Productivity in a Changing World seminar series: Towards a net zero economy while improving productivity: pipe dream or realistic outlook?

Tim Hampton:

[Tim speaking in te reo Māori] Me karakia ka tatou. Ko te tai whakarunga. Ko te tai whakararo. Ko te Tai Tokerau. Ko te Tai Tonga. Ko te Tai Hauāuru. Ko te Tai Rāwhiti. Tēnei, ko Te Tai Ōhanga. Hui e, Tāiki e!      

Tēnā koutou katoa. Ngā mihi nui ki a Professor Jonatan Pinkse te kaikōrero o te rā. Tēnā koe.

Ngā mihi o te ata kia koutou.

Ahakoa nō tāwahi ōku tupuna. I tipu ake au i Hakatere, nō reira. Kei te mihi ake ki te mana whenua o reira, arā. Ko Kiekie te maunga. Ko Hakatere te awa. Ko Ngai Tahu whānui te iwi. Kei te whanganui-a-tara au e noho ana. Nō reira e mihi ana au ki te hau kāinga o te A Te Awa.

Ko Tim Hampton tōku ingoa. Nō reira, tēnā koutou, tēnā koutou, tēnā tātou katoa. Ka haere ki te reo Pākeha.

Kia ora! Good morning, everybody or good evening and very much late good night to you, Jonatan. It is wonderful to have you here. It's wonderful to have everyone here participating in this presentation in the Treasury Guest Lecture Series with today's presentation from Professor Jonatan Pinkse. I'm Tim Hampton. I'm the Director, Economic System here at Te Tai Ōhanga - New Zealand Treasury and I'm really looking forward to the talk and the discussion afterwards today. We all know how important productivity is for the long run living standards, incomes, welfare of New Zealanders and around the world. And productivity in New Zealand's performance or lack thereof has been a big point of discussion for many years. The challenges for New Zealand's productivity are only getting harder in the changing world, whether it's the changing geopolitical context, climate change, economic and social shifts, so it's important that we revisit our existing models and policy prescriptions.

These shifts will require significant changes in our economy if we're to sustain and improve our economic and productivity performance. Therefore, here at Treasury we are hosting a series of presentations really focusing on the implications of these trends for New Zealand's economic and productivity performance and the sustainability and the resilience of the economy. Please keep an eye out for the announcements for future lectures over the course of the year. We've got a really impressive line-up of inspiring experts. In terms of today, I'm absolutely delighted to have Professor Jonatan Pinkse with us. Jonatan is a Professor of Strategy, Innovation and Enterprise at the Manchester Institute of Innovation Research Alliance, Manchester Business School at the University of Manchester. He's also a Theme Lead of Social, Environmental and Technological Transitions of the Productivity Institute. His passion is in innovation and sustainability. He's a regular speaker on topics related to strategy and innovation for net-zero and sustainability, business model innovation for disruption, managing the green transition in digital platforms.

In his research, Jonatan analyses how firms make strategic decisions to create a sustainable economy and deal with tensions between issues and actors. He investigates opportunities and barriers for firm adoption of disruptive and sustainable technologies from cognitive, organisational and institutional perspective. Jonatan's authored more than 60 scholarly and practitioner articles. In 2020 he was included in the prestigious highly cited researcher list. Today, Jonatan will discuss the urgent need for global action to achieve net-zero greenhouse gas emissions. He will outline a framework for the options firms have for transforming to net-zero while maintaining their financial stability and possibly improving their productivity. He will argue that success depends on whether firms choose to transform their core business. He’ll also explain how policy makers can support long-term change in the market and help new businesses model to emerge.

In terms of how we'll run today, I'm going to hand over to Jonatan very shortly and he'll present for around 45 minutes. We'll then have about 40 minutes for questions and discussions. Please, we'll use the Q&A function, so not the chat function, but the Q&A function, so please post your queries there and if you have any technical query, please use the standard chat function and the great team here will help you out. Mōrena everybody and over to you Jonatan, and once again, welcome.

Jonatan Pinkse:

Thank you, Tim, for the invitation. Let me first share my screen. If you could let me know if you see it. So, what I'll be talking about today is can we really improve productivity while addressing the climate emergency? So, can we create a so-called net-zero economy? Is this a pipe dream or realistic outlook? As a true academic of course, I will not give you an exact answer to that, but hopefully I'll get you to think about it and what the specific issues are with this. This is a talk very much based on my current role as a Theme Lead in a Productivity Institute, so I wanted to start with a brief overview what the Productivity Institute is, because like many countries in the world, the UK is also struggling with improving its productivity. While you would think with whole digital revolution, we should make major improvements.

This is one of the biggest funding streams of the SSRC, so the Research Council for the Social Sciences, really trying to see how does this all work, how can we improve it? And within this I specifically focus on the social, environmental and technological transitions. We can talk about the economy in its current state and how we can improve productivity, but we also know that we are facing major changes and the climate emergency is one of those. That is a major threat. On the other end, you have more of the digital transition, which could be a major opportunity. We try to understand how that all interacts. In this talk, I will mostly focus on the whole climate change issue.

Why do we want to focus on that so much? Well, I don't think we have to explain that anymore. Currently, we all know about the climate emergency. We know that greenhouse gases are causing this and that we humans are behind it with our industrial activities, with how we run our economies and also our own behaviour. Still, it's not all bad news. If you look at how we are trying to address the climate emergency, you now see that renewable electricity is becoming a success story. Here for example, you see the energy supply mix of New Zealand of the International Energy Agency and here you can see that most energy sources stay relatively stable. Our total energy supply is going up, but the growth is mostly from wind and solar. That is really the success story.

And what does it look like then? Well, currently the share of electricity generation from renewables, the latest data was 2021 was 82% and that share of total primary... Sorry, I can't see it myself. Primary supply is 40.8. This is very similar to many countries now that actually things are going quite well. Finally, we are taking this seriously. There's a real greening of the electricity system. In some countries like New Zealand, that will be a lot because of hydro for example, in other countries, like here in UK, offshore wind is one of the main sources. When I started focusing on this topic about 20 years ago, this was a very different story. Solar was not very mature, wind was maturing, but things have changed. This is the positive story, so we're getting there, but of course it's not all positive because the problem is not really going away.

Basically, what you see is that we still rely on so-called non-renewable resources, oil, gas, coal for many of the other activities in our economy. This is data from a few years back three years ago, but from the global report about the status of the renewable energy, and here you see that for example in buildings globally still around that time three years ago and it won't be much different now, about 86% was still non-renewable energy and traditional biomass, that's basically burning wood. In industry and agriculture, very similar, very high percentages and in transport it was even higher. Transport though is of course changing fast now with the adoption of electric vehicles, but overall, we still have a very far to go.

