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Welcome to the UCL ISR blog

By Katherine Welch, on 17 April 2012

 

Welcome to the UCL ISR blog, a guest blog with informative and insightful commentary from invited stakeholders on a range of issues relating to the sustainable use of natural resources.
The opinions expressed in these posts are those of the individual authors.
If you have a question or issue you would like to see commented on, or would be interested in posting a comment yourself, please contact us at sustainable-resources [at] ucl.ac.uk
image credit: SXC/Joseph Hart

BP’s Energy Outlook 2035: betting on dangerous climate change

By Nino D J Jordan, on 7 April 2014

Will humanity be collectively able to avert dangerous tipping points for climate change? Probably not, according to BP’s Energy Outlook 2035(1). Sadly, this may well be true. Is it good news for BP? Yes, rather so.

Is BP’s Energy Outlook 2035 an objective assessment of reality? Only to an extent.

BP Energy Outlook presents itself as a realistic assessment of reality, yet it is

  • a reality that BP actively shapes and
  • it creates a perception of reality that is beneficial to BP.
  • It also wittingly or unwittingly aids the perception that industrialising countries are responsible for emissions reaching a level that makes dangerous climate change likely, thus generating a sense that climate action in OECD countries will only have a limited impact.

When presenting the BP Energy Outlook 2035 at University College London on 1st April 2014, BP’s Group Chief Economist and Vice President, Christof Rühl, left no doubt that he considers climate policy to be low on the agenda of policy makers. According to the Outlook climate change policies will remain too lax for staying within the emissions confines recommended by scientists: “Global CO2 emissions from energy use grow by 29% or 1.1% p.a. over the forecasting period. Policies to curb emissions continue to tighten, and the rate of growth of emissions declines, but emissions remain well above the path recommended by scientists.”(2)

What if climate policies would become stringent enough for staying within the 2 degree limit? Following HSBC 25% of BP’s proven and probable reserves would be ‘‘unburnable’’ under a low carbon policy environment consistent with a scenario (‘‘450’’), which limits global warming to 2C, with “BP’’s value at risk from unburnable reserves [being] equivalent to only 6% of its market value as most of the ‘‘lost’’ reserves are low margin (3,4). This doesn’t sound too bad. Yet BP is still investing into more exploration and extraction, ensuring that their interests continue to be pitted against the successful implementation of a low carbon regime with extensive coverage.

BP does’t just assess what would be the most likely future developments in energy markets, it also actively shapes them. According to BP its Outlook “is based on a “most likely” assessment of future policy trends (5). Is BP just responding to markets signals and expectations of regulatory developments? Past investments, “sunk costs”, mean that “oil companies are unlikely to stop extracting oil, even if they invest in renewable energy (6). If “exit” is not likely, “voice” is: lobbying and the shaping of perceptions. Standard economic approaches treat firms as solely responding to government intervention (7). Yet firms such as BP actively invest in politics (8,9). Big oil and energy intensive industries want a world with a low carbon price. Others, e.g. renewable energy companies, energy efficiency pioneers and the concerned public, want a high carbon price. What BP tells us in its Outlook is that they think they will win.

BP’s Energy Outlook creates a perception of reality that is beneficial to BP. BP is a publicly traded company. A threshold carbon price can benefit BP as oil and gas gain in desirability when coal’s higher carbon intensity drives it to the sidelines. While a carbon price high enough to stay within a tolerable degree of global warming would also hurt BP it would still hurt oil and gas companies far less than coal companies. BP could probably manage the transition. Its suggestions of substituting gas for coal in the mid-term make sense. However, for BP loosing 6% of its market value doesn’t sound like an enticing proposition. A scenario compatible with a reasonable likelihood of averting dangerous climate change threatens the profitability of BP’s assets. Acknowledging this would presumably not have the most benign effects on its share price. Concerning the argument that some of BP’s assets may prove to be unburnable, they write “we believe that the unburnable carbon approach to assessing the impact of potential climate regulation on a company’s value oversimplifies the complexity of the issue and overstates the potential financial impact (10). Creating an impression that the future will be benign for big oil may yet turn out to be delusional for investors at large but is still good for current shareholders. The situation could be overdetermined: BP may not have much of a reason to assume that stringent climate policies will be put in place. Yet, even if they had reason to assume it, it wouldn’t be in their interest to admit it. Currently, the markets don’t price in the risk that climate regulation stringent enough to ward off dangerous climate change could impact on fossil fuel companies’ share prices (11). If BP recognised a low carbon scenario in their outlook as a realistic possibility, it would raise the question of how such a scenario would impact on their assets, entertaining the prospect that some might become unburnable or “stranded”. This could change market perceptions, with some investments moving out of more and some into less carbon intensive forms of energy. If BP included the possible impacts of a low carbon scenario on market demand in its Outlook it would become apparent that BP is actively investing on the assumption that this is not going to realise — that they bet on a future that entails dangerous climate change.

Emissions-according-to-BP_NJ

The Outlook can also be interpreted as suggesting that industrialising countries are responsible for emissions reaching a level that makes dangerous climate change likely. When commenting on Christof Rühl’s talk, environmental economist Paul Ekins, Professor of Resources and Environmental Policy and Director at the UCL Institute for Sustainable Resources, pointed out that the BP forecast graph depicting emissions by regions (see above) may be taken to suggest that the emissions cuts (compared to a baseline scenario) necessary for being in line with the International Energy Agency scenario “consistent with the goal of limiting the global increase in temperature to 2°C” (IEA 450 scenario) (12) would need to come from non-OECD developing countries. Yet, in order to make limiting emissions palatable for developing countries, OECD countries clearly need to take the lead.

