The transition from fossil to renewable energy demands enough capital to develop and release new solutions. This means that investors are needed. The last years, private investors in clean energy have experienced a rising demand in the market. This session will give the participants thoughts on how we can make sustainable investments profitable.

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Professor Michael Grubb
4CMR University of Cambridge Centre for Mitigation Research
Editor-in-Chief, Climate Policy journal
Senior Advisor, Sustainable Energy Policy,
UK Office of Electricity and Gas Markets (Ofgem)
Planetary Economics:
Energy, Climate Change and the
three domains of sustainable development

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Contents
Pillar 1
• Standards and engagement for smarter choice
• 3: Energy and Emissions – Technologies and Systems
• 4: The Energy Efficiency Resource – Technologies and Systems
• 5: Tried and Tested – Three Decades of Energy Efficiency Policy
Pillar II
• Markets and pricing for cleaner products and processes
• 6: Pricing Pollution – of Truth and Taxes
• 7: Cap-and-trade & offsets: from idea to practice
• 8: Who’s hit? Handling the distributional impacts of carbon pricing
Pillar III
• Investment and incentives for innovation and infrastructure
• 9: The Philosopher’s Stone? Innovation, Growth and Finance
• 10: Bridging the Technology Valley of Death
• 11: Transforming systems
1. Introduction: Trapped?
2. The Three Domains
12. Conclusions: Changing Course

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Three Broad Questions
• What have we learned?
• What is the role of economics?
• What should we do differently?

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What have we learned –
risks and perceptions
Climate change:
• It is hard to motivate people about climate risks
– A huge ‘psychological distance’
• We have been entirely unable to quantify climate damages in terms of
monetary equivalent
– Time (Stern), Equity (Dasgupta), Planetary risks (Weitzman)
• Climate change ultimately has more in common with security assessment
Energy
• Most people (and organisations) have little awareness of energy
– They are not ‘optimisers’, inefficiency is rife
• Systematically poor foresight on energy markets
– The Economist’s “drowning in oil .. @ $5/bbl?” (2000)
• Key energy issues are also about risk, volatility and security

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Economic Outputs (production & consumption)
Innovation
moves the frontier
Inertia increases the cost of
moving along the frontier, eg. in
response to changing resource
prices.
Current “best practice frontier” of
energy & emissions in producing
economic output
Neoclassical / welfare economics assumes and facilitates
behaviour aimed to optimise mix of resources, given technologiesInputs/Resourceuse
Eg.Energy&Emissions

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In practice there are three domains of economic processes
- all are relevant
“Business as usual”
innovation
Accelerated low
carbon innovation
Purely carbon-price-
driven innovation
3rd Domain
Sectors/ countries
Innovation
And System
Trajectories
“Pareto”
improvements
1st Domain
Fig. 2 -3 b Resource – output relationships across the three domains
Inputs/Resourceuse
Eg.Energy&Emissions
Economic Outputs (production & consumption)

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.. they rest on three fundamentally different
fields of theory, relevant to different scales

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They appear to offer three roughly equal
realms of opportunity (in all regions)Cost$USD/tonneofCO2e(inMillions)
-100
-80
-60
-40
-20
0
20
40
60
80
100
Estimates of Global Mitigation Potential by 2030
Annual abatement in 2030 GtCO2e
Source: McKinsey data from Pathways to a Low Carbon Economy (2009)
Advanced Economies
Emerging Asia
Rest of the World
Smarter Choices
5 10 15 20 25
Choosing cleaner products
and processes
(Pillar II) Innovation and Infrastructure
(Pillar III)

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Realm of
Opportunity
Smarter choices
(eg. energy efficiency)
Cleaner
products and
processes
Innovation and
infrastructure
investment
Field of
theory
Behavioural &
psychological
Classical and
welfare
economics
Evolutionary &
institutional
Standards &
engagement
They require three fundamentally different types of policy
All charts from M.Grubb, J.C.Hourcade, and K.Neuhoff, Planetary Economics and the Three
Domains of Sustainable Energy Development, Taylor and Francis, forthcoming 2013