I looked it up also for New Zealand. Is the trend similar as the global trends? I would say more or less, yes. The top graph here is showing it for the industrial sector. Here you need to look at the blue line. That's all renewables and that is around 20%, bit up, bit down, but much lower than the other forms of energy. Then if you look in agriculture, it is the red line at the bottom, it's super low. Here you see that really renewables are not really making a big wave in these parts of the economy, so there is a lot that is still necessary, and this is what we see all over the world. We have the Paris Agreement of 2015 where we agreed to reduce our greenhouse gas emissions, so we keep the warming of the planet to max 1.5 degrees compared to pre-industrial temperatures. That's really what they hoped for. More realistic probably is the two degrees targets, both are mentioned, but if you actually look at where we are, current policies are not enough at all, so we still need to reduce our emissions a lot.

This is the so-called emissions gap. And this is across the world, we are all facing very similar problems. As you can see at the bottom here, we need to basically reduce emissions from our energy system. There we make some progress. Agriculture and waste, industry, forests, nature-based solutions, transports, and buildings. It all needs to come together. We can't just focus on one part of the economy; we need to look at it across the board and this is where the problem is really. We're not really there yet. So, for example, if you look at the Climate Action Tracker, which is an NGO that tracks different countries how they're doing in terms of how we're reducing greenhouse gas emissions, what kind of policies are in place and then also what they call what is the fair share based on historical emissions of a country.

New Zealand is very much in the same ballpark as many other countries in Europe, US and so forth. It's considered by such an NGO is highly insufficient. New Zealand does have a lot of carbon sinks, so forests, but it's also losing that those partly, and really from a fair share perspective, the idea here is that a lot more should happen and that the current policies are not enough, but as I said, this is not unique to New Zealand. It is a very contentious issue. Why is that? Basically, what we are facing here is this idea of net-zero now. We used to call it climate change that we had to do something about climate change. Now we use the term net-zero, which is all based on the idea of the Paris Agreement that we basically should reduce our emissions, greenhouse gas emissions as much as possible, but we also realised that we can't fully get into zero so there we should then say, "Okay, for those emissions in the economy that we can't produce in the short term, we need to work on the net."

So here we need to start basically taking CO2 out of the air for example, or put it underground, and this is the whole offsetting and I'll explain that in more detail later on. This idea is now widespread. Companies all over the world are setting their targets, governments are putting it into law, so it sounds great. This whole idea of net-zero has really given a boost to this idea that we need to seriously deal with climate change, but as I said already, we don't necessarily focus on all parts of the economy. There is a huge focus on greening the electricity system, but basically there are many other sectors that we don't really look at and this is also because the solutions there are maybe not as obvious. You can't just put solar panels on everything and hope for the best. There are many parts of the economy that solar panels won't do anything. What you see is that you have many so-called hard to decarbonize sectors. You have the heating of houses, aviation, and shipping, so long distance travel, the building and construction sector, the way we use our buildings, agriculture.

In all these kinds of parts of the economy, there are not necessarily obvious low carbon solutions. Very often you'll read in the newspapers or online somewhere that something new has been found and this will solve the problem. Well, a lot of these so-called solutions have come and gone because quite often it is just an innovation that is operating in the niche, small scale, there might be some startups. Then these startups never really develop, they don't get sufficient funding, there are some disappointments in really what it can reduce in terms of greenhouse gas emissions and then it will disappear again, so it's actually really difficult to really step up investments in low carbon technologies. Also wind and solar, they might be mature now, but it has taken decades. It is not as if that was just five years and here they are and we further develop them. So that is a very long process of investments, a lot of learning how to use them, policy supports and so forth.

Then how does it over relate then to the economy? Are we becoming more productive if we become more low carbon? Well, that is not so clear either. Of course, we would hope that for the long term that will be the case, but the long term might be quite far away. What is then the relation between net-zero and productivity? Well, that really depends. First of all, if you look at energy generation, there is a reason why we are fairly prosperous in many countries and part of the reason is actually fossil fuels. Fossil fuels are in a way amazing as an energy source and a lot of our economic growth is based on it. We've built all industries around it. So, if you now say, "Hey, let's take away fossil fuels”, that is actually really difficult, and also that industry is very capital intensive and very productive. You can make a lot of money with oil for example, as we've seen recently with all the profits from the oil companies because of the high oil and gas price.

To just move away from fossil fuels and for energy generation, go away and use other sources is a huge adjustment cost. We're very much reliable still on it and really there's a very large capacity utilisation in the current industry, it works really well. Will a change there to energy generation make us more productive? In the long run we hope so, but in the short run it is not that obvious. Then if you look at energy usage again, you see here huge adjustment costs in industry but also how we heat our houses. I live in a house still that is fairly new but is using gas, natural gas. It means for me personally for example, that I need to spend quite a lot of money to change that while all the equipment is quite new in my house.

Here you see that really to push people to make a change, to push companies to make a change, you really need some kind of carbon price, which can come from an Emissions Trading Scheme, but that needs to be powerful enough or an effective carbon tax, which is politically quite difficult because people don't like an additional tax per se. In the European Union for example, back in the day before they launched the European Union Emissions Trading Scheme, they tried to negotiate a tax and it never really worked partly because of the word tax.

Then there is the whole idea of can we not become more productive by creating a green and/or the circular economy? If we're simply more efficient in how we use our energy and how we use our materials that will improve productivity and reduce our greenhouse gas emissions. That is indeed the case, but that is in and of itself very difficult because the circular economy doesn't work at all like our current linear economy. Companies should no longer see waste as waste but as a valuable output for maybe other parts of the economy, but it's a completely different way of thinking. On paper this can be a real productivity amplifier, in practice it involves a huge structural change of the economy, which is very, very difficult in practice to achieve.

Where are we then? Well, we are facing real serious problems, especially in these so-called hard to decarbonise sectors. As I said, if you look at these sectors like steel making, cement production, chemistry, airline shipping, the oil industry, what are the alternative? How are we going to produce cement without fossil fuels? How are we going to make steel without fossil fuels? There are different potential solutions, so here on paper, here on the screen, you see for example H2, hydrogen. Hydrogen is very often talked about as the solution. But is it really? Hydrogen has been seen as a solution for a very long time, but of course it's not an energy source, but an energy carrier, and then it very much depends on how you produce the hydrogen. There is always the assumption that it is made out of renewables by electrolysis using green electricity, but that currently is the more expensive form of hydrogen so it's not very likely, so it is not operating at scale at all. Here you see that there are simply no simple solutions.

But then they're also the hard to deploy sectors. Construction, this is what I found when I typed in New Zealand houses. Sorry for the joke, I know it's a Hobbit house. I know you don't live in Hobbit houses. As you can hear, I'm from the Netherlands and we don't live in windmills either, but I thought it was funny. It's probably quite efficient actually in terms of energy efficiency, nicely covered by the ground. And you have agriculture. Here you see that many of these sectors there might be low carbon solutions, but they really struggle to be adopted and diffused throughout the economy. For example, when we look at our housing stock. Currently, there seems to be some consensus that air source heat pumps need to be the new alternative for heating houses, and in many countries you see subsidies for that and they are being rolled out more and more, but it's also quite difficult to install them because you have all kinds of rules, regulations. They need to, for example here be a metre away from your neighbours, so if you don't have that space, you can't necessarily adopt it.

