The under control. However, this is not

The topic of the transition
from a concentrated and unidirectional economic model, based on fossil fuels to
a decarbonized one is increasingly current, despite the resistant of some
concentrations of interest that are strenuously opposed to an unavoidable
change of paradigm.

We are living an era that in
the next few years foresees a sharp increase in population, an expansion of
developing economies together with the improvement of citizens’ living
standards. As a result, global energy demand is expected to double
simultaneously with these expansions by 2050 and a further increase in
greenhouse gas emissions could occur if energy demand is not brought under
control. However, this is not the only reason behind why today activity against
environmental change represents a priority for governments around the world. A
timely transition can provide an opportunity for competitive advantage,
development and new additional business for precursors.

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The so-called
low-carbon economy is part of the bigger phenomenon named green economy, a new
economy that is making its way in the world. It represents a more democratic,
egalitarian and respectful economy, destined to transform and replace the old
economy based on the maximum exploitation of natural resources and on the
scares attention to the impacts of human activities on the environment and on
society. The low-carbon economy represents an almost anthropological change
that can change our society from its foundations and that requires a different
perspective also with respect to the concepts of work and profit. A perspective
that involves everyone, from businesses to citizens called to interpret a new
role and to take on new responsibilities. In fact, the issue around the
low-carbon economy is not just about environmental sustainability, but also
social and economic sustainability. It is therefore not just a business of this
or that sector, but it is an overall productive culture that concerns and can
invest the entire economic system of a country. In fact, the path of transition
could encounter many obstacles. First of all, the inertia of the old systems of
production and consumption along with the equally strong resistance of the
political class, which is much more tied to a traditional vision of the economy.
Second, there is the chronic delay in conceiving research and training as
strategic. Yet, beyond all these aspects, perhaps the most detrimental is the
lack of a clear and solid shared vision. That is the decisive component that
allows for the implementation of integrated economic, social and environmental
policies, which would eliminate partial and sectoral solutions only capable of
promoting particular interests. Therefore, the road to be taken for the
adoption of a low-carbon economic system is long and requires a profound
transformation of the economic regime. It is therefore on the different
attitude to resilience and innovation that different models of capitalism play
the shift to a low-carbon economy.

 

In this
analysis, will be employed the Soskice and Hall’s LME/CME approach (2001),
which aims to define the socio-institutional characteristics of different
systems, in order to establish the aspects on which a model has a comparative
advantage in a low-carbon transition over the other.

This study considers the
chance for the two pure models of capitalism, coordinated and liberal market
economies as defined by the VoC framework, of transiting to a low-carbon economy.
The essay provides a picture of three key driving factors that allow the
transition; in sequence innovation, financing and the political-institutional
context and applies them to the CMEs/LMEs perspective.

Based on the mentioned, three
components of the transitions, the analysis will argue that LMEs, having a
comparative advantage in radical innovation and in getting private funding for
it, are more suitable than CMEs for the emergence of a low-carbon economy.
Actually, the chance for CMEs to move towards a low-carbon economy is low
because they are organized on the heavy presence of industries and trade unions
that would obstacle the dismantling of the whole economic structure or at least
they would slow it down.

 

The essay is so structured.
Section 2 shortly exposes studies on LMEs and CMEs’ prospects to move to a
greener economy. Section 3 introduces the low-carbon economy and lists its
implications. Sections 4, 5, 6 apply the three main drivers of the transition
to LMEs and CMEs’ settings to examine the probability for them that a
low-carbon economy will emerge. Section 7 takes the UK and Germany as examples,
for LMEs and CMEs respectively, to observe current outcomes. Finally, section 8
outlines main conclusions.

 

 

I)             
CMEs VS LMEs in the transition   

 

Different
studies state that, according to the new institutionalism theory, the
development and support of new sustainable technologies and the institutional
architecture of the countries are directly related. Therefore, CMEs, facing a
more stable political structure and a clear integration between actors involved,
are more predisposed to encourage new sustainable technologies development. According
to S. Cetkovic and A. Buzogàny (2016), features of political coordination and
the State’s decentralization, united with a targeted support for research, make
CMEs able to acquire a pivotal role in the transition to renewable
energies. 

While S.
Cetkovic and A. Buzogàny focus their attention on the level of coordination
within a State and in particular in Germany, however, according to Lema et. Al
(2014) was the existence of a number of favourable factors, the most important
of which is the full and stable support of the government, to ensure that
Germany put efforts in favour of renewable energies.

However, these studies primarily
focus on political and institutional changes, leaving a marginal place to
innovation and its relationship with governance. Instead, in this analysis,
innovation, seen as a vital element of the transition, becomes a starting point
to understand how LMEs and CMEs support innovation and consequently how likely
is the transition for them.

