ENV GLOBAL FORUM OCT 2016 - Session 4 - A. Dechezleprêtre "How can environmental policies be designed to be compatible with (green) economic growth"

1. How can environmental policies be
designed to be compatible with (green)
economic growth? Evidence from firms
and industries
Antoine Dechezleprêtre
OECD Global Forum on Environment 2016

3. Overplayed competitiveness concerns
influence policy design
• Environmental policies can lead to small negative
effects on trade, employment, plant location and
productivity
– In pollution- & energy-intensive, trade-exposed sectors
• These impacts are small compared to other
determinants of trade and investment location
– Impacts overplayed, but firms legitimately voice their
concerns
• In fear of potential adverse competitiveness
effects, recent climate policies shield industrial
sectors from full regulatory costs

4. The perverse effects of EU ETS free
allocation rule: the cement industry
Observed cement installations
by activity level
Theoretical distribution
0
10
20
30
40
50
Number of installations
2012 - LD Countries
0
10
20
30
40
50
Number of Installations
2012 CF - LD Countries
Ø5.8 Mt excess clinker production in 2012 (= 5.2 Mt CO2 emissions)
Activity level thresholds: free allocation reduced by 50%
(resp. 75%) if production falls by 50% (resp. 75%)

5. Worrying consequences
• CO2 intensity of the European cement sector
+5% 2011-2014!
– EU 2050 objective: -80% CO2 emissions
• Cumulative surplus: 450M credits (=tonnes
CO2) for the cement sector
• Free allocations are received by large, carbon-
intensive incumbent firms
• SMEs who have developed commercially
viable low-carbon cements (e.g. Ecocem, EMC,
CarbonCure, BanahCEM) get nothing

6. Designing policies compatible with
economic performance
• Worrying about losers is legitimate
ØLevel the playing field at the consumption level
(eg consumption tax), without creating perverse
incentives that discourage efficiency and are
incompatible with long term objectives
• Growth-compatible environmental policies
need to encourage innovation
ØSupport new tech development, including by new
entrants, through innovation policies
ØProvide stable pollution pricing mechanisms

7. European
carbon market
introduced
Regulated
companies
Unregulated
companies
0
20
40
60
80
Low-carbonpatentfilings
2000 2002 2004 2006 2008
Year
Regulated Unregulated
Source: Calel & Dechezleprêtre, 2016.
Carbon pricing encourages low-carbon
innovation

8. !0.3%
!0.2%
!0.1%
0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Electricity%%
dirty%
Car%%
dirty%
Biotechs%
Electricity%
clean%
Car%
clean% Robot%
IT%
Nano%
3D%
Baseline =
average technology

9. Source: author’s calculations from EPO’s PATSTAT database
Reversing the dangerous decline in
global low-carbon innovation
20
40
60
80
100
Oilprice(2015$)
3%
4%
5%
6%
Shareofclimate-relatedinventions
1985 1990 1995 2000 2005 2010 2015
Year
Low-carbon innovation Crude oil price
20
40
60
80
100
Oilprice(2015$)
3%
4%
5%
6%
Shareofclimate-relatedinventions
1985 1990 1995 2000 2005 2010 2015
Year
Low-carbon innovation Crude oil price