Electric cars is one of the other things. Electric cars are definitely diffusing more in the economy, but there are many issues there as well. I'll go into more detail in a moment. I finally now drive an electric car myself. It works for me because most of my way of moving around is local commutes. My longer commutes are by train, but some other people don't have that. The other thing is I have a driveway so I can basically do the recharging quite easily, but the moment you don't have a driveway, you really depend on the public infrastructure to recharge and that is underdeveloped in almost every country around the world.

Then you have solutions for example like, "Hey, how can we reduce greenhouse gas emissions from agriculture?" Cattle is a main issue there, so how do we reduce methane? Very powerful greenhouse gas. A few years ago I spoke to some people at DSM. It's a chemical company originally from the Netherlands and they had developed a cow food supplement that reduce, would reduce the methane from cattle. It worked really well, but the main problem here was it would basically make the cow food more expensive and the farmers were not necessarily seeing the benefit for them. They now just have to spend more money on cow food without having a clear direct benefit for themselves.

At the time this company struggled to actually sell this product while it is a fantastic innovation on paper. And then there's the whole discussion in many countries of how do we actually do retrofits of our existing housing stock? Here in the UK most of our houses are leaking energy and it's really, really difficult to change that because it would mean a major efforts to do retrofits and it is very disruptive for people, it is very expensive, so such an industry is not necessarily developing that fast and that well.

Where does it leave us? Well, how can we think about this whole problem? Here is a little framework that I developed to try and see what are our options and how can we think about that and how can it then further develop? Where should we be going, where can we be going and what is realistic? This is a circle diagram with different circles. At the core I put the core business model of a firm. This is basically how we tend to think in business. This is how we make our money and most companies are trying to protect that. The moment you're trying to push companies to then think about climate change, you're trying to push them to change their internal business, the middle circle, but they also have to think about their ecosystem, so their supply chain, their value chain, who they work with, and then more broadly their market environments. On these different levels, different changes need to happen, and my main argument will be that it will be very difficult to push companies in this direction, especially if what is at the core here is very profitable.

Let me start with innovating. Here there are different ways of looking at how we can reduce our greenhouse gas emissions. The first one is really the internal focus; I call it here to improve carbon efficiency. It's basically to improve energy efficiency. A lot of measures are there. There are a lot of different solutions out there that simply need to be adopted and not every company is doing this, so just pushing them to start implementing what is already out there is a first way of doing it. If you go more into the ecosystem thinking, you need to start looking at supply chains, because it's not just about what companies are producing themselves in terms of greenhouse gas emissions, but for many it is more upstream, so they need to think about what kind of materials are we using, what kind of fuels are we relying on? How can we push our suppliers to change those? But also can we make changes in our own company so we start using different kinds of materials?

For example, if steel was a problem, try to move away from steel. Maybe there are some kind of other materials that are a better solution for what you're trying to make, build and so forth, but that involves more collaboration in your supply chain. Then there is the whole bigger opportunity of new markets creation. In the end it can be a huge business opportunity going net-zero because people are looking for solutions. There's a whole trend of servitisation going on, companies that help others reduce their greenhouse gas emissions and make money from that. All these different ways of innovating are partly about technology, partly about changing your business model, the way you create, deliver and capture value.

Some examples. A big move in innovation would be a further electrification. Why is electrification so important? Because of my starting point, we can green the electricity system we now know, so the more we use electricity for all kinds of end users, then if we then use green electricity to produce our energy, then we can get to more solutions. Here's an example of an electric arc furnace, which is an established technology where they use scrap metal to develop steel. The problem though is that it leads to a different kind of, lower quality steel, than went from virgin materials and you can be using coke ovens. You have to think about the consequences of changing your production process. Electrification is not always that easy. Another solution is what they're trying as well is hydrogen, so maybe you can reduce either or by using hydrogen gas. They are doing pilots in different parts of the world. This is an example from Sweden where they're trying to do that.

Here you see the bigger discussions, what should it be? Should we go for electrification? Should we be using hydrogen? Should we maybe create a bioeconomy, maybe fully develop a circular economy? These are all very big movements, but what does it mean actually for the companies on the ground if they go for this? It actually means very costly investments, very difficult to scale up. All their players in the supply chain need to play ball with them and need to come along with them on the journey. We did two in-depth studies, currently working on them, in the Productivity Institute. And here we try to understand how is net-zero innovation related to productivity in two of these difficult sectors.

One is in the construction sector and what we try to study is what is called modern methods of construction. What we saw in the UK and also in other parts of the world is that well construction, housing construction for example is not a very productive sector. Here people tend to do it in the same way as they used to do it and there's a lot of potential gain to be had there. There were a few companies here in the UK that tried to really disrupt the existing house builders and they did that by building such factories where they do most of the production inside the factory and then they transport this kind of, it looks almost like a caravan to the different parts of the country and then they finish the house on site. The whole idea is to control this whole environment much better, so you basically get more an idea of a manufacturing mindset, which can lead to huge learnings and that really can help productivity improvements.

It also is a way to address the so-called skills gap. It's more and more difficult to find skilled people to work in the construction industry. The moment you make it more like a standard protocol how to do everything, you can actually train people yourself, so all the startups that we looked at were doing that. They were training their own people and people did not necessarily have a background in construction themselves. What we found so far is that a lot of these new players really struggle. They come up with a business model that might really help improve net-zero because they can make more energy efficient houses in these really controlled testings in factories, but they're also doing things that people don't necessarily like. By having such standardised houses there's a lack of customisation. People quite often want to have a, "Oh I want to have my house built like this, built like that." Doesn't really fit here.

There were conflicts with the planning system, but the most important thing is it needed huge upfront costs. You need to first develop such a factory and that factory needs to run up to its capacity quite fast, so you need to get orders in. The housing industry is typically one that is fluctuating a lot. What we saw here is that these new players really struggled. They couldn't get enough orders, so two out of the three companies that we really focused on had to stop production quite recently because they really struggled. Did they fail because they tried to do something about climate change? No, not necessarily, but what we see is that they tried to address climate change and improve productivity with a business model that was new and that struggled. Actually, it is really difficult to do something new. There are reasons why certain industries work in certain ways because these are proven ways of doing things.

Very similar story we found with electric vehicles. Here you see that more and more we need to roll out this infrastructure for recharging. This is a new market, so this is a huge opportunity. So, we see a lot of startups entering this space but also established companies. Here in the UK, for example, BP and Shell are two of the main providers of recharging infrastructure. Also, here we see a lot of problems, because it's a very complex process. If you for example, start to have the public charging infrastructure, meaning that you have these plugs in the street for example, they have the main lampposts. Then a lot of people don't necessarily want that so-called NIMBY behaviour, not in my backyard. Because if it means that people are constantly being parked in front of your house because they need to charge their car, you don't like that, maybe you want to use that spot more for yourself.

