The UK Government established ‘Reaching Net Zero by 2050’ as a binding goal in 2019. To achieve this, there needs to be investment in clean energy technologies and green infrastructure to reduce carbon emissions and energy consumption. There is therefore a strong economic justification for policies to foster the amount of innovation and influence its direction, to help address the key societal challenge of climate change and the low-carbon transition.
However, preventing climate change is not the only challenge faced by the UK. Recovery from the Coronavirus pandemic as set out in the Government’s Ten-point plan to Build Back Better after the pandemic, and the ‘levelling up’ of the nations and regions of the country, are also key challenges faced by policymakers.
Taken together, these agendas need to tackle the combined goals of reducing inequality, increasing social and physical infrastructure, creating job opportunities and boosting competitiveness all within an environmentally responsible and sustainable framework.
This blog considers how policy instruments for the low–carbon transition could jointly foster the positive environmental, technological, competitiveness and social outcomes which are all goals of any recovery plan for the coming years. In other words, how can these policy instruments work together to reduce energy consumption and/or greenhouse gas (GHG) emissions while fostering firm productivity, job creation and private investments in cleaner technologies?
A starting point for this is performing an analysis of what policies have been working adequately and why. Taking stock of previous experiences with different types of policy instruments strengthens our knowledge and supports effective policy making. Understanding the extent to which appropriate policies, regulations and public investments can be used to lower trade-offs among different societal goals or to promote additional co-benefits is crucial for bringing about change.
A recent systematic review published in Nature Climate Change by researchers at C-EENRG (UK), CMCC (Italy) and the Bennett Institute for Public Policy (UK), and funded by the European H2020 project INNOPATHs, brings together evidence from across the world on a set of ten low-carbon policy options currently used by governments. The review shows that, when poorly designed, there are short- to medium-term trade-offs between decarbonisation and other socioeconomic goals. In that context, the implementation of such policies may be detrimental to households and small businesses less able to manage;, for example, the short-term costs of energy price hikes that will have a greater impact on households in so-called ‘left-behind’ areas.
Does this mean that the inherent tension between reaching net zero and the policy challenges of Building Back Better and ‘levelling up’ cannot be reconciled?
Certainly not, and the menu of decarbonising policy instruments, from quotas to feed-in tariffs (FITs), can be designed and balanced to benefit local firms and lower-income families – vital for achieving a just, affordable and more equal and economically competitive transition to a Net Zero future. It is possible to support green jobs, accelerate a path to a net zero future and, at the same time, reduce inequalities among under-performing parts of the country.
The role of innovation – an example
Innovation will play a prominent role in lowering the cost of technologies that will enable the low-carbon transition of the economy. This includes renewable energy generation, electric vehicles, biomass heating systems, and many other technologies.
One of the instruments that shows more positive impacts on innovation is feed-in tariffs (FITs) which foster the deployment of renewable energy sources and public R&D funding. Research has tended to show that technological learning effects for manufacturing are greater in countries with FITs than in countries with bid systems. This is because the reduced margins in bidding systems limits the R&D investment capability of manufacturers and suppliers. However, the first has had more negative distributional impacts. The combination of different policy instruments, for example, FITs plus auctions, can mobilize different energy producers and technologies in different stages of development to simultaneously reduce costs, support competitiveness for both large and small firms and reduce negative short-term impacts on small producers.
In relation to public R&D funding, an important aspect that deserves more consideration is the role of public R&D investments as a catalyst for R&D investment in the private sector. Public R&D investment is one of those win-win policy instruments capable of generating positive impacts across environmental and socio-economic outcomes. Still, if we want to comply with climate goals, public R&D funding alone might not be enough. Carbon pricing instruments are essential, but recycling mechanisms and compensatory non-environmental exemptions are needed to reduce trade-offs and increase political feasibility and acceptability.
In the context of the levelling-up agenda, the design of stepped R&D grants programmes targeting small companies or those in early stages of development, generate crowding- in effects that attract private funding. This can help foster firm-level competitiveness outcomes beyond the positive impact on innovation. Direct public R&D funding together with R&D tax credits may also stimulate higher R&D private expenditure in SMEs.