Considering that the OECD member countries have a joint population of 1,257 million in 2012 (13), with the global population exceeding 7 billion (14), a mere stabilisation of OECD emissions seems hardly adequate. Differences in capabilities as well as historical responsibility clearly mandate a pioneering role in decarbonisation for industrialised countries. While lower demand from industrialised countries for fossil fuels makes them cheaper and thus raises incentives for industrialising countries to rely on them, lower prices also make future exploration and extraction efforts less attractive. As investment for renewables increases in industrialised countries, prices also fall for industrialising countries. It is far from clear that OECD countries’ climate action would be insufficient for remaining below the 2C target. Even if the target was exceeded, such action would be far from futile. If rich countries pioneer low carbon infrastructures, this will also help industrialising countries to rein in their appetite for fossil fuels.

The BP Energy Outlook 2035 suggests to solely give a realistic forecast (15). Yet BP forecasts a reality it helps to create. And its forecast further bolsters investments into this kind of reality. BP’s sense of realism is a confidence in its own prospects. While much can be learned from the data, the way it is presented supports fatalism, helps to keep up share prices and aims to provide legitimacy to further fossil fuel exploration and extraction. It provides the rationale for betting on dangerous climate change.

Nino Jordan, Doctoral Researcher, UCL ISR
Nino is a doctoral researcher at the UCL Institute for Sustainable Resources. His research focuses on business interests towards environmental regulation and the interactions between innovation and regulation.View Nino’s profile.

References

  1. BP (2014) BP Energy Outlook 2035.
  2. BP (2014) BP Energy Outlook 2035., p. 81
  3. HSBC Global Research (2013) Oil & carbon revisited. Value at risk from `unburnable’ reserves
  4. On “unburnable carbon” see also Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment (2013) Unburnable carbon 2013: Wasted capital and stranded assets.
  5. BP (2014) BP Energy Outlook 2035., p. 95
  6. David Coen, Wyn Grant, and Graham Wilson (2010) Perspectives on business and government, David Coen, Wyn Grant, and Graham Wilson(eds.) The Oxford Handbook of Business and Government, Oxford University Press, Oxford, p. 18.
  7. “…economics has no use for a concept of power because it is assumed away in the conditions of the pure market.” Colin Crouch (2010) The global firm: The problem of the giant firm in democratic capitalism, David Coen, Wyn Grant, and Graham Wilson (eds. ) The Oxford Handbook of Business and Government, Oxford University Press, Oxford, p. 149.
  8. On firm “investment” in politics see Colin Crouch (2004) Post-democracy, Polity Press, Cambridge.
  9. On BP’s political contributions see e.g. Hiskes (2010) BP’s donations to Congress are more worrying than its donations to Obama
  10. BP (2014) BP Energy Outlook 2035., p. 14
  11. See Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment (2013) Unburnable carbon 2013: Wasted capital and stranded assets.
  12. “A scenario presented in the World Energy Outlook that sets out an energy pathway consistent with the goal of limiting the global increase in temperature to 2°C by limiting concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2.” IEA Website
  13. http://data.worldbank.org/country/OED
  14. http://www.un.org/apps/news/story.asp?NewsID=45165
  15. Christof Rühl: “Don’t shoot the messenger!”, University College London on 1st April 2014

Fisheries: voluntary self-regulation as a model for bold trade policy reform

By Nino D J Jordan, on 21 March 2014

haul

Voluntary self-regulation by organisations such as the Marine Stewardship Council promises to make fishing more sustainable. While self-regulatory efforts are a great start, it is questionable whether they alone suffice to tackle the task of making the world’s fisheries sustainable again. But they have a great – as of yet underappreciated – potential: complementing and facilitating government action by providing orientation for bold trade policy reforms.

Overfishing has led to the depletion or even collapse of many fish stocks. States have found it difficult to respond to the challenge of overfishing. Even within the EU, with its extraordinary level of inter-state cooperation, until recently fishing reform had been an extremely sluggish process[1].

While state inaction left the seas free to overexploitation, in the 1990s a private initiative promised to provide the much-needed responsibility. It took the collapse of fishing stocks to alert Unilever, one of the world’s biggest buyers of frozen fish, to identify overfishing as a threat to its business. Unilever soon teamed up with the World Wildlife Foundation (WWF) to initiate what would become the Marine Stewardship Council (MSC): a non-profit organisation which sets a standard for sustainable fishing and allocates the right to use its label to those found to behave in accordance with it[2].

According to the MSC its certification scheme now covers “over 10% of the annual global harvest of wild capture fisheries”[3]. While there has been criticism levied at MSC standards and compliance with it, it is largely considered to be a successful scheme.

Personally, I always look out for the MSC label when I buy fish but I’m never quite certain whether this actually makes much of a difference or just has a feel-good effect. For while my individual purchase might come from more sustainable fisheries it would still add to the aggregate global demand for fish. When the MSC’s Chief Executive, Rupert Howes, gave a presentation at the UCL Institute for Sustainable Resources (20 Feb 2014) I raised the question if, instead of consciously limiting my fish consumption, he would actually encourage me to buy more (certified) fish. He replied along the lines that increased demand for MSC certified fish actually makes MSC certification and thus the adherence to sustainable fishing standards more attractive to fishing companies.

WATCH THE PRESENTATION
Feeding the world and maintaining the productive capacity and integrity of marine eco-systems Rupert Howes, Chief Executive, MSC

I think his point is a very good one. Yet some doubts persist. While buying MSC certified fish may help to raise incentives for fishing companies to comply with sustainability standards, its purchase still keeps alive what I would call “a culture of fish consumption“: people will praise the taste of fish dishes, put up photos of them on the internet and floods of saliva will pour forth from their friends mouths. Now the saliva is there, moral virtue is supposed to rein it in. More expensive, certified fish is deemed “good”, while the cheap, “dirty” and unsustainable fish is “bad”. Those who can afford or prioritise “sustainable” fish can feel good about themselves, at ease with the world, while the consumers of non-certified fish should — in order to boost the market for sustainable fish — at least feel some slight unease around their taste buds. While ecological economists don’t tire to preach that the environmental costs of products should be reflected in their prices, here — like so often — the reverse holds true: one has to pay a premium for sustainably sourced fish.