Also, we see a very fast upgrading of the technology here, so quite fast you see already that the current technology that they're implementing is outdated. This then leads to stranded assets, meaning that these companies might go bankrupt. Then you would say, "You have the whole physical infrastructure in the streets, but it's no longer operational, it's not up to date, so it's actually just there not doing anything." We also try to understand how are small and medium-sized businesses, for example, adopting electric cars and here we see a lot of hesitation. Basically, electric cars are still more expensive. It's not really clear what the main benefit will be for them, so they are basically shying away. For bigger companies it's a bit different story because they can actually really do their full fleet management and use the whole part of the digital revolution as well to start managing better.

Here you see a little bit a so-called unjust transition. You want everyone to have access to these new low carbon technologies, but it's not necessarily working out that way. It is actually quite difficult to do that. Low income people can't afford it. They don't necessarily have the driveway. Small businesses don't have the premises to do charging on their own land, so they also depend a lot more on the public infrastructure that is not necessarily there where you need it. What we see here is that these whole processes of going for innovation for net-zero is very difficult in practice. Can digital technologies help us there then? Are digital technologies really the solution? They could be. In the whole electricity revolution, green electricity really, solar, wind is very intermittent, but here you get smart grids, big data. The whole idea of using AI to better manage it is a huge opportunity, but you can also use AI for example, for other applications, so it can help you see much better what is happening in your supply chain to see where you can manage cost efficiencies.

However, digital technology of course brings a lot of risks itself, so we developed a little framework where we try to understand that. First of all, when we talk about digital technology as the solution for net-zero, we very much talk about the so-called intended outcome. We try to really get something positive out of it, but that's not necessarily always what is happening. Digital technology is what they call a generative technology. Once people start using it, it can be used in all kinds of different ways that are very difficult to foresee, so it will have a lot of so-called negative second order consequences. If you start using for example, blockchain technology to make your supply chains more transparent. Well, blockchain is using a lot of energy, so it's not necessarily very helpful. If you rely on AI for your decision making around net-zero, using algorithms can lead to all kinds of forms of bias. Maybe when doing this, you're upsetting your customers because you are profiling them in a way, based on your AI solution, in a way that they don't like. The whole idea about privacy is a major issue.

You have to realise the moment you're really going for the digital transition to look for solutions for the net-zero transition, it is not that easy. There is a very complex relationship between the two. Overall, do we need innovation? Yes, clearly. We are not there yet. There is the emissions gap, so this is the main thing what we need to do as an economy, but the innovation can go in many different directions and it's very unclear what will be the solution in, for example, the hard to decarbonise sectors.

That is the innovation part. What are the other parts? Other alternatives are what I called offloading or offsetting. Offloading is what we talked maybe about a little bit less, but this is really about trying to reorganise your industry or your company. For example, what some companies do in a more reactive way perhaps is that they start shifting across borders sometimes where their carbon intensive activities are. If you are operating in a country where there are very strict regulations on the emissions, they sometimes want to move it to basically pollution havens, countries where it is easier. This is why we need global action on it. The other thing that you see is that there's a vertical disintegration. Companies try to get rid of the carbon intensive parts so they can say we are no longer responsible for it. They basically are cleaning up their own balance sheet when it comes to carbon.

Is the problem gone? No, of course not. If you just push it away in your supply chain, but you're still fully relying on the materials or the energy that is used there in your own value chain, then we are not really getting anywhere. Then you see the whole idea of divestment. You try to get rid of it, and then it very much depends on who is buying it and what they're doing with these kinds of activities. Still, is this all bad? No, not necessarily. Of course, it is an important step for companies to try and move away from further investing in activities that are causing the greenhouse gas emissions. This idea of we are trying to discontinue certain activities or we're no longer investing in them is a positive one.

Some examples, in Europe, people talk a lot about this oil company, Ørsted, which used to be DONG Energy from Denmark, because it used to be very much an oil company and they really moved into renewable energy quite fast. How did they do that? Basically, a lot of financial transactions. They just did a lot of buying and selling of different assets and then further developing new assets themselves, but as I said, it depends a little bit who they are selling their oil activities to. For example, what happens are these then being dismantled or are they just being used and continue to be used? And then on an economy level we're not really getting anywhere.

Another example is a few years ago what happened in the German electricity industry. Their RWE and E.ON, two of the biggest players did a very complex swap of activities in assets where basically one started really focusing on power generation, RWE, about really using renewables and the other one really focusing on smart grids mostly and retail. They go more the big data route, trying to really predict how the market works, how to shift balances and so forth. They did that by divesting Uniper, the fossil fuel assets, but that company still exists, and that company is still important and had to be saved recently even by the German government because of the whole Ukraine crisis, they were risking going bankrupt. Since there was a reliance on these fossil fuels still for the economy it had to be saved even. This whole swapping does mean that the future direction of the electricity industry then in Germany is very much renewables, but it doesn't mean that the non-renewables are gone.

That is offloading. Then the final part is offsetting. Offsetting is very much on an industrial scale about CCS or CCUS, carbon capture usage and storage that you're trying to grab the CO2 from the industrial processes and put it on the ground. This has been around for a very long time now already but has always struggled to really scale. One of the reasons is that it is basically a technology, a solution that really needs a high carbon price. No single company will do this unless there is a price on carbon because otherwise there is no clear benefit. This will not improve their productivity. You just actually need to have more investments in very, very expensive capital where in the end the carbon on the ground won't do much and you won't really get extra value. This is partly why they made a change to then talk also about usage and that it's really much, very much also about we can use CO2 as well. It's not just about storing it, but maybe CO2 can become an important input for other processes. I'll show you a few examples in a moment.

The other thing is carbon credits, more industrial carbon credits, so that you do trading somehow in industries, but most importantly is forest carbon credits. The idea that you start investing in the planting of trees, reforestation projects, forestation projects and so forth, which happens across the world and that is very often part of the so-called voluntary carbon markets where the price is not very high of these carbon credits and because of that is seen as a very attractive solution but maybe not very effective. Then there was also direct air capture, which I'll show you in a minute.

This is for example where clearly New Zealand has a debate. I'm not a specialist on New Zealand, but this was in the Guardian a few weeks ago and there is criticism that New Zealand might be too reliant on tree planting. What you see then is if you really go for the tree planting, how effective is that going to be in the long run? How do you ensure that these trees are going to stay there? If they're only there 30 years and then you cut them down again, then there is no solution, really. Then the carbon that was stored is going back up into in the air. It is almost as if it seems to be the easy way out that people want to go for and the moment is cheaper than it sounds attractive, but it's not ready. Some people are completely against using offsets. I'm not 100% in that camp as I'll show you in a minute.

