Why institutions?

• Transition to a low-carbon economy will be constrained by many factors:– structure and rate of growth of the economy– resource endowment and existing

infrastructure– and the governance of the energy sector

• >>>>>>>>>>INSTITUTIONS

Questions

• What elements in the manner in which China’s energy sector is governed are likely to assist or constrain the nation’s transition to a low-carbon economy?• What are the implications for China's

transition to a low-carbon economy?

Aims

• To explore how the study of institutions may help to elaborate on the challenges lying at the heart of transition management

• To apply these ideas to the case of China• See:– Short report from Transatlantic Academy http://www.transatlanticacademy.org/publications– Book: Governance of Energy in China. Transition to a

Low-Carbon Economy (Palgrave Macmillan) September 2012

Structure of talk

• Socio-technical transitions• Institutions• Selected Chinese institutions• Implications for low-carbon transition

Socio-technical transitions• Change in the system of social behaviours and rules

relating to technology and technological advance. • Steam engine, electricity, internal combustion engine,

telecommunications• Most such transitions:– Driven mainly by perceived private benefits– Take 50-100 years, maybe faster today

• In contrast the low-carbon transition:– Is driven mainly by perceived public benefits– Faces significant time pressure– Requires direct government and societal support

Obstacles to transition• Obstacles ‘lock-in’:– structure and rate of growth of the economy– resource endowment and existing infrastructure– actors with vested interests– institutions of governance; adaptive capacity

• Transition management is about involving the whole of society in this change>>

• Institutions: the formal and informal rules of society, and beliefs

1. Embedded institutions: norms, beliefs, ideas

2. Institutional environment: political system, bureaucratic structures of government, judiciary, legal system.

3. Institutions which govern transactions:Firms, bureaus, markets, hybrids, networks. Policies, laws, instruments

Behaviours: The actual transactions which determine prices, output quantities.

Adapted from Williamson (2000)

Institutions

Institutions• Self-reinforcing through positive feedback• What do they do?– create predictability – resilient to change >>> path-dependency– constrain the path of economic/political development

• How do they change?– most change is incremental– slow change leads to inconsistencies/frictions which reduce

stability of the system– builds towards a threshold– a combination of external shocks and actions of actors drives a

relatively sudden change

Institutions and adaptability

• Adaptive efficiency (adaptive capacity):– Dependent on culture & institutions– Degree of preference for/imposition of conformity– Openness to competition (political and economic)

• The analysis of institutions gives insights to:– Economic and political development– Energy transition

• Focus on levels 1 and 2, and the way in which they constrain changes at level 3

Chinese embedded institutions:

• Many go back hundreds or thousands of years• Centralisation of power; Hierarchy; Family• Relationships/guanxi and social capital/shortage impersonal

trust• Conformity and consensus vs individualism• Appropriate behaviour vs search for truth:– false reporting and feigned compliance

• Governance became synonymous with management of resources 治國 (zhi guo)

• Self-reliance & state control of key industries/resources

China institutional environment (1)• Institutional environment: can be directly linked to post-1949, but

many have roots in Imperial past:• Combination of centralisation and fragmentation– Centralisation of political power– Role of political elite still important, but some pluralisation of

decision-making– Hierarchy and personal relationships– Progressive decentralisation of economic management– Poor definition of roles and responsibilities– Multiple centres of power and institution building– Powerful SOEs

China institutional environment (2)• Immature ‘modern’ legal system: long historical roots• Weak civil society• Fragmentation of authority:– Opportunities for rent seeking and abuse of power– BUT opportunities for policy innovation

• The importance of CCP – Policy making and implementation– Co-opting different sectors of society– Some reform, professionalization of civil service and

democratisation of CCP– Adaptability has been key to retaining power

Implications for policy making and implementation

• Policy making is no more rational than in a democracy: – Multiple actors with multiple interests– Search for consensus can prevent decision making– Strong actors can distort policy making – Limited scope for new entrants (political and economic)

• Policy implementation constrained by:– Local governments/SOES pursuing own agendas– Corruption, rent seeking and clientilism – Immature legal system

Adaptive capacity• Strong sources of resilience to institutional

change:– Institutional change in some sectors has slowed

(reversed?) over last 10 years

• Evidence of adaptive capacity:– Openness to new ideas from overseas– Willingness to experiment– Multiple centres of institution building– Social learning with government– Highly entrepreneurial society

China institutions of energy governance

• A high degree of institutional resilience and moderate degree of adaptive capacity has led to – Significant changes at level 3– Only minor changes at level 2

• Stranded between the plan and the market– Limited effectiveness of administrative and

economic instruments

1. Embedded institutions: norms, beliefs, ideas

2. Institutional environment: political system, bureaucratic structures of government, judiciary, legal system.

3. Institutions which govern transactions:Firms, bureaus, markets, hybrids, networks. Policies, laws, instruments

Behaviours: The actual transactions which determine prices, output quantities.

Adapted from Williamson (2000)

Institutions

Implications for low-carbon transition (1)

• Policies can be agreed and implemented IF:– Large funds, no powerful losers: • state-backed construction of new energy capacity• discounts on energy efficient appliances

– Administrative instruments targeting small number of actors and/or campaign-like style:• Top-1000 enterprise energy efficiency• Vehicle efficiency• Recent coal mine safety campaigns

Implications for low-carbon transition (2)

• Policies are likely to be much less successful if they involve:– Redistribution of rents and powerful losers:

• Sector reform• Energy taxes and higher energy prices

– Administrative instruments targeting large number of actors:• Wider industrial energy efficiency• Building and household energy efficiency• Environmental and safety regulation

Implications for low-carbon transition (3)

• Institutional and policy innovation in the energy sector:–remains at the margins, mainly at level 3–short-term unpredictability (level 3)– longer term path dependency (level 2)

Conclusions (1)• In the absence of a major slowdown in economic

growth and/or a political transformation:• Construction of new capacity to produce and

deliver low carbon energy of all types will continue• But will be almost matched by growth of fossil fuel

capacity• Efforts to promote energy efficiency and energy

conservation will continue to face major obstacles

Conclusions (2)

• In this, China is little different from many other energy intensive economies, but:– Sheer size– Large population, growing middle class– Rapid economic growth, albeit slowing– Coal is dominant fuel– Role of industry in the economy

• Implications for global climate change: Get out the lifeboats