Will consumers shift to certified fish quickly enough to save fishing stocks from collapsing and maritime life from severe disruptions? Perhaps it’s going to work. But it’s a risky bet. And if it doesn’t work – who is to blame? Consumers, because they didn’t buy the right fish? Or not enough of the right fish?

The success of the MSC labelling scheme shows that consumers are not just interested in the mere physical qualities of fish but also in the process by which it landed upon their platter. It demonstrates that market pull in one place can change fishing practices in another. It’s a testing ground for standardisation and monitoring activities.

All this makes a good case for revisiting the possibility of applying trade measures against the import of fish which sourcing doesn’t qualify as sustainable. The World Trade Organisation (WTO) is extremely wary of the introduction of “discriminatory” measures whose rationales can be interpreted as fig-leafs for protectionism. This translates into strong scrutiny towards restrictions on the basis of the process or the method by which a good is derived rather than by its mere physical qualities. Yet, the jurisdiction on the possibilities for enacting import restrictions based on “non-product-related processes and production methods (PPMs)” is far from exhaustive. Private standard setting and monitoring exercises such as those conducted by the MSC can help to demonstrate that “non-discriminatory” import restrictions on the basis of “non-product-related processes and production methods (PPMs)” can be designed and monitored[4]&[5].

What I suggest here is an appreciation of the pioneering role of private sector initiatives such as the MSC. Governments should draw on these foundations and insist on the adherence to similar standards as a precondition for market entry. The regulatory “pull” from a giant market such as the EU’s would be able to exert beneficial effects at far greater scale than what can currently be accomplished by private sector initiatives.

Once the, admittedly, giant leap of making the adherence to criteria of sustainable fishing a condition for market-entry is taken, fishing companies all over the world might develop an interest in lobbying governments to strengthen regulation and to cooperate in order to make their fishing grounds pass sustainability criteria.

Voluntary private self-regulation can be a model for the introduction of sustainability criteria in trade policy. Once private initiative is followed up by trade policy, the main worry about fish will hopefully be of culinary nature.

Nino Jordan, Doctoral Researcher, UCL ISR
Nino is a doctoral researcher at the UCL Institute for Sustainable Resources. His research focuses on business interests towards environmental regulation and the interactions between innovation and regulation.View Nino’s profile.

 


[4] For a more detailed discussion see Fabrizio Meliadò, Fisheries Management Standards in the WTO Fisheries Subsidies Talks: Learning How to Discipline Environmental PPMs?,
Journal of World Trade 46, no. 5, 1083–1146.

[5] For a critical take on exclusion and potentially discriminating factors see Stefano Ponte, The Marine Stewardship Council (MSC) and the Making of a Market for ‘Sustainable Fish’,
Journal of Agrarian Change 12 (2012), no. 2-3, 300–315.

Kazakhstan – it’s not just the economy, stupid!

By Florian K Flachenecker, on 19 March 2014

Kazakhstan_FlorianLast week I attended a workshop on the ‘Sustainable Use of Mineral Resources’ organised by the British Council and Kazakh partners in Ust-Kamenogorsk, a city in eastern Kazakhstan. I did not only appreciate the great cuisine and remarkable hospitality, but the trip also made visible some of the challenges the country is currently facing.

Following the workshop’s title, I expected discussions about sustainability. A sustainable use of resources requires all of its three dimensions to be reflected – economic, social and environmental. Generally, a sustainable resource management seems to be the key issue here. The goal is to fairly share economic profits among society without compromising environmental stability. Most discussions during the workshop focused on mapping the mineral landscape through international academic collaboration. The results will facilitate exploitation with a predominant attention on the economic side of the sustainability equation.

Concentrating mainly on the economic side is just not enough. Nevertheless, most emphasis is put on economic considerations. Kazakhstan is a resource rich country. The oil industry accounts for more than one-fourth of GDP. Additionally, there are substantial reserves of raw materials such as uranium, copper, iron ore, and zinc. Recent discoveries of rare earth metals promise a prosperous future. The extraction industry is booming. In short, there is great potential for economic development. The growth rates in GDP over the past decade demonstrate that Kazakhstan is harvesting these economic benefits.

Kazakhstan_Florian2From a social point of view there is room for improvement. Despite increasing investments in health service, education, and poverty reduction, major gaps between urban and rural areas persist. High-level education seems to be most successful. Kazakhstan has already played an important role in the former Soviet scientific research community – going far beyond the Baikonur space launch facility. The newly established state-of-the-art Nazarbayev University in Astana emphasises the on-going importance of this legacy. However, the full social potential is not sufficiently considered.

Also environmental aspects are not a top priority on the political agenda. Historically known for its nuclear testing, contemporary Kazakhstan struggles to cope with pollution from metal smelters, car emissions and heavy industry. Environmental impacts of the growing resource-intensive economy are of secondary importance.

In summary, significant endowments are only one part of the story. In order to escape the so-called resource curse, it takes more than ‘just’ getting rocks out of the ground to benefits from them in the long run. The ball is in the court of politicians, businesses and academia now. After all, it’s not just the economy, Kazakhstan!

Florian Flachenecker, UCL ISR Doctoral Researcher

Florian completed his MA at the College of Europe in European Economic Studies. He holds a BSc in Economics from the University of Mannheim. Florian worked at the Centre for European Economic Research (ZEW), the collaborative research centre ‘The Political Economy of Reforms’ at the University of Mannheim, Deutsche Bank AG Research for Economic and European Policy Issues and at UBS Deutschland AG at the Chief of Staff.

The German Energiewende: drying up or moving forward?

By Raimund Bleischwitz, on 12 March 2014

http://en.wikipedia.org/wiki/File:Schneebergerhof_01.jpg#globalusageThe expected change in the German government in late 2013 has marked a turning point in the country’s Energiewende – the plans to phase out nuclear energy by the year 2021 while continuing to reduce energy-related greenhouse gas emissions and to derive at least 80% share of Germany’s electricity from renewable energies in 2050. Putting a grand coalition into power could be translated as a voters’ voice to gain without pain. And that’s exactly the challenge.