Then there are now more and more innovations for so-called negative emissions, so direct air capture and storage. This is based on a company, it's called Carbon Engineering and where they would then basically suck CO2 from the air. This is then on a very small scale, very expensive. It gets a lot of attention every once in a while. Will this really save us? I don't know. Recently in Europe we discussed quite a lot E-fuels. This is where you use hydrogen and CO2 to make a new fuel, but the fuels can actually be used in so-called normal cars. What is happening here is that you see that trying to create negative emissions, use them for applications quite often, not really making a transition. There are questions for example about the upscaling of such technologies. Is that really happening? Is this really a solution? How expensive is it? But also, what is the underlying motive for an investment here? Is it really actually to prolong business as usual? European car manufacturers for example, see it as an opportunity to continue producing their cars on an internal combustion engine or is it really a bridging technology?

Yes, we know we're moving to electric vehicles, but we can't do that immediately, so this is a way of doing that. That is very often the story, but whether that's really the case, I have my doubts. Now what about the productivity gains? Is this going to be a productivity amplifier to capture CO2 from the air? Very unlikely. The benefits are not that clear. The usage in CCUS for example is a very small part. Is it really all bad news? Not necessarily. Here for example, you see that a few years ago the EU pushed the car manufacturers to come up with electric cars, but most of them were struggling, but you know this company called Tesla that did it really well. They actually then benefited from the fact that other car companies had to buy these carbon credits from Tesla, this helped Tesla. Really was an important source of revenue for a short periods, which really helped them to further scale up and now they've become a real challenger of the big car manufacturers.

Here you see that sometimes the money that is generated through some kind of offsetting can help. Many carbon offsets, forestry projects for example, can have huge benefits for communities of developing countries. The moment we start criticising it, then typically the investments in those projects dry up, which has used social consequences for people in the private communities in developing countries. We have to realise what it means. Offsetting is not necessarily all bad, but it should not be the first solution to go to, because what we see here, if we look at this wheel, currently my personal opinion is that most companies, somehow seem to use these different options that they have to mostly protect their current business model. They buffer their core business model. They try to do those kind of investments that allow them to continue doing their business as usual, and they do that because they are not clear about how some of their stakeholders, their customers, their investors would respond if they go all the way in a new direction.

There was a reason why many of the existing construction companies in the UK were not going for these modern methods of construction, because there are a lot of issues with them as well, so they fear reputational damage. The moment you go for new technology, you might actually then go in a direction where you sell something which is not as proven as the current technology and then you might get huge issues that customers don't like it. With heat pumps, for example, air source heat pumps don't give the same kind of heating that people are used to, so they might see this as a lack of comfort and then people start complaining. This is why mainstream companies are a bit saying, "Oh, we're not so sure because we don't want have complaining customers."

But what you see here is that lots of companies will focus maybe on the offloading, offsetting to basically show a balance sheet that they're doing great in terms of carbon, but they've just pushed the carbon up somewhere else in their supply chain to different countries or they use offsets a lot. Here they're really not reducing the greenhouse gas emissions in absolute sense, but they're stretching the so-called net of net-zero, so what should we do? We should use offloading and offsetting in a productive way to further innovate. Offsetting can be a financial mechanism to create a space to then further down the line move to innovation. Offloading is very much to see what are current activities that we no longer want to invest in, we want to get rid of them and how can we change what we invest in and move into a new direction?

Really what do people like, how can we move there? What are the low carbon solutions where you can create a new markets? What kind of services can you link to that? Maybe you find new sources of revenue. What kind of solutions are really being supported by the investor community? How important is the whole ESG trend that you get all kind of the moral investment community? What do they resist and so forth? You need to start thinking in how it all starts to work together.

In the UK for example, you now have a company that is making quite big waves in the electricity sector because they try to do it all, so they are called Octopus Energy, and this is a company that basically approaches the whole energy generation in a different way. Yes, they are investing in renewable energy, they invest in solar and winds, but they very much also focus on data. They see themselves as a technology company. They manage data, they use this Kraken tech. Basically it's just data in the cloud. They analyse everything about how energy moves around, and they also enable you as a customer to use the data. You can just download it in Excel to really analyse your own energy data if you like. Then they try to roll out all kinds of new services. They allow you to buy an electric vehicle, they allow you to buy a heat pump. They do all kinds of research and development, but at the same time they give you services to offset your carbon. Travel carbon calculator they had. When they supply gas, they will try and do that with offsets of Renewable World, a partner.

Here you see then a company that is trying to go in all kinds of directions, but it's also a very young company. Such companies trying to figure out a bit what is the direction in the market for net-zero where we can really make a change, but also of course where they can make a lot of money. They're growing really well, but they're also growing really fast, and very fast-growing companies can also collapse in a spectacular way, so we have to see. They're my current supplier, so I hope they will not fail like my previous one. Bulb were actually bought by Octopus, is a whole story in and of itself.

To conclude, where are we going? From a policy perspective my argument would be that we need to start getting companies to think about business model innovation. They need to do more innovating; they need to think about what kind of net-zero solutions are attractive for our customers and how can we get there and there are all kinds of different ways of doing that. One of the ways is really to counter this business model buffering. A simple ban or a fine, so why are we now interested in electric cars? Because in quite a few countries there's now a ban on the sales of cars with internal combustion engine in 2035 or 2040. Carbon price is necessary. Only when it becomes part of the investment decisions we will move somewhere, but also try to really critically look at current hidden subsidies quite often for fossil fuels and then really try to restrict this creative carbon accounting.

If companies are just focusing on their so-called scope one and scope two emissions, so what they produce themselves and from buying electricity instead of also focusing on scope three in their supply chain and what their users of their products are actually generating. Then what we found very much in the construction sector is that things like a planning system needs to really have a look at, "Okay, what are we actually currently stopping in terms of net-zero investments and how can we change that?" There are reasons why the planet system is sometimes a barrier because we don't want to have a windmill everywhere, but here in UK for example, there's an effective ban on onshore winds. Is that really what we want? There are also parts of the country where you could have onshore winds, but it's currently not possible.

The final thing is really to try and push for these business model transformation trajectories, all kinds of support, infrastructure support around EVs for example here it's very much just let the market solve it. Maybe there needs to be more of a steer from the government. Really try to work on standardisation around products that it's also clear when people are buying products when it says it's net-zero, that it's really net-zero and that is not some green-washing involved, and things about implementing a cross-border carbon tax being discussed so there's no unfair competition from abroad.

What is the main message here? Well, first of all, a question is can policy, can the government put the climate central even when there are no obvious productivity wins? That's always a very difficult one because then you get the fight between our environment and the economy, but our environment is very often also the long-term survival of our economy, so it is almost a false dichotomy, but it will always play a role in policy decisions. Then how far are you willing to go as a government in destabilising businesses? If you put an effective ban on polluting technologies that will destabilise businesses, it means sometimes that you can't have certain established businesses to be your partner in a transition. They will start lobbying against it, they will fight it and they can do sometimes do so very effectively, so how can you somehow destabilise them enough but also keep them on board? That's a very fine balance.

