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Economic theory justifies policy when there are concrete market failures. The article shows how in the case of innovation, successful policies that have led to radical innovations have been more about market shaping and creating through direct and pervasive public financing, rather than market fixing. The paper reviews and discusses evidence for this in three key areas: (i) the presence of finance from public sources across the entire innovation chain; (ii) the concept of 'mission-oriented' policies that have created new technological and industrial landscapes; and (iii) the entrepreneurial and lead investor role of public actors, willing and able to take on extreme risks, independent of the business cycle. We further illustrate these three characteristics for the case of clean technology, and discuss how a market-creating and -shaping perspective may be useful for understanding the financing of transformative innovation needed for confronting contemporary societal challenges.

Reducing the energy demand has become a key mechanism for limiting climate change, but there are practical limitations associated with large energy savings in a growing global economy and, importantly, its lower-income parts. Using new data on energy and GDP, we show that adopting the same near-term low-energy growth trajectory in all regions in IPCC scenarios limiting global warming to 1.5 °C presents an unresolved policy challenge. We discuss this challenge of combining energy demand reductions with robust income growth for the 6.4 billion people in middle- and low-income countries in light of the reliance of economic development on industrialization. Our results highlight the importance of addressing limits to energy demand reduction in integrated assessment modelling when regional economic development is powered by industrialization and of instead exploring faster energy supply decarbonization. Insights from development economics and other disciplines could help generate plausible assumptions given the financial, investment and stability issues involved.Climate policy calls for energy demand reduction on top of decarbonizing energy generation. Analysis of historical energy–income data shows that achieving these climate targets alongside economic development poses unresolved policy and modelling challenges, especially for developing countries.

The distribution of ownership of transition risk associated with stranded fossil-fuel assets remains poorly understood. We calculate that global stranded assets as present value of future lost profits in the upstream oil and gas sector exceed US$1 trillion under plausible changes in expectations about the effects of climate policy. We trace the equity risk ownership from 43,439 oil and gas production assets through a global equity network of 1.8 million companies to their ultimate owners. Most of the market risk falls on private investors, overwhelmingly in OECD countries, including substantial exposure through pension funds and financial markets. The ownership distribution reveals an international net transfer of more than 15% of global stranded asset risk to OECD-based investors. Rich country stakeholders therefore have a major stake in how the transition in oil and gas production is managed, as ongoing supporters of the fossil-fuel economy and potentially exposed owners of stranded assets.The necessary and rapid transition to a low-carbon economy will lead to massive stranded assets, which could risk the stability of financial markets and the economy. Through a global equity network, most risk and responsibility is owned by investors, such as pension funds, in developed countries.

Improving energy efficiency quickly is key to mitigating climate change and requires improvements implemented in firms. As these require upfront investments, good access to external finance is important. Theory suggests that information asymmetries may prevent lenders from including energy efficiency into their lending assessment, even though higher energy efficiency increases firm cost-competitiveness and its collateral value. Empirically, little is known about the impact of energy efficiency on access to external finance. For the first time, we examine empirically the effect of a firm's higher energy efficiency on their ability to obtain loans in European Union countries by exploiting a unique firm-level dataset. We find that energy efficiency has no effect on the ability of a firm to obtain external financing compared to other indicators on the financial or operational health of the firm. The results reveal an unexploited potential for energy efficiency policy to signal when firms are energy efficient.

Widespread implementation of energy efficiency is a key greenhouse gas emissions mitigation measure, but rebound can “take back” energy savings. However, the absence of solid analytical foundations hinders empirical determination of rebound magnitudes. In Part I, we developed foundations of a rigorous, analytical, consumer-sided rebound framework that is approachable for both energy analysts and economists. In this paper (Part II), we develop energy, expenditure, and consumption planes, a novel, mutually consistent, and numerically precise way to visualize and illustrate rebound. Further, we operationalize the macro factor ( k ) for macroeconomic rebound. Using the framework and rebound planes, we calculate and show total rebound (using k = 3 ) for two examples: energy efficiency upgrades of a car (56.2%) and an electric lamp (67.0%). We also calculate rebound when extending the framework to include an energy price effect. Finally, we provide information about new open-source software tools for calculating rebound magnitudes and visualizing rebound effects. JEL Classification: O13, Q40, Q43

Widespread implementation of energy efficiency is a key greenhouse gas emissions mitigation measure, but rebound can “take back” energy savings. However, the absence of solid analytical foundations hinders empirical determination of the size of rebound. A new clarity is needed, one that involves both economics and energy analysis. In this paper (Part I), we advance foundations of a rigorous analytical framework for consumer-sided rebound that starts at the microeconomic level and is approachable for both energy analysts and economists. We develop foundations of a framework that (i) clarifies the energy, expenditure, and consumption aspects of rebound, (ii) combines embodied energy with operations, maintenance, and disposal effects (under a new “emplacement effect”), and (iii) provides the first operationalized link between microeconomic and macroeconomic levels. The framework enables determination of the effects of non-marginal energy service price decreases, satiated demand for the energy service, and reduced economy-wide energy demand. JEL Classification: O13, Q40, Q43