The new Minister: Sigmar Gabriel

The newly appointed Minister, SPD Chairman Sigmar Gabriel, has moved the topic away from the Ministry for the Environment and merged it within his portfolio of Economy and Energy. In doing so, he faces at least two tough challenges:

  • External competition: Energy prices have risen for industry and private households in Germany and the EU, while the new supply of unconventional fuels in Northern America has led to more favorable energy prices in the US. Therefore, it is no wonder that energy-intensive industries are speculating about relocation. Green industry also causes concerns: German solar cell producers (along with others) face stiff international competition, and significant scrutiny that has been exacerbated by a recent financial scandal within Prokon, a giant German wind farm planning firm.
  • Internal burden sharing: The previous government was generous in relieving industry from paying its share, with some 1,900 companies being declared ‘energy intensive’ and therefore exempt from the “Energieumlage“, a surcharge paid by German electricity consumers for clean energy  production. The publication of details related to these exemptions created a public outcry during the election campaign in late summer 2013. At the same time, the European Commission has started a complaint against Germany under the suspicion of unbalanced state aid.

These concerns over affordability and fairness culminated in a statement in late 2013 made by Hannelore Kraft (SPD), the powerful Prime Minister of Northrhine-Westfalia, arguing in favor of competitiveness and a cap on expanding renewable energy production (REN). This statement came in parallel with findings about an uneven fee distribution within Germany, according to which Bavarian users (governed by the CSU) receive high shares of the surcharge revenues while Northrhine Westphalian users pay high levels of fees. The social underpinnings of this imbalance are potentially disruptive: wealthy citizens put photovoltaic cells on their posh houses and receive support, while poor citizens struggle to pay their electricity bills in rented homes.

Two tough Energiewende guys: Rainer Baake and Jochen Flasbarth

No wonder that the Coalition Treaty of the new German government has been quite reluctant to pave the way forward. However the appointment of two Secretaries of State – Rainer and Baake and Jochen Flasbarth – has communicated a tougher message about the future. Baake, who is a renowned supporter of REN and former secretary of state under the Green Minister for the Environment Jürgen Trittin, has taken over this position under Sigmar Gabriel. Flasbarth is a former President of the Environment Protection Agency and has been appointed Secretary of State at the Ministry for the Environment. Both are seen as strong administrative leaders with strategic capacities to accomplish the German Energiewende. Main competencies (economy, energy, housing, environment) are now ruled by Socialdemocrats, which should facilitate policy coordination.

It’s the energy economy, stupid

Will this trio be able to rock the country and push the Energiewende forward? The political challenges for 2014 are enormous and cast some doubt on this possibility. In particular:

  • The renewable energies law (EEG) is going to be revised by Summer 2014. According to a proposal made by Sigmar Gabriel in January 2014, a more focused support, direct sales, new capacity mechanisms, and competitive bidding should make deployment more cost effective. Both the steep rise in the energy surcharge from 3.59 Eurocent/KWh in 2012 to 6.24 Eurocent/KWh in 2014 and the state aid complaint raised by the European Commission will challenge the Minister to cut back the industry exemptions. However, one of the biggest beneficiaries, the German Rail, has announced ticket price increases if such cuts will become reality.
  • Investments into a better power grid, including some 8,300 km (5,171 miles) of new transmission lines to connect northern renewable energy generation with southern demand centers, still need to be planned and will raise local NIMBY resistance; Bavarian Prime Minister Horst Seehofer (CSU) currently fuels the fire of any objections with an eye on his local elections in March 2014.

But, despite these challenges, there are promising trends too. Existing policies have pushed technologies and innovation systems. In 2013, 23.4 percent of electricity in Germany was generated by renewable energy sources. The country could mark a new record in exporting power. Foreign observers note that no major interruptions have occured; the system continues to be reliable. Programs on resource efficiency help manufacturing industries to cope with high commodity prices. And there is citizens’ support: Germans are busy renovating their homes to make them more energy efficient. Energy cooperatives are on the rise. More than 100 municipalities intend to become “100% renewable”.

The Energiewende happens in the EU

But, Energiewende is NOT merely a national game. Ongoing consultations with EU neighbors about transmission technologies and trade are a key. The European Commission is active in carbon emissions reductions (- 40% by 2030!), delivering the internal electricity market and facilitating investments in smart grids. The proposed European Commission text for the revised state aid guidelines in the field of energy and the environment (currently in public consultation) leaves the door open for financing renewable energy support; albeit details are likely to remain controversial.

Over time, the EU aims to harmonize national REN support schemes and facilitate renewable energy integration into a fully European energy market. Neighbors such as Iceland and Norway are already large producers of REN, and the Western Balkans may become REN exporters. The European Energy Charter and partnerships with Russia, Ukraine, Turkey, Central Asia, as well as the EU neighborhood policy with Northern Africa offer further perspectives. The new German government can be expected to play a more active role in any such foreign energy policy.

Outlook: competition and coalitions for international relations

Who is going to win the race for new energy strategies? Analysts expect electricity costs to increase by 2020, and potentially decrease slightly after this point due to replacement of fossil fuels with REN and a decline in wholesale electricity prices. The US, on the other hand, is now reaping benefits from its abundant unconventional fuel supply, but it may have difficulties in the long run if the boom comes to an end and infrastructure isn’t modernised. Besides a lot of political rhetoric, there should be an active joint interest of many states in REN, international energy security, and access to the raw materials necessary to maintain the energy systems and manufacturing industries.

Blog by Professor Raimund Bleischwitz, BHP Billiton Chair in Sustainable Global Resources at UCL ISR. View Raimund’s profile.

Three Challenges to the Circular Economy

By Stijn Van Ewijk, on 10 March 2014

Photo credit: carrotmadman6A sustainable society without circular flows is hard to conceive. For instance cradle-to-cradle, bio-mimicry, and industrial ecology heavily emphasise recycling and reuse activities. Today, all those philosophies seem to have been summarized and trumped by the concept of the circular economy. This week, the circular economy was being celebrated at the “Resource Event” in London, where some 100 speakers shared their views on the circular economy.