Then should policy enable offsetting, even if it crowds out innovating? My answer is probably not, but we see it quite often. Whether the price for offsets are really low, then that's the easy way out. Then really how can we not just focus on technologies but also to really enable the adoption and diffusion of these technologies in different industries? And that very often needs some kind of business model innovation, what companies are selling, what kind of value they are delivering to their customers might change and as a customer we need to adjust there as well. We can't always expect exactly the same thing as we used to have, so my electric car can't go as far, so that is not what I like. What I love though is that it's nicely silent and I like to listen to music in my car and it's beautiful now. You have to sell what is attractive and not just focus on what is not attractive.

So, there's still a lot of work to do and this is why we need to actively think about it and it's a big debate, so I'm very curious what you think about it. I would like to open it up for questions now.

Tim Hampton:

Kia ora Jonatan, thank you very much for that. I really like how you highlight just some of the practical trade-offs and the reason why these changes don't just naturally occur. As you say, fossil fuels from economic and income perspective has been incredibly productive for economies and the individuals and it will take a long time to transition, and so I really like that, just that practicality, the pragmatism that the challenges that are encountered and having looked at your work, I'd encourage the other participants to engage in more of those papers because it does get into more of the stuff that you covered at the end in terms of the ‘so what’. I’ll come to some of the online questions shortly and many of them were coming through. You then addressed them in a couple of subsequent slides, so it's been fantastic.

The key take-up for me was that productivity for firms are only going to do this if this is good for the bottom line at the end of the day. At a minimum it needs to be financially sustainable for them, but ideally in most cases actually it's actually got to be financially lucrative for them. Firms are always looking to increase their productivity. Do you think that the productivity that can come from this shift, the productivity growth, will it be sufficient to compensate for the lower productivity growth that'll come because they're investing their productivity growth efforts in this space? We here in New Zealand, we typically assume labour productivity growth and the one to 1.5% on the assumption that businesses and government will always be trying to grow the pie and be innovative. What I'm hearing from you is we can still keep it positive productivity growth, but if we do this right, but is it going to be enough to, do we need to have a lower productivity growth assumption, not just rather than a lower productivity level assumption?

Jonatan Pinkse:

That's a very difficult question because it is almost like a running experiment currently. We're not just investing at that large scale in the sectors where we might want to have productivity growth. Of course, a lot of the investments in the green economy do go along with the whole digitalization, automation and so forth, so because of that it can lead to a larger productivity growth. You can get a lot more out of your existing capital; you need fewer people. In that sense, I would say yes, there's a lot of potential there. Is it then really the green investment that is doing it, I think not necessarily. It is more the digital investment that is doing it then, but they then work in tandem together. It's one of the questions we're always asking ourselves and the research simply does not yet exist because the investments are not yet there at that scale to see will this really help?

If I just look at the hesitation of many sectors to go in this direction, people have doubts. Because otherwise they would just jump on the opportunity and really say, "Oh, this is really going to help us." And that's why we very much now currently see with the project on electric car adoption. Small companies will say, "Sorry, we just don't really see how it will help us plus it brings a lot of risks, so the moment you change such technology, you need new skills." We talked to a taxi company for example, and they explained that the moment something goes wrong with the electric car, it's a real problem because there's no one who can repair the thing, so it took them weeks before they got someone to repair it, and that was for them reason to say, "Okay, we go this far in adopting them, but only as far as the government demands us." They were in London, so they have to, otherwise they can't operate in the city centre of London, but the moment they don't have to, they will not, because they saw a lower productivity for them.

They very often could not use their capital as a lot of unused capacity because of the problems of recharging, not being operational, and so forth, so there's a clear steer from the government necessary to really cover these bridging costs, these adjustment costs, because they will be seen. They will be incurred now and if you then can't immediately get the revenues to the level you want them to be, you need them to be, it will be very problematic. We've seen it already in the construction industry and my guess is that quite a few of the EV charging infrastructure companies we've spoken to, a lot of them will probably also disappear the coming years because they just can't get enough revenues out of their new assets.

Tim Hampton:

That last example on the EVs, it was one of the questions that came through early in the presentation in terms of, certainly here in New Zealand that it feels like it takes a while, a long time for the infrastructure to get up and running on the EV, and the presentation and just now I think you covered that well. In terms of the adopting new technology one of the questions that comes through, in your presentation you talked about the role of government, good quality regulation and that sort of stuff, which again struck me as actually a bit of a reversion back to core productivity growth enabling, encouraging innovation, enabling quick failure and those sorts of things. The question was in regard to solar panel and wind and that stuff, you noted that's taken quite a few years to get here. Do you think that in this space, the take up of technology, that turnaround is getting shorter? You see with different platforms now that they take off, their take-up rates are much, much shorter. Do you think that's going to play a role on the positive side here?

Jonatan Pinkse:

Yes, because it is becoming much easier, and this is typically what you see as business model innovation. I gave my students back in the day, I think there was 2008 or '9 when I still lived in Amsterdam, always the little case. I bought a new house there in Amsterdam and I hatched to buy a parking spot for my house, even though I didn't need it, there was about 20,000 euros or something like that, but that was just part of the mortgage and there was no way for me not buying it. I wasn't offered a similar thing for my solar panels. I did not have solar panels because the main problem was I couldn't afford it. I was a lecturer; I didn't have the 20,000 to also spend on it. There wasn't a clear financial solution for it either, so they had to figure out how they give me solar panels without me paying a lot of money, and that is very much the financial mechanism.

What we've seen in the meantime is that so many companies have stepped into that gap to start offering people sometimes also to scams unfortunately, "Hey, you can have your solar panels so cheap. This is how it works; this is how you can do it together." But you also see it in a more positive way. We've studied it in the Netherlands, the whole movement of peer-to-peer energy, for example. This idea of, "Hey, Airbnb exists. Can't we do Airbnb for energy?" So, there was a Dutch startup, former student of mine set it up who very much said, "Okay, many people can't have the solar panels themselves, but they could get maybe the green electricity from the local wind farm, from the local solar farm." And they basically created a platform that enabled these kind of transactions and you wouldn't buy your electricity from them, they were only enabling that. That's the kind of business model innovation that has clearly sparked the imagination of larger firms.

Engie, a former Gas de France, very big company, started doing exactly the same. This startup was bought by another big electricity company. What you see here is that how we can start thinking about the adoption of such technologies really goes along with how can we make it affordable for people, and there are more and more ways of doing that through sharing economy ideas, circular economy ideas, platformisation of the economy and so forth, so definitely. The other part is of course China. They've just become cheaper all these products because of the massive investments of China. Of course, there are a lot of tensions in the world around China, but we cannot deny the impact they have had on the whole solar revolution. Without China, it would never have brought the prices down, but Germany played a big role as well. Their feed-in tariff created the first proper market for Chinese solar panels and that really stimulated the whole thing and really gave it a push.

Tim Hampton:

Nice, nice. Through presentation and towards the end you talked about offsetting and offloading being part of the picture, but traditionally that's been the easy go-to and we need to make sure it all joins up. Question was, let me just, was around, what are some of the things that can really be done to help businesses really focus in on the innovation side and make sure that the offsetting and offloading is using proportionately and for good?

