with environmental problems. • Public authority either requires the cessation or reduction of the damaging activity (performance based regulation) or requires action to be taken that mitigates the damage.(often technology based regulations). • Need to be backed up by sanctions and these may or may not be sufficiently deterrent. Stoianoff & Bubna-Litic

8. Market based instruments • Pollution caused by human economic activity • Price historically not placed on the damage to the environment as a cost of production • Need to internalise this externality to maximise social welfare • Various instruments available but there are two key ones to be considered • Carbon taxes and emissions trading schemes. Stoianoff & Bubna-Litic

9. Theoretical Framework • Arthur Cecil Pigou(1920): The Economics of Welfare • theoretical foundation for taxing pollution • Emission fee levied on polluters according to output of pollution • Effect is to internalise external costs of pollution and therefore maximise welfare Stoianoff & Bubna-Litic

10. Theoretical Framework • 52 years later, the OECD adopted Pigou’s idea as the polluter pays principle in the 1972, Guiding Principles Concerning the International Economic Aspects of Environmental Policies. • the primary aim was to avoid market distortions through the use of direct and indirect environment-related subsidies. • A similar concept was later embodied in Principle 16 of the 1992 Rio Declaration, to promote 'internalisation of environmental costs’. Stoianoff & Bubna-Litic

11. Theoretical Framework – PPP – 1972 Guidelines • This principle is “to be used for allocating costs of pollution and control measures to encourage rational use of scarce environmental resources and to avoid distortions on international trade and investment”. • It is expected that “the polluter should bear the expenses of carrying out… [these] measures” and further • “the cost of these measures should be reflected in the cost of goods and services which cause pollution and/or consumption” Stoianoff & Bubna-Litic

12. Theoretical Framework - Coase • Coase (1960): The Problem of Social Cost • criticised the use of taxes to correct market imperfections favouring the market’s ability to correct itself where externalities exist • “If factors of production are thought of as rights, it becomes easier to understand that the right to do something which has a harmful effect (such as the creation of smoke, noise, smell, etc.) is also a factor of production…” p.44 Journal of Law and Economics (October 1960) • Through such transferable ‘property rights’, the market can be used to value them and ensure their best possible use. Stoianoff & Bubna-Litic

13. Theoretical Framework - Baumol & Oates • Baumol & Oates (1988): The Theory of Environmental Policy, Cambridge University Press • Elaborate on Coase’s property rights theory Stoianoff & Bubna-Litic

14. Theoretical Framework - Baumol & Oates • Suggest that these property rights be distributed to parties granting them the right to pollute to a specified level • The government will allocate as many ‘rights to pollute’ as necessary to a tolerable level of pollution. • Accordingly, businesses that keep their emissions below their permitted level have capacity to trade in their remaining rights to pollute to those who have exceeded their rights. Stoianoff & Bubna-Litic

15. Theoretical Framework - Brundtland • The Brundtland Report – Our Common Future • The Report espoused “[t]he integration of economic and ecological factors into the law and into decision-making systems” • The PPP was acknowledged as an economic efficiency measure that discourages subsidies leading to international trade distortions. • The Report embraced the idea of internalising environmental costs and passing on those costs to the consumer through products of the enterprise. • But it recognised the importance of economic incentives working together with environmental regulations to ensure the necessary investment in environmental measures by industry Stoianoff & Bubna-Litic

16. Environment – related Tax Incentives since the 1990s in Australia • Mine site rehabilitation expenditure concessions – various incarnations since 1990/91 • Concessions for environment protection expenditure (since 1990/91) and for expenditure on environmental impact statements (1992) • Deduction for donations to environmental organisations - Register of Environmental Organisations established 1992 • Conservation Covenant expenditure and capital gains concessions (2002) • Carbon sink forest concessions (2008) Stoianoff & Bubna-Litic

17. Tax incentives akin to US Brownfields Redevelopment • Full deductions available in year environmental cleanup expenditure incurred. • But also Tax credits for energy efficiency and expenditure on renewable energy similar to Australian 1998 National Greenhouse Strategy Stoianoff & Bubna-Litic

18. But Internalising Costs means Pricing Carbon A price on carbon should provide industry with an incentive to find ways to reduce their polluting behaviour in order to achieve a competitive advantage in the marketplace. This means investment in renewables and greater efficiencies – has this happened? Stoianoff & Bubna-Litic