Improving energy efficiency quickly is key to mitigating climate change and requires improvements implemented in firms. As these require upfront investments, good access to external finance is important. Theory suggests that information asymmetries may prevent lenders from including energy efficiency into their lending assessment, even though higher energy efficiency increases firm cost-competitiveness and its collateral value. Empirically, little is known about the impact of energy efficiency on access to external finance. For the first time, we examine empirically the effect of a firm’s higher energy efficiency on their ability to obtain loans in European Union countries by exploiting a unique firm-level dataset. We find that energy efficiency has no effect on the ability of a firm to obtain external financing compared to other indicators on the financial or operational health of the firm. The results reveal an unexploited potential for energy efficiency policy to signal when firms are energy efficient.

The production and use of fossil fuels need to decline rapidly to limit global warming. Although global net-zero scenarios abound, the associated development ramifications for fossil fuel-producing low and lower–middle income countries (LLMICs), as well as adequate international responses, have been underexplored. Here we conceptualize that, depending on country context, three types of development transition follow from declining fossil fuel production and use for LLMIC producers, namely an energy transition, an economic transition and an equitable fossil fuel production transition. We propose a classification of these transitions, arguing that heterogeneity in LLMICs’ fossil fuel production and usage substantially impacts their pathways towards low-carbon development. We illustrate this by discussing different cases of fossil fuel-producing LLMICs, focusing on Mozambique, India, Lao PDR and Angola. We conclude by detailing context-specific international support portfolios to foster low-carbon development in fossil fuel-producing LLMICs, and call for a re-orientation of international support along principles of global solidarity. Development ramifications of global decarbonization efforts for fossil fuel-producing low and lower–middle income countries remain underexplored. This Perspective suggests three transition pathways for navigating these ramifications.

This thesis reports research on energy in growth and distribution and on sample selection in industrial organization in three essays. The first essay presents a new method for sample selection from one-dimensional noisy data, by conditioning the selection on the data structure. Gibbs sampling from a Bayesian mixture model of data cross sections, each observation is assigned an indicator latent variable and sorted into signal or noise component. Application to US firms’ profit rates from COMPUSTAT from 1962 to 2012 yields an asymmetric Laplace distributed signal, confirming earlier estimates. The model retains 97% of the raw data, compared with as little as 20%, in a previous application, and 93% for a symmetric Laplace distribution. A change point analysis demonstrates a Bayesian filtering method based on co-variates. The second essay analyzes the extent to which productivity growth can be decoupled from fossil fuel combustion. A hypothesis derived from ecological economics of a high positive correlation between average national labor productivity and the fossil energy-labor ratio is contrasted with hypotheses extant in the literature. Constructing a dataset from 1950 to 2012, previous regression results by Rada and Taylor (2008) are replicated, extended and explained in their economic context. The elasticity of the fossil energy-labor ratio with respect to labor productivity grows to unity after 2000, explained well by the ecological but not other hypotheses. Decoupling via technology hinges critically on switching to renewables, not saving energy. The third essay measures weighted international per capita energy use inequality corrected for net embodied energy exports (consumption approach) and interprets the energy distribution from a Jaynesian maximum entropy perspective, extending and critiquing Lawrence et al. (2013). Application of standard tools from economic inequality analysis to Eora MRIO embodied energy data from 1990 to 2011 shows that consumption approach inequality has been higher throughout, with net embodied energy transfers to rich regions. Reinterpretation of the exponential distribution as arising from Jaynes-Shannon informational entropy elides problematic assumptions about energy trade and shows the exponential distribution to be a good first approximation to the data. Residual unexplained information suggests the need for additional economic theorizing about energy inequality.

Ambitious scenarios of carbon emission redistribution for mitigating climate change in line with the Paris Agreement and reaching the sustainable development goal of eradicating poverty have been proposed recently. They imply a strong reduction in carbon footprint inequality by 2030 that effectively halves the Gini coefficient to about 0.25. This paper examines feasibility of these scenarios by analyzing the historical evolution of both weighted international inequality in CO2 emissions attributed territorially and global inequality in carbon footprints attributed to end consumers. For the latter, a new dataset is constructed that is more comprehensive than existing ones. In both cases, we find a decreasing trend in global inequality, partially attributed to the move of China from the lower to the middle part of the distribution, with footprints more unequal than territorial emissions. These results show that realization of the redistributive scenarios would require an unprecedented reduction in global inequality far below historical levels. Moreover, the territorial emissions data, available for more recent years up to 2017, show a saturation of the decreasing Gini coefficient at a level of 0.5. This observation confirms an earlier prediction based on maximal entropy reasoning that the Lorenz curve converges to the exponential distribution. This saturation further undermines feasibility of the redistributive scenarios, which are also hindered by structural tendencies that reinforce carbon footprint inequality under global capitalism. One way out of this conundrum is a fast decarbonization of the global energy supply in order to decrease global carbon emissions without relying crucially on carbon inequality reduction.