Jonatan Pinkse:

Yeah, well with offsetting it's setting some kind of limits on that, so if you have a carbon market that you can't fully just use it to comply, so relying on the voluntary carbon market should not be a way to comply with the regulated markets, so it needs then be from proper projects. That was always the case. For example, on the UN level, the whole idea of the clean development mechanism back in the day to do projects in developing countries, they had to show additionality, that it was leading to additional greenhouse gas emission reductions. There was a whole process that became a whole business. Well of course the voluntary carbon market, a lot of things are being offered where we have no clue what you're buying and where it is and so forth, so that should not be a route. Of course, the more critical the shareholders and other stakeholders are of companies, of what companies are actually proposing and how they're reducing their greenhouse gas emissions.

You see this whole trend like, "Okay, if you're fully going for the offsetting, we no longer believe you." So that is one way, just the whole reputation of companies is not really improving when you're fully going for the offsetting. Does it mean that they're no longer doing it? No, of course not. Many are relying on it or more indirect ways, and so it's very much for the government to say, "Okay, how can we establish that if we allow offsets that the offsets are of good quality and it's certain type of project and not whatever, you can get your hands on that is as cheap as possible because that's what the market will do otherwise." Offloading is very much about how do we try to restrict economic activity that we no longer see as good parts of the economy, and that is very difficult. You might remember BP and Shell recently first saying that they wanted to reduce their oil and gas activities, but then the prices went up like crazy and now both of them have said, "Well, let's wait a little."

And this is what you see, they promise offloading and then they're not for the simple reason that they can just simply make too much money. Then you get all kinds of discussions in different countries, "Okay, should we have some windfall tax on them? How do we tackle that in a way that we're not just pushing them to other countries?" Because that's always what they threaten. They're global companies. They say, "Well, we just move our activities around." But in practice, very often that is more a threats than that companies are massively changing the location of their production facilities, but they will always use it.

This is where the whole financial community plays a huge role. Institutional investors need to really take their responsibility. They own large parts of such companies, they need to speak up and you see that more and more happening, but still maybe not enough because when we talk about the shareholder, we talk about it sometimes a bit as the enemy, but most of us are shareholders directly or indirectly. It's ourselves and how do we then basically shape that? How do we talk to our pension fund, what they're doing? And for many people that's too far away, but that's all part of the puzzle.

Tim Hampton:

It seems like a real game of whack-a-mole. Again, just picking up on one of the questions. Throughout the presentation you just highlighted the multiple considerations that need to be done and the fact you need to address this on so many fronts, collaboration and coordination on so many fronts. The question here is it seems that elected leaders are unlikely to have the ability to identify what needs to be done and how to achieve a coordinating collaborative solution, but also in my mind just they've only got so much capacity. There's only so many battles that they want to take, and then as is often the costs of change are concentrated and the benefits are diffused, and so it takes a lot of political time, capability and capacity. Are you aware of any countries where officials have developed a coherent way of supporting their leaders to achieve this?

Jonatan Pinkse:

No, sorry. What I truly try to say is I can't mention just on one country, "Oh, they do it really well." Sometimes people when we talk about the electric cars, the success case is, Norway. Yes, Norway indeed the adoption of electric cars is fantastic, but how do they do it? Well, you might also know that they have a very, very big oil industry, so they finance all the things that they do with oil money, so it's very two-sided there. They then have the resources but in a way that we don't necessarily agree with, so I wouldn't say, "Oh, this is the way to go. Everyone needs to follow that route."

I mentioned the feed-in tariff in Germany for example, that back in the day looked really good. The idea that you would allow people who would produce green electricity to profit from that and make money with it is a fantastic incentive, but I do remember as well back in the day that I spoke to an economist who said, "Well, now it's still small." And now people say, "Oh, that's fine." When this really grows, they will start seeing the addition to the electricity bill of this feed-in tariff and then the politics will change. Well, I must say this is exactly what happens, a lot more criticism of the system and then it did not continue in the same way as it was generous back in the day. In Spain they even stopped it completely they had a similar system.

Because that's always the case, any kind of policy that turns out to be super popular will then also become then really expensive. In the Netherlands where I'm from, the subsidies for electric vehicles were fantastic. Well, what was the most popular electric car in the Netherlands? A Tesla model S. Who can afford a Tesla model S? Most people can't, so it was basically subsidising people that were relatively well-off already to buy another fancy car. That is then part of it as well. Very successful, does it really do what it needs to do? Not too sure, so that's why I said there's not one way, but there are all kinds of different policy innovations around the globe where you might say, "Hey, this is actually quite interesting."

And one of the things I find most interesting is just a simple ban, so by just saying you no longer can sell this kind of car, or you can no longer use that kind of technology. That does something amazing, it brings certainty. We know for fact that this is no longer possible from then, so you need to step up your investments to be able to make the transition by then. Of course, what happens in practice then is quite often that the lobbying machine starts working and then the loopholes and the ways around, and that's what government needs to deal with. Of course, how do we deal with the pushback from industry? But a simple ban at times is at least giving a very clear signal this is our direction of travel.

Tim Hampton:

No, that's really good. Early on in your presentation, you talked about the role of electrification. One of the discussions that's getting a lot of coverage here in New Zealand at the moment is the choice is, are saying some people don't present as a choice. Some people say do both, but yes, that push towards electrification, but then there's also the push to make sure that electrification is from renewables and that if because of the extra marginal cost of the investment, at least for a period of time, makes electrification more expensive, therefore discourages the transition to electrification. Any comments on that?

Jonatan Pinkse:

Yeah. I wrote a few years ago something for Forbes where I tried to do the thought experiment, where should we be going basically? And whatever route I was taking on my hat and through different examples, electrification was definitely part of the solution. Why? Because the trends of our greening of the electricity system is continuing, that is just going on and on and on. That is going up everywhere, so yes, it is the case that currently we still use a lot of fossil fuels for electricity generation, but if we now change the end use and make that based on electric energy and not electrical energy and not thermal energy, then assuming that the electricity system will be greening more, then we move in a direction that we are better prepared for it in the long term. It definitely will play a very big role, but there are huge rebound effects.

People now sometimes talk about electrifying things, "Oh, it's electric, so it's good for the environment." Well, no, because a lot of what we now do, we electrify a lot of things where we used to walk. If you see the little scooters, the E-scooters for example, my students always laugh because I ask them always when they use them, "Do you use them?" Yeah, some use them because they're from cities where they're all over the place and they admit, "Yeah, no, I'm just lazy. I take an E-scooter when I used to use walk." Then it's not really electrification is not electrifying something that used to be fossil fuels. No, it's electrifying something that used to be nature-based, I don't know walking. You're very have much have to see what is it? Is it really substituting for something else or it's just adding up.