19. Statistics • Investment in renewables • Patent statistics as a measure of innovation Stoianoff & Bubna-Litic

20. Investment in renewables • According to the International Energy Outlook 2011, world marketed energy consumption is estimated to grow by 53 percent between 2008 and 2035. • Much of this increase is occurring in countries outside the Organization for Economic Cooperation and Development (OECD) where demand is driven by strong, long-term economic growth. • Energy use in non-OECD nations is expected to rise by 85 percent as compared to 8 percent for OECD economies. Stoianoff & Bubna-Litic

21. Investment in renewables • In 2011, global investment in clean energy reached a new record of US dollars (USD)260 billion, up 5 percent on 2010 and almost five times the total of USD53.6 billion in 2004. • Investments in solar far outstripped those for wind. • US clean energy investment regained its leadership over China for the first time since 2008, according to Bloomberg New Energy Finance. • 2011also saw the one trillionth dollar invested in clean energy globally since Bloomberg started compiling data in 2004. Stoianoff & Bubna-Litic

22. Investment in renewables • Renewable energy sources are now the fastest growing sources of electricity generation in the world, with an estimated increase of 3.1 percent per year from 2008 to 2035. • The renewable share of total energy use is expected to increase over the same period from 10 to 14 percent. • The REN21 2011 Renewables Global Status Report, states that renewables delivered close to 20 percent of global electricity supply in 2010. • By early 2011, they comprised one quarter of global power capacity from all sources. Stoianoff & Bubna-Litic

23. Investment in R&D in renewables • R&D spending on renewable energies rose 40% to $9billion in 2010. • Government R&D support overtook company R&D spending through ‘green stimulus’ packages. • Solar attracted 40% of all research dollars. Followed by biofuels and wind and then strong growth in marine and small hydro. • Government support rose 27-fold to push R&D spending to $4.7 billion in the Asia-Oceania region. • UNEP / Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2011 Stoianoff & Bubna-Litic

24. World Patent Statistics • The total number of patent applications in the four energy-related fields (fuel cells, geothermal, solar and wind energy) reached 28,560 in 2009, almost nine times as much as in 1990 – growing exponentially from 1999. • Solar energy- related patent applications account for 50.3% of the total in 2009. • There was a substantial increase in solar and wind energy patent applications, while those in the field of fuel cell technology saw a small drop in the last two years. Stoianoff & Bubna-Litic

25. Patent Statistics by Origin • Japan (34.1%), the Republic of Korea (18.7%) and the US (14%) accounted for more than two-thirds of total solar energy patent applications with UK at 0.9%, Canada at 0.8% and Australia at 0.7%. • However, only the Republic of Korea (1.6%) and China (1.1%) have more than 1% of their total PCT patent applications published in this field. • For fuel cell technology, Japan accounted for more than half of all patent applications in this field(UK 1.4% and Canada 1.8%) • For Japan (1.3%) and Canada (1.0%), more than 1% of their total patent applications are in this field. Stoianoff & Bubna-Litic

26. Patent Statistics by Origin • Patent applications in the field of wind energy technology are more evenly distributed among several countries, with Germany and the US accounting for a similar share (around 17%) with UK accounting for 3.5% and Canada 2.1%. • However, only in Denmark (3.1%) and Spain (1.6%) did patenting in this field represent more than one percent of total filings. • The distribution of geothermal energy patent applications is similar to that for wind energy technologywith UK providing 3.2% and Canada 4.2% of patent applications. • Absolute numbers and relative shares of geothermal energy patents are very low. Stoianoff & Bubna-Litic

27. How achieved? Carbon pricing: • Carbon tax and pricing • Cap and trade schemes • Indirect taxes, such as energy taxes, excise taxes or value added taxes (VATs). Tax incentives: • Credits • Grants • Tax holidays • Accelerated depreciation • Non-tax incentives. Stoianoff & Bubna-Litic

28. 12 Common Policies to promote renewable power generation Divided into three categories: • Regulatory policies • Fiscal incentives • Public finance Stoianoff & Bubna-Litic

29. Regulatory Policies Stoianoff & Bubna-Litic

30. Fiscal Incentives Stoianoff & Bubna-Litic

31. Public financing Stoianoff & Bubna-Litic

32. OECD 2010 Report • Innovation is critical to achieving environmental outcomes at a reasonable cost • Environmentally related taxation has many positive features and its use is widening in OECD economies • Environmentally related taxation stimulates the development and diffusion of new technologies and practices Stoianoff & Bubna-Litic

