I) Political-institutional context
The prospect of a potential low-carbon scenario can be finally deduced from the behavior of the most important players in the political-institutional structures of the two models.
In fact, the success of such an economy, subject to the constraint of burdensome barriers, such as the global competitiveness on production costs, is also conditioned by the need for major transformations, both in the political asset management and planning of the common good and in the cultural models that guide individual customs. In these areas, efforts are being made to envisage the evolution of the economy, aimed at understanding the inhibitory feedbacks, induced by consolidated individual behaviors, which hinder the action of technical decision-making apparatus.
Innovation and development of technologies are key elements of the transition towards a low-carbon economy and further its progress, but they need a solid socio-political context which will support them.
Indeed, the low-carbon transformation is not automatic. It’s a choice. The choices made by governments and those involved in the development have a huge impact on the transition. In order to get to a low-carbon economy model, which could also be social and economic sustainable, policies must be inclusive. An integrated and long-term oriented approach is in fact needed for the low-carbon economy sustainability of the future. That is why, in this last section, will be analyzed the importance of a long-term perspective, planning and key economic-political actors.
In order to ensure the transition, the adopted policy measures will be more effective as they will be integrated into a medium-long term vision, consistent with the objectives set. Within a long-term vision, the policy maker will be able to better evaluate the opportunity to adopt ambitious measures to guide the evolution of the transition (for example incentive / disincentive plans or plans for the phasing out of certain technologies) capable of anticipating and amplifying the range of benefits that can be activated for the economy itself and the society. At the same time, the coordination and homogeneity of policies is necessary, not just sufficient. This would be possible by providing the appropriate tools and coordinating different actors for the development and implementation of policies that are innovative and consistent with the evolution of the transition schemes.
The political and social alignment is also a very important condition for investors. In fact, investors are leaning towards a visibility on the future. They want to identify countries’ targets, how they can contribute and how they can benefit from investments in a low-carbon economy. Therefore, investors require stability of policies and clarity on the visibility of the final target.
Drawing from the VoC framework, from a political-institutional organization point of view, Coordinated Market Economies seem to have a comparative advantage since they meet the coordination requirements, necessary to implement a low-carbon economy. Indeed, according to Soskice and Hall (2001), in coordinated market contexts, companies rely heavily on relationships that are not market-based to coordinate their efforts with other socio-economic and political actors. While, in liberal market economies, companies coordinate their activities on the basis of hierarchies and factors architectures typical of a competitive market. Of course, the strong dependence on the market, of liberal economies, partly contrasts the vision of stability that guarantees the transition. However, according to Geels (2002), drawing from the ‘Appreciative theory’ of transition, (Nelson and Winter, 1982), a structure with little hierarchy can be problematic for policymakers who have set priorities on environmental issues. Indeed, hierarchies are useful for the pursuit of imminent political priorities.
Furthermore, LMEs and CMEs also differ in terms of electoral politics. Specifically, liberal market economies tend to depoliticize social policies, such as the energy/climate policy, instead of seeking a clear political agreement. This represents a more sustainable process under transition pressures. While, coordinated market economies are mostly characterized by multi-party systems accompanied by institutions aimed at information exchange, behavior monitoring and bad behavior sanctioning, such as trade unions. This implies that in CMEs, where trade unions and coalitions have a remarkable influence on government’s choices, in order to protect interests of the heavy industry workers, the decision-making process is longer and complex.
Indeed, these coalitions could obstacle such a shift towards this new economic paradigm, since at least at the beginning of the transition, this would mean the loss of thousands of jobs related to economies based on heavy industry, as for definition it is that of CMEs. Therefore, the apparent strength of cooperation in coordinated economies can actually turn in an obstacle in this context. However, a low-carbon economy could benefit from the absence of a fragmented context of interests and the presence of hierarchies pushing for a shift, encountering in LMEs a more favourable environment.
II) The UK and Germany
At this point, therefore, particularly interesting to have empirical evidence of the results achieved so far by the two countries that the literature takes examples of the two pure models of capitalism: the UK for liberal market economies and Germany for coordinated market economies.
Tab. 1 “Change in carbon intensity 2015-2016” Source: PwC UK
The graph shows the change in carbon intensity for the year 2015-2016 and it reveals that the UK is outperforming in reducing carbon intensity by 7.7%, compared to Germany that shows a rate of 6.6%1. This is directly related to major investments in low-carbon technologies and the stability of its services sectors. On the success of the UK, Jonathan Grant, Director of Climate Change and LCEI (Low Carbon Economy Index) co-author at PwC, observed: “A number of factors have contributed to the low carbon transition in the UK, including cross-party support for tackling climate change, support for energy efficiency in our homes and renewables projects”. This demonstrates the fact that cooperation can be achieved also in liberal economies and if it follows a comparative advantage in radical innovation, it’s guaranteed to boost ratings.
While, the German transition process remains in great difficulty. In Germany and many other European countries, they finance promising but not yet profitable technologies to which traditional investors are not interested. Yet, the closure of coal-fired power stations is hardly mentioned in the country, also considering the obstacle of trade unions in the sector that, between power plants and the mining sector, take care of thousand workers’ interests.
In fact, the reality is that a multitude of actors in the world economic system, consumers, producers and workers of many industries and above all politicians, have a very strong short-term interest in maintaining the energy status quo. In the case of politics, for example, just thinking about how current energy system guarantees a major amount of taxes for the State, and a constant flow of energy at a relatively low cost to voters.
For this reason, too, changing the system is very difficult: sometimes countries believe it is preferable to extend the life of the old system, than risking a change that will give only medium-long term perceptible benefits.
The idea of low-carbon economy arises from the awareness of the epochal scope and the global relevance of the climate crisis, of its close connection with an economic system based on fossil fuels; from the unsustainability of a model of polluting economic growth, linear and high consumption and waste of natural resources to the growth of expectations for a better welfare and the need to reduce income inequalities that have reached unacceptable levels in recent decades. Indeed, low-carbon economy is not just a vision of the future based on awareness of the challenge of our time, however, it is a path of change able to propose challenging but possible solutions to the main problems we face nowadays. This path, which many key actors, in different parts of the world have already begun to follow, outlines a transition, an epochal change in the ideas that have guided the economy and development until now. In this study, the three features of innovation, financing and the political-institutional context, have been analyzed in LMEs and CMEs, as main drivers of the low-carbon transition. According to the analysis, in order to move to a low-carbon economy radical innovations in products and processes, specific element of liberal economies, are needed. Consequently, since radical innovations usually present a high value of risk, they are better supported by private investors and the market, rather than public investments, which is instead a common practice in coordinated market economies. Lastly, although many studies argue that a coordination between actors involved in the transition is indispensable, the recent UK’s success in decarbonizing shows that coordination is important but not the focal point of transition. Actually, CMEs, that by definition present a great coordination between institutions, are usually defined by the powerful presence of trade unions which in the circumstance of a low-carbon transition may perform as an impediment, rather than a strength.
1 PwC research, September 12, 2017