Bob Hancké
18 February 2025
What are the problems you may encounter once you engage in the green transition, after having left behind the deeper conceptual issues that plague our approach to decarbonisation?
Over the next week, I will present essays on three key problem areas for the green transition: the deep uncertainty associated with it, the importance of sequencing and, more broadly, of systemic thinking in the transition, and the effects that these have on green investment. The first develops the intuition that much of the green transition is not known and not even very clear, and the closer we get to policies, the less clear the transition becomes. The second is related to the idea that a transition has important moments where nothing less than a wholesale rethinking of the system, including its first-order preconditions and subsequent effects, is necessary. And the third speaks for itself: without money, investment is impossible, but – and this is the crux of the problem – the uncertainty of the transition exacerbates these investment problems, and existing accounting systems, which often do not cover unidentified brown costs and green benefits, skew investment away from green projects.
To get a handle on the technical, economic and political uncertainty, start with the basic, and not very controversial, idea that the green transition is a relatively open process, the way transitions have historically always been. Neither incentives nor technology alone will determine the path of the green transition. Instead, their influence will be subject to contingencies and affected by political and economic actors, structures and processes. As a result, the green transition produces deep uncertainty. Think of just the staggering number of possible futures. To keep things simple, imagine that we have 100 mutually independent choices to make and that for every choice two viable alternatives exist. The possible and virtual universe within which we engage the green transition is, therefore, 2E100, i.e. 1.27 followed by 30 zeroes – a somewhat large number… While things may be slightly less dramatic in the real world, this astronomical number gives a sense of the epistemological complexity we face, and the cognitive uncertainty that follows.
Start with technology: we have no good idea of what will underpin the elimination of CO2 – pure renewables, non-carbon alternatives like nuclear power, low-emission systems like e-fuels, or other, perhaps deeper social innovations that we cannot yet imagine? We also have little sense of the timeline and the speed of change; will 2035 really be the last year for standard cars, will fossil-based power plants actually be phased out over the next decade, and will we really enter a carbon-free world in 2050 or thereabouts? Leading policymakers say yes in their many public announcements to that effect, which is a good sign; developments on the ground, however, leave more than a grain of doubt. Hardly a day goes by without a slight shift in the adoption of green policies and strategies. Yet many such small, often not easily perceptible, deviations from a path will sum up to large shifts (including slowdowns and stalled reforms). Despite all this goodwill, the green transition evolves only very slowly – the idea that motivated this essay.
Moreover, many processes associated with greening require deep coordination, well beyond what would naturally occur among like-minded actors. For instance, if we leave things to highly incentivised, decentralised economic actors, we will likely end up with a standards war in batteries, in charging stations, or even simply different types of electricity that are at best only partly compatible, from low-voltage household to high-voltage industrial power. This would make some economic sense if there were significant first-mover advantages – i.e. if the first to market can impose its proprietary standard on the rest of the market – since that would propel all forward-looking economic actors to get into the market (this seems to have been Tesla’s strategy thus far). But such first-mover advantages are countered by the first-mover disadvantage of also being the first to make mistakes or, more innocently, of preparing the ground for later competition. Netscape may have been the first serious internet browser, but very few below the age of 45, and even very few who are older than that, know about it. ChatGPT may have been the first to market, but DeepSeek appears at least as good, and for a fraction of the cost. The history of technology is littered with the remnants of such failed (or at least severely diminished) first movers: think of Nokia, Intel, or AOL. Since standardisation by the market is unlikely to work well in a sector with many competitors and potentially important second-mover advantages, an immobilising standards war is almost built in. The green transition is littered with such deep technical uncertainties and anyone who suggests otherwise is naïve.