33. OECD 2010 Report • Tax design issues can have a significant effect on the resulting innovation • Taxes and other environmental policy instruments can complement each other • Best practices for implementing environmentally related taxation rely on a wide range of considerations Stoianoff & Bubna-Litic

34. OECD 2010 Report - Subsidies Stoianoff & Bubna-Litic

35. OECD 2010 Report – Drivers of Innovation Stoianoff & Bubna-Litic

36. OECD 2010 Report – Model of Innovation Stoianoff & Bubna-Litic

37. OECD 2012 Report – Choice of Tax Instrument Stoianoff & Bubna-Litic

38. OECD 2012 Report – Types of Innovations ❶ Create new products for consumers that generate fewer emissions when used. For example, firms could offer to consumers more energy-efficient appliances that reduce carbon emissions, or paints with a high solid content that release fewer VOCs into the atmosphere. ❷ Use less emission-intensive inputs (of the same type). For example, a power generation firm could switch from high-sulphur to low-sulphur coal. ❸ Use less emission-intensive inputs (of a different type). The same power generation firm could generate power from natural gas instead of coal, which will likely require more structural modifications to the existing capital stock. Stoianoff & Bubna-Litic

39. OECD 2012 Report – Types of Innovations ❹ Reduce pollution intensity per unit of input (without modifying inputs). For example, the same plant could also optimise their equipment to reduce NOx emissions per unit of fuel (which remains the same) but not impact the overall fuel usage per kWh. An example related to cars would be on-board diagnostic systems. ❺ Reduce input use per unit of output. For example, a power generation firm could make their overall plant more efficient for fuel use without affecting the amount of NOx emissions per kWh by insulating to minimise heat loss. This occurs through reduced use of fuel per usable kWh, not reduced emissions per unit of fuel. Stoianoff & Bubna-Litic

40. OECD 2012 Report – Types of Innovations ❻ Finally, undertake end-of-pipe/remedial measures. For example, an aluminium producer could reduce CO2 emissions by using carbon capture and storage to prevent emissions from entering the atmosphere even though they have already been created. ❶-❻ Organisational innovation cannot be linked exclusively to one area in the equation above, as they typically affect the general orientation of the firm. As such, they tend to act as complements to other types of innovations within the firm. ❼ Of course, the firm (and the consumer) could simply produce (and consume) less. Stoianoff & Bubna-Litic

41. OECD 2010 Report – Impact of Tax Instrument Stoianoff & Bubna-Litic

42. Implications • The table assumes each instrument is implemented in isolation. • Taxes on pollution provide incentives for all six of the potential abatement measures, as levying the tax directly on the pollutant does not exclude any potential abatement measure and provides the greatest range of incentives for invention and technological change. • Taxes on proxies to pollution provide much the same incentives, except where the abatement actions become disconnected from input use. Thus, taxes on proxies to pollution have no impact on actions four and six, in line with findings that taxes on pollution encourage relatively greater end-of-pipe abatement than taxes on proxies to pollution. • Reductions in value added taxes for “green” purchases provide direct incentives for consumers to adopt new innovations, as they lead to a direct and identifiable price reduction versus non-reduced goods and services. Stoianoff & Bubna-Litic

43. Implications • Accelerated depreciation allowances encourage greater investment in physical capital. Such an instrument does not affect mitigation measures that are generally not capital intensive, such as actions one, two and four. • generally available or environmentally targeted R&D tax credits alone cannot provide incentives for mitigation, unless these help reduce the cost of existing processes or create new products (without a price on carbon, R&D that significantly reduces the cost of carbon capture and storage, for example, would still have no economic rationale to be adopted). As such, only actions one, three and five are stimulated for invention and adoption. Stoianoff & Bubna-Litic

44. Ranking instruments • Fischer and Newell (2008) in their study on the US electricity sector and climate change mitigation, have attempted to rank instruments in terms of economic efficiency and innovation inducement: • emissions tax/charge; 2) emissions performance standard; 3) fossil fuel tax; 4) share requirement for renewable energy; 5) subsidy for renewable energy; and 6) subsidy for research and development. Stoianoff & Bubna-Litic

45. Next Steps: Stoianoff & Bubna-Litic Project • Comparison of Carbon Pricing mechanisms utilised in each chosen jurisdiction. • Comparison of Innovation Strategies and Investment in Renewables • Impact of these mechanisms and strategies. • Analysis of patent statistics to identify correlations. • Research partners in Canada and UK welcome! Stoianoff & Bubna-Litic