 

 

II)           
A TRANSITION TO A LOW-CARBON
ECONOMY  

 

A transition
towards a progressively more sustainable future, with decreasing greenhouse gas
emissions and the recovery of environmental degradation, requires a different
economy, namely more environmentally friendly production, processes and
technologies and a different concept of well-being, associated with new
criteria through which companies can evaluate the added value they produce as a
function of the whole wealth and not just the flow of revenues and the number
of accumulated machines and infrastructures. The vector of this absolutely
needed transformation is the low-carbon economy which, although declined
according to different sectoral meanings and scaled to the levels of
development of various nations and their vocations, gathers all the effort
currently ongoing in the world towards sustainable development. The low-carbon
economy involves a new vision of problems and dynamics of development, new
cultures, different skills and training methods. Indeed, from this transition,
derive new sectors (low-carbon sectors), new types of job (green jobs) and new
technologies (green technologies).

The technical
and economic feasibility of this challenge will depend not only in the real
conviction for the cause but also on the different development perspectives,
public policies and risks that will take place on the road to change. This will
require a structural transformation of society, a new consciousness, a
revolutionary order.

 

A modern economy
cannot move towards a low-carbon path if traditional industries do not increase
their energy, carbon and material efficiency through new ways of organizing or
through new forms of innovation that lead to products that are less energetic
in their use, even if this innovation is triggered by considerations of cost or
competitiveness rather than genuine environmental concerns. However, without
environmental interests and without an adequate vision of their future, no one
would be able to remain for long on a coherent transition path towards a
different and sustainable type of economy. Hence, a transition with deep
meanings, which go far beyond the narrow energy and economic boundaries, leading
to ethical and social contexts.

The possible success in the
long term will require new skills, different collaborations, continuous
innovation, investments with uncertain returns and a change in what are today’s
market values.

In recent years,
many are the temporal hypotheses linked to the scenarios of such a transition.
One of these is represented by the interesting study by Benjamin K. Sovacool
(2016) entitled “How long will it take? Conceptualizing the temporal dynamics
of energy transitions”, according to which the new energy and economic
revolution can be completed within a fraction of the time that was necessary
for previous revolutions. However, he says, in order to get there “it would
take an interdisciplinary collaboration, a multi-scale effort”. He argues that
the transition towards a low-carbon economy may be different than the past
transitions since resource scarcity, the threat of climate change and the
greatly improved technological knowledge and innovation could greatly
accelerate global change for a cleaner economic future.

 

III)         
Innovation

 

According to
Aldo Bonomi’s holistic view, “Low-carbon economy means reasoning around the
ways in which the model of capitalist development incorporates the sense of
‘limit’ (environmental, social, productive), as a new principle of
accumulation, making it the engine of a new cycle. It appears as a paradigm
that invests productive processes, products, regulatory policies, lifestyles,
artistic representations, (re)use of the territory, smart cities, smart lands”,
(Il Sole 24 Ore, 30th of April 2014). The sense of the limit,
identified as the new principle of accumulation, offers a new interpretation to
the low-carbon economy, whose efficient achievement is only possible by
modifying in depth not only the production processes and products, but also the
organization of the industrial and territorial supply chains.

In fact, the
transition towards a low-carbon economy is a complex process that not only
represents the transition from a traditional economy to a greener one but it
presupposes a radical change in the structure, culture and practices that
characterize the society. It is a transversal challenge as well as an
opportunity of growth for countries. This can be achieved through the
development and implementation of eco-innovations; ie. those types of
innovation which take into account not only the economic profile, but also the
social and environmental dimensions as essential components of sustainable
development. The low-carbon economy is a constantly moving construction site in
which the traditional economy is transformed, bringing with it a radical change
in the structure of society and in its culture. Therefore, innovations seems to
be the first driving factor for the development of a low-carbon economy and, in
this context, we talk about the so-called ‘eco-innovations’. The objective of an
eco-innovation is that of a radical change towards new production and
consumption systems based on a sustainable supply and use of resources and a
reduction/elimination of emissions and consequent impacts, which gradually
leads to the absolute decoupling between growth, use of resources and impacts
on ecosystems. Each type of eco-innovation per se leads to incremental
improvements. However, the path to sustainability requires the shift from
incremental innovations to radical innovations that have broad systemic effects
and are the only way to solve environmental problems.

Therefore, it can be deduced
that the low-carbon transition makes a difference between incremental and radical
innovation, where the latter seems to be more important; even better if
accompanied by a risk-taking attitude which is essential to produce radically
innovative strategies.

Linking this
feature to the VoC framework, Soskice and Hall (2001) distinguish the two
models of capitalism starting directly from the innovation sector which, in
this perspective, is identified as one of the main factors in the determination
of a comparative advantage.

By definition, the radical
innovation concerns a shift in the technological regime of an economy and lead
to changes in the enabling technologies. This type of innovation is
competence-destroying and needs some kind of deregulation (Dicken, 2003). Deregulation
is usually particular characteristic of liberal economies that exploit it as a
method to improve their level of coordination. Indeed, LMEs are known to be pioneers
in areas where innovations are more important and where firms’ mergers and
acquisitions are widespread and necessary practices. These are also sectors in
which the assumption of a business risk plays a more fundamental role in order
to produce innovative strategies that can attract the attention of the market.