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Dominant
timescale
/ Domain
Decision
framework
Field of
theory
Mitigation
economic
process
Realm of
opportunit
y
Pillar of
policy/
response
Short term
–
Ignore /
satisfice
Ignorant or
disempowered
Behavioural
&
organisation
al
Move closer to
the ‘best practice
frontier’’
‘Smarter
choices’
Standards and
engagement
(Pillar I)
Medium term
–
Cost /
Optimise
Costs / impacts
are tangible
and significant
Neoclassical
& welfare
economics
Make best trade-
offs along the
frontier
Substitute
cleaner
production and
products
Markets and
pricing
(Pillar 2)
Long term
–
Secure/
Transform
Transformatio
nal risks and
opportunities
Evolutionary
&
institutional
Evolve the
frontier
Innovation and
infrastructure
Public-led
investment
(Pillar III)

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Drivers
Financial Cost & Benefits
-Capital Cost/Constrains
Hidden and Intangible Costs
- Incompatibility
- Performance Risk
- Management Time
-Other Transaction
Market Misalignment
-Split Incentives (landlord/tenant, builder/buyer,
maker/user)
Behavioral Factors
- Loss Aversion
- Discounting Pyramid
- Risk Bias
- Procrastination
-Invisibility of Carbon/Energy
-Inattention
Financial Cost & Benefits
- Operational Savings
Hidden and Intangible Costs
- Increased Thermal Comfort -
Improved Working Environment
-Better Controls
Market Misalignment
-Landlord/builder/Maker “build-in”
Behavioral Factors
-Corporate Social Responsibility
-Inherent Environmental Value
-Fashion
-Social Pressure
“Our worst property is 13 times less energy efficient than the best” – major UK retailer
“You should be pleased if you have the measurement systems in place to know that”
– response from another retail company
Barriers
Pillar I – Standards and Engagement
for Smarter Choices

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‘There appears to be a nearly
inverse relationship between those
policies that policy analysts tend to
endorse as holding the greatest
promise .. and political feasibility ..’
Rabe 2008, 106
Pillar II – Markets and Prices for
Cleaner Products and Processes
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€
CER (Phase II
allowances)
‘Energy forecasting was invented to
make economic forecasting look good’
- Anon

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Pillar III – Innovation in Energy
0
2
4
6
8
10
12
14
16
R&D per Sales, % (2011)
We are seeking radical innovation in some of the least
innovative sectors (energy, construction) in our economies …

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INVENTION DIFFUSION
Highly innovating,
close connection
consumers & innovators
(1st & 3rd Domains)
R&D intensity 5-15%
INNOVATION
Moderate innovation,
mostly business to
business connection (2nd
& 3rd Domains)
R&D intensity 1-5%
Technology push
Technology push
Technolog
y push
Market pull
Low innovation,
little connection between
innovators and markets,
R&D intensity < 1%
Market pull
Market pull
Technology
Valley of Death
Low innovation can be explained, and overcome by combination of
pusher further and puller deeper - with clear potential for net gains

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Pillar III is also about infrastructure and
transformation

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Planetary Economics
Some implications

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The Future is Open
and the default trajectory is neither optimal nor secure
0
5000
10000
15000
20000
25000
30000
35000
0 10000 20000 30000 40000 50000 60000
TotalGlobalCO2Emissions{MtCO2)
Global GDP ($bn)
Total Global CO2 Emissions
1980
1990
2007
‘Business as usual
Frontier
Efficiency and
innovation-led
frontier
Fig. 12 -1

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Manage bills,
increase
responsiveness
Values & Preference
Prices, products
and finance
I. Satisfice
Foster smarter choices
II. Optimise
Cleaner products and
processes
III. Transform
Innovation and
Infrastructure
Technology Options
Education & Access
- Enabling Environment
Revenues & Revealed costs
Standards &
engagement
Markets &
Prices
Strategic
Investment
The key for policy is to integrate and synergise
across all three domains

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Planetary Economics
Domain and Pillar
Standards &
Engagement for
Smarter Choices
Enhanced efficiency,
subsidy removal &
more rational choices
Prices and markets
for cleaner products
and processes
Investor
confidence,
revenues, energy
security
Strategic investment
for Innovation &
Infrastructure
Accelerating
Innovation in weak
sectors, coordinate
supply chain &
infrastrructure
Co-Benefits A New Framework
Role of Climate
Policy to
- Motivate
- Stabilise
- Coordinate
- Finance
transformational
policies to enhance
growth, energy
access & and climate
security