Indeed, there is no one-size-fits-all policy approach. Policymakers should deploy incentives for innovation, such as targeted R&D funding, while also adapting tariffs and/or adopting policy mixes to benefit those across income distributions and in those less economically developed areas.
The link between evaluation and appraisal (or how the past informs the future)
All this evidence can be explored in more detail in the Decarbonisation Policy Evaluation Tool (DPET). The DPET is designed as a helpful reference for policymakers, academics and general users as it allows them to explore the possible trade-offs or co-benefits of policies to support the net zero-carbon transition. The INNOPATHs project that funded the development of the DPET at C-EENRG and CMCC, and the teams in charge of making this tool a reality[i], have been pioneers in understanding that indicator-based approaches to policy evaluation – such as the one presented in the DPET – have a lot to say on environmental policy evaluation where system transformation dynamics are at play.
The recent review of the Green Book – the government’s guidance on options appraisal – identified that “current appraisal practice is likely to undermine the government’s ambition to ‘level up’ poorer regions and to achieve other strategic objectives unless there is a step change improvement.”
One of the key themes that the Green Book review identified was the failure of those conducting appraisals to situate the proposal into the wider policy context, which led to an over-reliance on ex-ante appraisals like Cost-Benefit Analysis (CBA). The researchers behind the development of the DPET, believe that tools like it will help to address this issue and provide a better understanding of the connections and tensions between the triple challenges of Net Zero, Building Back Better and ‘levelling up’ faced by today’s policymakers.
Projects like INNOPATHs or the Economics of Innovation and Energy System Transitions (EEIST) project funded by BEIS[ii], are working on a methodological paradigm shift. For example, from using CBA or general equilibrium modelling to more complex approaches able to show the transformative power of policy instruments needed for the energy transition.
Interactive platforms like the DPET act as the vital link between understanding the real effects of the policy instruments used for the low carbon transition and the ex-ante appraisal tools needed for decision-making. For example, the comparison of the DPET’s ex-post evidence with existing modelling results on different policy instrument outcomes, will allow the identification of differences between ex-ante appraisals and ex-post evaluations and could lead to improving the modelling of policy instruments.
This analysis is necessary to identify and correct possible biases that could explain differences between projections/simulations of the impact of policy instruments and their actual performance once they are implemented. This in turn will improve the decision-making processes of the future.
[i] The DPET is one of the four interactive tools designed within INNOPATHs funded by the EU H2020 Grant Agreement No 730403. The team in charge of the development of the tool and the Systematic Review is formed by Prof. Elena Verdolini in the Euro-Mediterranean Centre for Climate Change (CMCC) and University of Brescia (Italy); Prof. Laura Diaz Anadon in the Centre for the Environment, Energy and Natural Resource Governance (C-EENRG) in the Department of Land Economy at the University of Cambridge (UK) and Dr Cristina Peñasco in the Department of Politics and International Studies (POLIS) at the University of Cambridge.
[ii] The Economics of Energy Innovation and System Transition is a University of Exeter led project with members across 16 institutions (including C-EENRG at the University of Cambridge) which develops complexity-based modelling solutions to support decision making around low-carbon innovation and technological change to facilitate low-carbon transitions. Prof Laura Diaz Anadon (Director of C-EENRG) and Dr Cristina Peñasco (a faculty member at the Bennett Institute and Fellow at C-EENRG) are leading the work analysing the empirical evidence for general principles for policymaking.
About the author
Dr Cristina Peñasco, University of Cambridge, Department of Politics and International Studies, Lecturer in public policy
Dr Cristina Peñasco is a University Lecturer in public Policy at POLIS. At Cambridge she is also a Bye-Fellow at Queens' College, a Centre Fellow at Centre for the Environment, Energy and Natural Resource Governance (C-EENRG) hosted at the Department of Land Economy, and an ... Learn more