Based on my research on understanding, measuring and achieving sustainability, I have developed quite positive feelings towards the circular economy. To me, it clearly represents the most important strategies towards sustainable resource use. However, the road to a circular economy is long and winding, and there may be many potholes on the way.

Drawing from the presentations and panel discussions at the Resource Event, I identified three major challenges in achieving the circular economy.

     1. Controlling life cycles efficiently

It is no surprise that many products are hard to disassemble or to recycle. Product designers are not waste managers and have no strong reasons to incorporate end-of-life considerations into their products. The circular economy therefore requires integrating the entire product life cycle from raw material extraction to disposal (or preferably reuse and recycling). This can be done either through intensive collaboration between companies or single ownership of the product chain.

However, such integration has many disadvantages. First, if companies own the entire life cycle of products, they can easily cross-subsidize different activities, leading to inefficient production and high prices. Similarly, strong collaboration can facilitate cartel like behaviour. Second, if producers manage the waste of their own products, it may be more difficult to benefit from economies of scale in waste management. Finally, the upfront costs of owning or managing the entire life cycle may be too high for newcomers.

     2. Making linked industries resilient 

Sometimes the resource loop cannot be closed within one industry. It is possible to turn plastic bottles into plastic bottles into eternity, as closed loop shows, but many industries will see their waste being used as a resource by other industries. Linking up different production chains creates a web of complex interdependencies that can leave the system very vulnerable to disruptions. Similar complexities and collapses are quite common in other systems.

Many proponents of the circular economy set nature as an example. However, nature is not perfect. The huge complexity of ecosystems means that a change in one variable (say loss in biodiversity) can create a cascade of effects ending in the collapse of the entire system. In the same way, a cascade of events led to the crash of the complex and interlinked financial system, which in turn affected many others sectors. The ramifications of a similar crash in for instance manufacturing would be unpleasant at least.

     3. Keeping the environment on the agenda

The conversation among all the participants at the Resource Events was clearly mostly about the economics of the circular economy. The trillion pound opportunity in transitioning to the circular economy – as calculated by the Ellen MacArthur Foundation – was cited extensively. However, it would be silly to forget that resource use is strongly connected to environmental and social issues.

Of course, there is great potential for reducing environmental harm in applying the circularity concept and many proponents of circularity see this as an important argument in favour of the concept. But the exact relationship between circularity that maximizes profits and circularity that minimizes environmental benefits is unclear. If governments want to support the circular economy, they should know what policies are needed to achieve both economic growth and reduced environmental impacts.

Circularity clearly is an attractive option for the future. However, the actual implementation of circularity requires facing some major challenges. Integrating life cycles and industries leads to complex systems that may hamper competition and leave the economy vulnerable to disruptions. Most importantly, the circular economy should not only create monetary benefits but also meet the need for reduced environmental impacts. Hopefully, we have gained a better understanding of these issues by the time of the next Resource Event in 2015.

Photo credit: carrotmadman6

Stijn van Ewijk, Doctoral Researcher, UCL ISR
Stijn is a doctoral researcher at the UCL Institute for Sustainable Resources. His research focuses on sustainability indicators for waste and resources, the causes of waste problems, technological pathways to sustainability and the effectiveness of resource and energy policies. View Stijn’s profile.

Trading natural capital: a trigger-happy policy?

By Stijn Van Ewijk, on 31 January 2014

photo credit: La Citta Vita via photopin cc

photo credit: La Citta Vita via photopin cc

Policy can be like firing a gun. Government sets a target, arms itself with the right policies and pulls the trigger. In the reality of the environmental policy arena however, the target tends to be rather blurred, the policies are difficult to pick and pulling the trigger may not cause even one bullet to hit the target. Recognizing these difficulties, this week’s annual SDRN conference was aimed at gaining a fuller understanding of setting and meeting sustainability targets in the United Kingdom.

Based on my research interests, which focus on sustainability indicators, I was most intrigued by the panel discussion on the valuation of natural capital. Natural capital represents the value of the goods and services provided by ecosystems such as building materials, food crops and climate regulation. What struck me, as well as many of the other participants, is that our ability to measure natural capital has far exceeded our understanding of the sustainable use of natural capital.

Trading nature

At the conference, two valuation methods for natural capital were presented. The consultancy Eftec has been valuing ecosystem services for a long term and has contributed to frameworks for ecosystem payments, including the biodiversity offsetting pilots in the UK. Such schemes allow for ecosystems to be valued and traded, making environmental policy a relatively straightforward transaction. Another consultancy, Trucost, calculated the loss of natural capital caused by economic activities like electricity generation, cattle ranching and wheat production and contrasts these costs with the associated profits. Both methods clearly assign an economic value to natural processes and functions.

However, the practice of contrasting natural capital with profits demonstrates the weakness of the entire approach. Natural capital valuation implies that any part of the natural environmental can be traded for other forms of capital including company profits. In other words, the commodification of nature suggests that environmental destruction can be bought off with high profits.

This suggestion is rather problematic, since sustainability does not mean that the entire global ecosystem can be substituted for profit. The natural environment provides many critical services that we as humans depend on for survival. The more of nature we destruct, the more valuable the remaining part of it becomes. The price of the natural environment would therefore have to increase to infinity as we become increasingly dependent on shrinking ecosystems, a fact that is not included in the natural capital valuation schemes that were presented at the conference. Furthermore, ecosystems tend to be complex and interlinked systems. Trading a part of an ecosystem may distort the system balance and lead to a collapse of the entire system.

Sustainability targets

Several speakers at the conference stated that natural capital trading can be supplemented with regulation. Yet, even a strongly regulated market for natural capital signals that nature is a commodity and can inspire actions that are detrimental to it. However, the most important point here is that successfully regulating a market for natural capital requires a clear and workable definition of sustainability. Unfortunately, in most cases, clear estimates of how much natural capital can be traded and converted is lacking.