In contrast, while CMEs enjoy
organizational models based on large companies and structured networks with
policies specifically aimed at supporting innovation, however they are
specialized in sectors in which incremental innovation is more diffuse. Thus,
in the case of coordinated market economies, innovation is usually continue,
aimed at introducing improvements to existing processes and services, without fundamentally
changing the underlying key technologies (Dicken, 2003). In fact, it mainly
takes place in traditional industrial field, such as machinery and chemical
sectors, which are in contrast with the emergence of a greener economy.

In conclusion,
the innovation is prerogative of the emergence of a low-carbon economy which
requires a total disruption of production processes and the introduction of not
only radically innovative products, but also radically innovative strategies. Therefore,
starting from this point of view and connecting the VoC framework, a low-carbon
economy seems to find more chances to emerge in liberal economies rather than
in coordinated ones, which are far from an incremental innovation model; an
indispensable feature of this transition.

 

IV)         
Financing

 

The process of
innovation needs the involvement of many subjects. In order to achieve the
transition to a low-carbon economic system, scientific and technological
research play a crucial role. That is why the previous analysis allows us a
connection to the need of financing for R&D and training. The low-carbon
economy requires technological innovations that are guaranteed not only by
ambitious policies but also by investments, which has a key function to
accelerate the development of technologies, reduce costs and facilitate the
implementation on a large scale. Moreover, the new technologies are those that
will have to challenge the old economic system, a transformation of this
magnitude cannot consider to be obtained without a constant search for
development and innovation by both public and private entities. Indeed, R&D
offers a very important contribution that is not only of vital importance in
this sector, but it also offers a chance for an action plan focused on
long-term objectives. The development of low-carbon technologies is also
clearly connected to the lack of infrastructure, a key problem in the energy
sector. It can be argued that low-carbon technologies are the best response to
this deficit, especially from a sustainability and equity perspective. In the
world of energy infrastructures, there is a strong need to renew and innovate a
‘park’ plants in full maturity, adapting the offer to the ever increasing level
of energy demand in the world, mainly coming from a life expectancy in sharp
growth in the coming decades. The energy infrastructure and sectors essentially
need massive amounts of liquidity moving towards them. Thus, finance plays a
crucial role in speeding the transition to a decarbonized economy. Investments
can profoundly influence climate change. Throughout the process of transition
to a low-carbon economy, major investments are needed: an Accenture research1
estimates a requirement of 2.9 trillion euros to finance development and
roll-out in five key sectors in Europe in the coming years..

 

Observing the
Varieties of Capitalism framework and the structure of financing of LMEs and
CMEs, the availability of investments and therefore access to credit shapes the
transition of the two models of capitalism.

Historically, LMEs are
characterized by a strong presence of private non-institutional investors who
invest personal capital (Venture Capital) or specialized financial
intermediaries. Venture capitals, in the strict sense, facilitate the capital
injection in the early stage phase of innovation, helping its development.
Indeed, the presence of Venture Capitals is known to establish a beneficial
circle which produces and spreads the innovation. In particular, the Venture
Capital fund can contribute to specific managerial or sector knowledge and it
can also contribute with reputational capital, useful to attract managerial /
scientific talents.

Therefore, institutions such
as Venture Capital, which has seen its biggest diffusion in LMEs, and appears
to be much less developed in CMEs where instead there is a stronger tradition
of banking financial instruments as a form of financing, are more helpful for
the development of low-carbon innovation.

In fact, CMEs’ credit
system characterized by large banking institutions that usually provide
long-term investment financing for large industrial companies, drastically
reduces the possibility of developing risky innovation, which instead have to
rely more on firms’ internal capital.

 

However, in order to speed up
the development of low-carbon economy financial and economic sectors, clear
public policies on the target to be achieved, are needed. This lead us to the
last section of our analysis based on the political-institutional context
behind countries.

 

V)           
Political-institutional
context

 

The prospects of
a potential low-carbon scenario can be finally deduced from the behavior of the
most important players in the political-economic 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 facilitate its progress, however, they need a solid
socio-political context to support them. Organizational capacity is
fundamental.

Indeed, the low-carbon
transformation is not automatic. It’s a choice. The choices made by governments
and those involved in development have a huge impact in 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 community. 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 see 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
context, companies rely more 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, drawing from the ‘Appreciative
theory’ (Geels, cf. Nelson), a structure with little hierarchy can be
problematic for policy makers 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 associations have a certain influence on government’s choices
to protect interests of the heavy industry workers, on what these economies
usually rely on, 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 an economy based on heavy industry, as for definition it is that of
CMEs. Therefore, the apparent point in favour of cooperation in coordinated
economies can actually turn in 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, finding in LMEs a more favourable
environment.

1 Accenture,
Carbon Capital – Financing the Low Carbon economy, in collaboration with
Barclays

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