Economic uncertainty is just as pervasive. We assume but have no proof that a market for low-carbon products exists. In part, some will correctly argue, that is because we do not have many green products yet, and the few market-based solutions for emissions have, within their logic, performed reasonably well. While these objections are correct, the problem runs deeper. Take the example of electric vehicles (EVs): even after a decade of mass production, government subsidies to encourage adoption, and a general cultural shift in their favour, sales of EVs are modest at best, with significant swings (including stagnation in 2024), against a background of repeated suggestions that different technologies – biofuels, hybrid cars, or hydrogen-powered vehicles, for example – should be allowed to compete and coexist. With such a volatile economic outlook for green solutions, all parties involved – investors, workers, consumers and policymakers – are reluctant to put all their eggs in one basket, even though a concerted push in one or a very limited number of directions is exactly what we would need now to secure rapid decarbonisation. VW, Volvo, Stellantis and a host of other car manufacturers who solemnly declared a 100% electric future in the early 2020s, have started backtracking by 2025 (and may well change direction a few more times before the decade is over). Not surprisingly, this has led to tensions in the supply chains, endangering the survival of the specialised companies that produce electric car components for the OEMs: their investment, which they had hoped to realise over less than five years, may suddenly have to be amortised over ten years or more, a situation that not only puts their survival (and, therefore the green transition itself) at risk, but that current and prospective shareholders are also not very happy about. Economic uncertainty begets reluctance, which, in turn, begets instability, thus exacerbating the uncertainty.
Political and policy uncertainty is the third reason for the uneven development of green solutions. It is impossible to imagine a successful net-zero strategy without significantly upgraded geographically spread utility networks such as a well-developed charging infrastructure or a much larger and more powerful electricity grid. Many of these have the characteristics of public goods: they produce benefits, so-called positive externalities, even for those who do not contribute to them. Private companies are reluctant to invest in such proto-public goods because it is unclear if they can be sufficiently competitive in the margin, i.e. relative to the price of the good and to the advantages it confers on other companies who benefit from the existence of the public good. Take the example of rail privatisation in the UK and Germany: in both instances, the ‘indirect’ part of the network (tracks, signals, stations, etc.) that is crucial but does not make much of a direct profit, has been excluded from private investment. The result: horrendous service and high ticket prices – until that part is nationalised.
With few exceptions, the standard solution to such hold-up problems – the public good is necessary but in the limiting case no one is willing to produce it – is for government to step in. Yet, even with the ball firmly in the government’s court, democratically elected governments and their priorities can change – witness the dramatic turnaround in the US after 20 January 2025, and the more gradual recent flip-flopping in Europe. And political history matters: Since particular interest groups have privileged access to governments in some countries, while others do so elsewhere, the degrees of freedom for policymakers differ. Taking these dynamic and diverging elements into account, it is hardly a big leap to imagine political tensions between countries, a disastrous set-up for green projects that require coordination and cooperation across borders. Sometimes the problem is simply a lack of knowledge or experience, administrative overconfidence, or bureaucratic incompetence. While the history of industrial policy in post-war Europe may include many success stories, for example, it also has its fair share of failures due to such factors. Industrial policy is necessary but not sufficient for the green transition, therefore, and many other policy processes require careful mutual calibration to make the transition work. In sum, political uncertainty is, even under the best of circumstances, a highly probable context for the green transition.
In sum, technological, economic and political uncertainties are endemic to the green transition, frequently hard to understand, and often impossible or very difficult to resolve. Economic actors in capitalism may love risk with a commensurate return, but do not handle uncertainty very well. While risk and its return are calculable based on probabilities, uncertainty reduces the numerator in any risk assessment to zero, as it is intrinsically unknowable. Incidentally, this critical difference between risk and uncertainty makes the talk of ‘de-risking’ among policymakers and economists confusing and conceptually sloppy: it is a matter of getting investors to the starting line, not of shifting the slope on their returns.
Deep uncertainty, as the start of the Great Financial Crisis of 2008 reminds us, means that markets stop functioning well and trigger a series of market failures; these can, obviously, not be resolved through markets. Here the optimistic argument based on relative prices breaks down; economic actors can assess risks and make decisions on that basis, but uncertainty is immobilising. Basic market failures – such as the absence of perfect knowledge of technology and information on demand for new products and services, the likely presence of significant increasing returns to scale in areas such as standards, the existence of positive and negative externalities that result from collective action, and systemic network effects where the success of one element depends on the simultaneous presence of many others – are the key argument for a green industrial policy, in which government makes markets, suspends uncertainty, and produces the public goods necessary for private action. While there may be potential issues with government intervention, there seem to be inescapable problems without it.
Comments