Instead of focussing on the estimation of natural capital, more effort should be put into defining the limits to exploiting natural capital and the formulation of sustainability targets. In the absence of such targets, the trading of natural capital as an environmental policy seems rather trigger-happy.

Stijn van Ewijk, Doctoral Researcher, University College London

Stijn is a doctoral researcher at the Institute for Sustainable Resources at University College London. His research focuses on sustainability indicators for waste, the causes of waste problems, technological pathways to sustainability and the effectiveness of waste and energy policies. View Stijn’s profile. 

National Policies – Flying High for Planetary Boundaries?

By Raimund Bleischwitz, on 30 January 2014

Globe (C) Reto Stöckli NASA Goddard Space Flight Center/NASA Visible EarthEver since the concept of planetary boundaries has been published I felt a bit torn between admiration and distrust. Admiration because the assumption of a safe operating space for economies is well-grounded in earth system science, and the authors have a good take in making some of those key boundaries explicit. But there’s always been a sense of mistrust either because any concept aiming at the management of global public goods requires an almost insatiable belief in global governance and like-minded actors. Facing the decline of the Kyoto Protocol and sweeping waves of resource nationalism such belief is hard to carry on.

I was thus honoured to be invited to a workshop in Brussels* seeking to discuss the policy dimension of such planetary boundaries. My own research on the global resource nexus underlines some strategic strengths of the latter: Looking at interlinkages across essential resource inputs (energy, water, food, land, minerals) the resource nexus is closer to actors on the ground, it helps to realize business opportunities through resource efficiency of all kinds, and it would spot security concerns over access to resources, such as the ones emerging in the South Chinese Seas.

Being together with experts over two days here is what I’ve learned through discussions and conclusions at the workshop:

  • There is good recent evidence on global tipping points;
  • Research translating the safe operating space into boundaries for countries has been done and will continue;
  • The authors of the planetary boundaries will publish an update that will be more explicit on regional stress multipliers and its implications.

Are such findings likely to be strong enough to create a political momentum within countries, in the EU, and internationally?  I wish it would, but I doubt.

One of the lessons learned over the last years, in my view, is that environmental research needs to be translated into and communicate with transition strategies. There is no point in having environmental policy objectives without an explicit acknowledgement of social aspirations and other purposes inherent in human beings.

The great strengths of the current debate about Sustainable Development Goals is its aim to overcome the prevailing dichotomy of the Millennium Development Goals and to identify goals that exploit synergies between social, economic, political, and environmental ambitions. The great opportunities of eradicating worldwide poverty by turning natural endowments into markets for resource efficiency – including better water and food management – is worth to be pursued.

National policies have a role to play in addressing feasible pathways for eco-innovation, in starting processes of deliberations with stakeholders, and in pushing markets via intelligent incentive systems. Towards such role, a national sustainability strategy should have a visible stream dealing with an integrated vision, with incentives, actors and institutions, and with policies. It may also act as a platform on a few cross-cutting pathways such as blue green infrastructures (integrating water, waste water, nutrients and energy management), resource-light vehicles (integrating car-related CO2 emissions into delivering sustainable mobility), cascading use of biomass with bio-gasification, large-scale metals recycling at international scales, etc. There should also be an index that identifies sustainability gaps at a national scale with breakdowns for individuals and industries.

The concerned scientist will probably continue to argue that this won’t stop ecosystems from deteriorating and, eventually, to collapse. And that’s a justified assessment. Upgraded research on the dynamics of environmental change deems necessary. But it will be good to integrate the socio-economic dimension and, indeed, look at national sustainability policy as an opportunity to act.

Prof. Dr. Raimund Bleischwitz, UCL Institute for Sustainable Resources
The Global Resource Nexus: Managing Markets Under Stress video - Prof Bleischwitz for the Transatlantic Academy


*International Expert Workshop “Safe operating space. State & Perspectives as a Concept for National Policy”, held in Brussels on the 23rd-24th January 2014, organised by the Network of European Environment and Sustainable Development Advisory Councils (EEAC), the Advisory Council for Sustainable Development (CADS), and the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).

Barnosky, A.D. et al. (2012): Approaching a state shift in Earth’s biosphere, in: Nature 486, 52 – 58, doi:10.1038/nature11018
Abstract: Localized ecological systems are known to shift abruptly and irreversibly from one state to another when they are forced across critical thresholds. Here we review evidence that the global ecosystem as a whole can react in the same way and is approaching a planetary-scale critical transition as a result of human influence. The plausibility of a planetary-scale ‘tipping point’ highlights the need to improve biological forecasting by detecting early warning signs of critical transitions on global as well as local scales, and by detecting feedbacks that promote such transitions. It is also necessary to address root causes of how humans are forcing biological changes.

Hey, C. (2012): Safe Planetary Boundaries: A new environmental policy frame? Contribution to the “2012 Berlin Conference on Evidence for Sustainable Development” 5-6 October, 2012. Available at:  http://www.berlinconference.org/2012/wp-content/uploads/2012/10/hey_safe-planetary-boundaries_a-new-environmental-policy-frame.pdf

Nykvist, B., Person, A., Moberg, F., Persson, L., Cornell, S., Rockström, J. (2013). National Environmental Performance on Planetary Boundaries. A study for the Swedish Environmental Protection Agency. Report 6576. Swedish Environmental Protection Agency. June 2013.

Pisano, U.; Berger, G (2013). Planetary Boundaries for SD. From an international perspective to national Applications. ESDN Quarterly Report N°30. October 2013. Available at: http://www.sd-network.eu/quarterly%20reports/report%20files/pdf/2013-October-Planetary_Boundaries_for_SD.pdf

Fossil fuel markets and the costs of distorted incentives

By Jun Rentschler, on 9 December 2013

Traffic and air pollution in Cairo, Egypt. Photo©Kim Eun Yeul World BankMarket distortions in the context of fossil fuels create inefficiencies with substantial environmental, social and economic costs. Tackling distorted prices, and creating functioning markets can align the incentives for sustainable development.

