Thursday, 22 November 2012

Managing policy rents for the green transformation

By Hubert Schmitz

Last week I attended a conference at the German Development Institute (DIE) concerned with green industrial policy. It concentrated on rent management for the green transformation. This is an issue on which we at IDS are working with our DIE colleagues. Our common starting position is that first, enormous investment is needed to bring about the green transformation. Second, the bulk of this investment has to come from the private sector. Third, due to market failures government needs to intervene and help mobilise this private investment. These three things are not controversial; they are widely shared. Controversial however is how much government should intervene, how it should go about it and which green sectors it should target. It is a highly politicised debate – see for example the fierce discussion in the UK over government support for wind power.

Such political contestation is inevitable. After all managing policy rents means providing (and withdrawing) opportunities for above average profits on investment. This is always a difficult task but particularly challenging when it comes to accelerating the green transformation. The reasons? We are in a hurry; this is the first transformation in history to be achieved against a deadline; carbon emissions need to come down by dates which are frighteningly near. Second, the uncertainties are enormous; the viability and costs of the new technologies are impossible to predict. Third, these investments have time horizons of three or more decades. What a nightmarish scenario for policy making – even without the politics!

In our own work we (Tilman Altenburg, Oliver Johnson and I) have asked what guidance we can derive from the international experience with industrial and energy policy. What are the critical success factors for rent management? Let me share with you our initial thoughts. Management of green policy rents runs four risks:
  1. Abuse of the incentives
  2. Selecting the wrong instruments
  3. Targeting the wrong technologies or sectors, and
  4. Doing too little.
Critical success factors are those which help policy makers deal with these four risks. Let us take them one by one.

The first risk is the abuse of government incentives by rent seekers. This is the most talked about risk but it can be contained in a number of ways. These include monitoring by independent research organisations, by consumer protection agencies and by the press. Yes, the private sector can try to capture the whole process but this is hardly what has occurred in the British or German renewables industry.

The second risk is choosing the wrong instruments. Consultants tend to sell best practice rather than best fit. This is best dealt with by testing instruments in selected parts of the country. China and Vietnam have become so successful partly because they have a long tradition of experimenting and testing before rolling out policies country wide.

The third risk is targeting the wrong technologies or sectors. This is the old debate over whether governments can and should pick winners. History tells us that the most successful economies have prioritised sectors. Yes, they made mistakes in the process but making mistakes is unavoidable. It is hard to see how the green transformation can be achieved without making informed choices of priority sectors and technologies.

The fourth risk is doing too little. In my view this is the most fundamental risk. The creation and allocation of rents remains insufficient and as a result the required scaling up of investment is not achieved. It is true that investments in renewable energy have been substantial in recent years but the totals are counted in billions of £, € or $. In contrast, investments in the fossil fuels industry are counted in trillions. These investors seek to protect their assets and undermine the case for renewables with any means at their disposal.

Achieving a substantially greener investment and energy mix is not a project which can be achieved from within government alone. It requires government working with business and with civil society (NGOs and research communities): a government-business-civic alliance. Members of the alliance do not have to be driven by concerns for the climate. Support can be gained from government and business people whose priorities lie elsewhere, notably securing energy, building new competitive industries and creating green jobs. The chance of exerting influence increases dramatically if players with different motivations (climate change, energy security, competitiveness, jobs) are brought together. In short, ‘building transformative alliances’ needs to be included in our list of critical success factors for green rent management.


Emilie Wilson said...

Hi Hubert,

Thanks for unpicking this complex problem.

With COP18 unfolding over the next couple of weeks, even the Mail seems to be on board with the need to accelerate the transition to a green economy..

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