Around the world we observe countless examples in which the management and usage of natural resources (and fossil fuels in particular), fail to deliver socially, environmentally and economically optimal outcomes. Overconsumption of fossil fuels, local pollution, greenhouse gas emissions, unequal distributional impacts, excessive exposure to volatile market prices, technological lock-in, corruption, and misappropriation of resource revenues – the entire value chain of natural resources is prone to “market failures”, i.e. the inability of markets to achieve a socially, environmentally and economically efficient allocation.

It is widely acknowledged, especially in the context of climate change, that market distortions can entail environmental externalities. Yet it is important to understand how market distortions can also result in substantial economic inefficiencies, with further repercussions to environment and society.

Prices: One of the most critical market distortions in the context of fossil fuels relates to pricing –particularly when already inefficient market prices are further distorted through fiscal policies.

Indeed, it is commonly argued that the prices of fossil fuels traded on international commodity markets do not reflect their true costs to society and environment. Inadequately low prices thus incentivise over-consumption, with further indirect environmental and social externalities.

Such externalities due to market prices are further exacerbated as many governments maintain fiscal policies in support of fossil fuels: Direct subsidies for fossil fuel producing or dependant industries, subsidies to end-users, special tax reductions or exemptions, or a general failure of fiscal policy to account for environmental and social externalities – fossil fuel subsidies can take different forms, but essentially all distort incentives at substantial environmental, social and economic costs.

Especially as international oil prices become increasingly volatile, governments which maintain costly fossil fuel subsidies expose themselves to substantial budgetary risks. In developing countries this often means that resources are crowded out from investments which are essential for economic and human development – for instance, in education, health and other infrastructure. While often justified on the grounds of making energy more affordable for poorer households, fossil fuel subsidies mainly benefit the wealthy (i.e. the owners of multiple SUVs and large centrally heated houses).

The IMF, World Bank and others therefore advocate the removal of fossil fuel subsidies as a critical step towards sustainable development. Previous experience has shown that, if well implemented alongside other compensatory policies, such reforms can be successful despite major political economy obstacles. They may have enormous benefits not only in environmental terms by reducing emissions and pollution, but also in economic terms by freeing up funds for infrastructure investments and by incentivising energy efficiency and technological innovation in the private sector, alongside possible competitiveness gains.

Market structures: Other severe incentive distortions may result from market structures and their regulation (or lack thereof) – for instance in the presence of monopolies. Monopolies are often the sole providers and allocators of resources, such as oil, gas and electricity; in the past these were typically state-owned (e.g. in the former Soviet Union). This alone does not necessarily entail a market failure: the provision of certain goods and services is linked to such high fixed costs (e.g. establishing country-wide infrastructure for gas distribution) that operating a “natural” monopoly may be efficient. Yet, under insufficient oversight and regulation, low institutional capacity, intransparency and interference of political interests, monopolies can quickly become the root of market failures with environmental, social and economic externalities. Lacking competition removes incentives for investing in R&D, promoting technological innovation and pursuing efficiency gains. As a consequence, deteriorating competitiveness, technological standards, and service quality go hand in hand with increasing environmental, social and economic costs.

Of course distorted incentives due to market structures are by no means limited to monopolies. Whenever competition is restricted, or interests strongly politicised, then market mechanisms may be distorted and allocative efficiency obstructed. In addition, other structural patterns, such as network effects and incomplete markets, may play a further role in suboptimal market outcomes.

Further analyses, including country specific case studies, are needed to understand the exact nature, magnitude and consequences of different market distortions. Overall however, the potential benefits from mitigating such market distortions are tremendous for the environment, society, and economy, and could extend to governments, households, and the private sector.

Jun Rentschler, UCL ISR Doctoral Researcher

About Jun

Prior to starting his PhD, Jun was a Research Analyst at the World Bank’s Chief Economist’s Office for Sustainable Development, working on topics around risk, green growth, resources and climate policy. Before this, he worked as an Economic Adviser to the German Foreign Ministry, based at the German Embassy in Tokyo, where he focused on economic and energy policy. Besides various internships in the private sector, he has worked on projects with the Grameen Microfinance Bank in Bangladesh and the Partners for Financial Stability Program by USAID in Poland. Jun holds an MSc in Economics from University College London, with a specialisation in time series econometrics and resource economics.

Raw materials matter, but…

By Florian K Flachenecker, on 3 December 2013

COBALT_launch©Ecologic EventsRaw materials matter, but their beauty lies in the eye of the beholder. I attended the conference Industry and Society’s needs for sustainable management of raw materials in Europe: Exploring solutions for future action, which took place on 28 – 29 November 2013 in Brussels. It was the kick off event of the three-year FP7 project COBALT that is funded by the European Commission (http://www.cobalt-fp7.eu). The conference’s objective was to shape the further work of the project as well as moderate future policy and research debates – including the work of the European Innovation Partnership on Raw Materials. My goal was to better understand the motives of the different stakeholder involved.

Around 150 participants discussed the challenges and opportunities concerning a sustainable management of raw materials. One key outcome became clear right from the start. Given the heterogeneous backgrounds of the participants, each stakeholder represented a different view on the topic. Supply risks, technological innovations and affordable prices of raw materials played an important role for the industry but also policy makers. The environmental and social impacts of raw material usage were dominantly represented by NGOs and affected individuals. The lack of reliable data on raw materials throughout their life cycle and legal uncertainty concerning the management of raw materials was raised by academia. This fascinating mixture of interests made me realize how difficult it is to find a ‘good’ solution for managing raw materials.

Little consensus was reached with regards to the role of innovations. On the one hand, some participants argued that through higher and increasingly volatile prices, the incentive to reduce raw material dependency increases. This leads to an increase in R&D expenditures with the aim to use raw materials more efficiently. Substitution can additionally play a role in overcoming constraints on the supply of raw materials. Hence, innovations will ultimately solve many challenges. On the other hand, several participants argued that addressing the issue in the long run requires changing our current consumption patterns. They claimed that there are limits to the amount of raw materials we can use even if innovations occur.

European Commissioner Potočnik introduced the EU response. As the EU is a net importer of raw materials, its economy faces major challenges. Resource efficiency, eco-innovations, eco-design and moving towards a circular economy are some prominent solutions, yet lacking clear targets and broad political support so far. The subsequent panel discussion pointed out that there are internal controversies in the European Commission. DG Enterprise and Industry covers raw materials whereas resource efficiency generally lies within the competences of DG Environment. However, this separation might result into a fair competition of partly diverging interests in order to come up with the ‘best’ solutions.

Further discussions revealed that information seems to be essential. We still do not know enough about resource flows to adequately assess their impact on the economy, environment and society. Besides developing more suitable indicators, product labeling might be one solution to provide better information to customers. Training companies and fostering venture capital to invest in resource efficiency might help to get broader support by the private sector. The idea of ‘getting the price right’ by including negative externalities seems difficult to achieve in practice but an important path of setting incentives for individuals and the industry. At the same time, the competitiveness of the European industry should not be undermined – especially given the EU’s goal that industry’s share of EU-GDP should be around 20% by 2020.

In summary, the conference provided a fruitful exchange of ideas of various stakeholders involved in the topic. It helped me to debate diverse concepts for future action with a variety of different actors. After all, we have to find a way of aligning the incentives of all participants in order to address the major challenge of a sustainable management of raw materials in Europe – even if their beauty lies in the eye of the beholder.

Florian Flachenecker, UCL ISR Doctoral Researcher

About Florian

Florian completed his MA at the College of Europe in European Economic Studies. His Master thesis ‘Sustainability and Resources – An Assessment of Resource Efficiency Policies in the European Union’ (forthcoming) received the ALCOA-award for best thesis on sustainability. Florian holds a BSc in Economics from the University of Mannheim – including an exchange semester at the Tecnológico de Monterrey – specialising in political economy, environmental economics and econometrics. He worked as a student assistant at the Centre for European Economic Research (ZEW) as well as the collaborative research centre ‘The Political Economy of Reforms’ at the University of Mannheim. Throughout his studies, Florian was awarded scholarships from the German Federal Ministry of Education and Research, the Friedrich-Ebert-Foundation and he received the BHP Billiton Doctoral Studentship. Florian had the opportunity to gain practical experience at Deutsche Bank AG Research for Economic and European Policy Issues and at UBS Deutschland AG at the Chief of Staff. Furthermore, he worked as a teacher in an elementary school in Peru and received a high school diploma in the USA.

European Raw Materials Initiative: Challenges and Opportunities

By Ruya Perincek, on 15 November 2013

RMI_symposium 8 NovOn 8 November 2013, the UCL Institute for Sustainable Resources hosted ‘The European Union Raw Materials Initiative: responding to key legal and policy challenges’ Symposium in collaboration with the UCL Faculty of Laws and the UCL European Institute.

Raw materials or non-energy raw materials, for instance Beryllium, Cobalt, Graphite, Magnesium, and Niobium, are of high importance for the European high-tech manufacturing industry and, hence, for about 30 million jobs, economic growth and competitiveness. As the world’s largest trading block and market, the EU is facing a changing global context with new challenges as well as opportunities. Some of the most challenging elements of this new global context include, among others, the risk that tensions between countries escalate into outright conflicts, the diverging price trends in commodity markets, or the USA’s oil and gas boom. Nevertheless, there are also some improvements in the governance of non-energy raw materials thanks to the Extractive Industries Transparency Initiative (EITI), supported by the EU.

From a European perspective, scarcity does not seem to be the major challenge in the context of raw materials. Access and security of supply are among the biggest challenges, as the global demand for metals and minerals has increased with the rise of new emerging economies such as India, China, and Brazil. At the same time, these countries are increasingly exporting less and less minerals and materials as domestic demand grows. These potential exporters have been through a great transformation, which puts them in a similar situation to the EU: China, for example, which is seen as a potential exporter due to its large mineral and metal deposits, has become a net importer of many natural resources. Theoretically, China is therefore as vulnerable as Europe. Take the recent export restrictions of Indonesia or Vietnam – China, importing a great portion of natural resources from its neighboring countries, will be hit by those restrictions. For these resource-rich developing countries, there are several reasons for export restrictions, namely, attempts to raise higher tax revenues, enhance environmental protection or increase food security.

As part of its Raw Materials Initiative, the EU has launched the European Innovation Partnership (EIP), which focuses on new approaches to EU research and innovation for “societal benefits and modernization of key sectors”.  The EIP, which is a tool to drive the Raw Materials Initiative, aims to combine a strong research and innovation dimension with “demand-side” measures. By connecting relevant actors at EU, national and regional levels, the initiative intends to generate positive effects on Europe’s competitiveness, growth and employment in support of “Europe 2020”.

EITI, an international initiative to improve governance and accountability through the publication of company payments and government revenues from oil, gas and mining, is seen as great opportunity for the EU to support the establishment of a multi-stakeholder platform in which new policies on sustainable mining and regional development can be discussed and formulated.

Some major challenging questions for future research were identified during the symposium: firstly, while the EU is shifting to a green economy, environmental pressures caused by resource-intensive mining shifts to the east. The question, therefore, is how to manage this relationship. Secondly, can Europe turn its advantage in environmental technologies and policies into new policy approaches, not only within European affairs but also from an external action point of view? Thirdly, how can the EU create a harmonized or common minerals intelligence system? Gathering secondary data in particular seems to be a major challenge. Finally, uncoordinated efforts, different state aid policies and protectionism lead to certain risks for the EU’s trade regime and internal market. The EU needs a common regulatory framework addressing policy and legal challenges of reducing dependency on raw materials. How can this be achieved? What should such regulatory framework look like? The EU faces several challenges, which need to be addressed by research. The conference, certainly, helped to identify a useful research agenda on raw materials.

Slides will be available from the conference on the UCL website soon.

Ruya Perincek, Doctoral Researcher, UCL ISR