We see very similar movements in circular economy. More and more companies are maybe going for a circular product line, but they're actually just adding to overall production. Just this product line happens to be circular, but a while that's not necessarily and when it's really successful it's only pushing more and more. It's never fully circular, so what is actually really the impact? We don't really know. It's so often based on, we assume that this and we then assumed that and then we assumed that, so this is good, but all the assumptions then in the end never really work out. Indeed, the hydrogen was then made from natural gas and that was supposed to be bridging technology, but hey, it went so well we have a domestic industry now based on it. Let's continue. We make a lot of money, and that's what you don't really get. Then you become a bit cynical. It's like, "Are we really getting there?" Maybe not.

Tim Hampton:

I'm both entertained and depressed and excited by everything you got to say. But I’m with you in understanding your point there about the substitutions and you talk quite a bit about electric cars and parking, scooters, excuse the pun for a minute. The role of electric trains and also electric bikes in this space.

Jonatan Pinkse:

Well, I'm from the Netherlands and when I sometimes come back into my own country, I'm amazed how fast everyone can cycle nowadays, because the E-bike is all over the place there. That used to be more for older people and now the teenagers use them as well. There it really comes into a culture of people cycling anyway, so actually there they now use more energy you might think because they used to cycle in normal ways and now they use E-bikes, but in Mariana countries there's a huge barrier to use a bicycle. I live in a small town called Lancaster, which has a very big hill in the middle. I'm quite fit, but I have trouble getting up there with my normal bike, so there an E-bike is of course the solution, but that needs the cultural change.

That is very difficult because what you see then, what is the barrier there has nothing to do with climate change, that has everything to do with safety. There's road safety. You need to invest in road safety to really get different forms of how people move around. People need to be safe. When you talk about public transport, that's all about capacity, affordability, reliability. I don't know if you know anything about the train system in the UK. What people mostly know about it that it's not very good and that's an understatement. If you dependent on that train system in the last couple of years it has been absolute pain. I live in the north, it has been even more painful. I can't blame anyone for not believing in that as a solution currently. That needs, again major investment.

But in Germany they're now experimenting with having the regional trains super affordable because they did a test and the test worked really well, and that seems to be a bit of a game changer that now people are considering it, so if you suddenly say, "Well maybe not the super-fast long-distance trains, but the shorter ones." Short distance ones just make it very affordable, even free, then it does maybe lead to behavioural change. These are little policy experiments that they did as a recovery from COVID that turn out to be usually successful. It might then have unintended consequences later on, but for now I really like how you see, "Hey, we tried this, it actually works." And that will hopefully then stimulate further investment. Night trains in Europe are being reinstated because more people want to actually do long distance travel using trains. Still, if you compare it to the highly affordable way to fly around, it's still very difficult sell.

Tim Hampton:

And in France you're seeing again the ban being as a tool in that space.

Jonatan Pinkse:

Yeah.

Tim Hampton:

You've touched on a couple of these, but can you just run through a couple of different examples and your thoughts on the use of taxation for addressing the change we're talking about here?

Jonatan Pinkse:

That I find difficult because I was trained as an economist, but I forgot about my economics background. I think what is important is how people are using it. You want to get the end user to change their behaviour, so that they start thinking about what am I using? I last week read an article, it was about Swedish policy, thinking about how can we green the steel industry. Their assumption is very much, "Okay, we still will be using steel, we just need to green steel, so we need to go for hydrogen, things like that, so we maybe need to tax then the steel company, so they then make that move." But it never really questions if we need to use steel for everything. Their suggestion was can't you think more about the end user and make it more difficult for them basically to start buying things made from steel because that then will change how we make products because of the change in demand.

Where do you actually tax? Where do you create an incentive for people to change their behaviour? And that is not always in a way that you take for granted that the composition of your industry is going to stay the same. That's what I noticed here in the UK for example, they modelled, we have clusters, net-zero clusters here, which is interesting. They want companies to work together. One is in the northeast and the modelling was all based on the assumption that in 50 years the composition of the local industry is exactly the same as now. That is very unlikely for all kinds of reasons, but then again, you're not questioning whether we need all these kind of industries. This is where this whole idea of net-zero should not just be about energy, it should be more and more probably all about materials.

Because a lot of the carbon emissions come from how we make our materials and how is that happening. This is where, for example, the carbon tax, the cross-border carbon tax starts playing a role. As long as you can import your steel and products like that from Brazil or from China in a much cheaper way, then of course your local industry that you try to push to go for net-zero will never be able to compete. This is all problematic from the World Trade Organisation perspective. And you get the whole non-trade barriers and the whole thing. It is very complex, but I don't think we can solve it just based on the assumption that everyone is well aligned in the global political arena because we know that's not the case. US might swing again next time with the election, we get Trump again and then everything that is currently being built in that direction is wiped away again.

Tim Hampton:

Lots of really positive comments coming through in terms of really insightful talk, et cetera. Just one question here is around, it's about executive capabilities. What in your opinion can or should government enterprise policies shift in business capability support systems so that business executives and owners make the right decision in balancing productivity and climate change agendas?

Jonatan Pinkse:

It really depends on what kind of part of the economy, what kind of businesses you look at. In research and also in the newspaper we tend to focus a lot on the large companies. They actually know quite well what to do and they're trying to invest in all kinds of different pilot projects, are involved in different kinds of initiatives, collaborations and so forth. What we've seen here in the UK, and that's probably across many countries around the world, is the other part of the economy, the small and medium-sized enterprises don't really know what it means for them. Part of the government is actually educating these kinds of companies and enabling them to say, "Hey, what is out there and how can we actually start using that because there's a huge underinvestment because of a fear of the unknown. We don't really know how it works, we can't afford this and so forth."

To really also look at the simple businesses, the small businesses, what they also call the foundational economy, things that we use. During COVID we talked about that a lot more because we started realising what do we really rely on. And to really start helping companies see what the benefits might be. We have a local programme here in the northwest of the UK, of England, which was all about digital adoption and they basically just helped SMEs do digital adoption. Quite a few that figured out, "Well actually when I do that, I'm actually reducing my energy use." And that then just became an on programme, "Hey, how can it actually come together?" And now they have a new programme which is really focusing on that. It was just because people didn't realise what they could do, what the options were for them, because quite often we might assume that we know, but not really and that is also to the level of consumers.

Yes, I have my electric car now, I don't yet have a heat pump. I don't yet have solar panels. Solar panels I'm not sure if I want solar panels on my roof because if I buy green electricity, I might say I find that they're the better way, but I do have a gas boiler. I try to figure out how to replace that and there's some kind of government scheme here that should help you. Well, I have a PhD and I still don't get it. You see that such internet portals can be so difficult to navigate. What we found in the case of the Netherlands, one of the most important pushes for people to switch energy contract were actually a new type of company.

The comparison websites, there were more websites that showed just, "Hey, if you go for this one or you go for that one, this is actually cheaper and it's actually greener and the whole thing." So, by just making it transparent plus very easy for people, they started doing that. Those were private companies, but sometimes the government can also play that role and to really have that function of, "Okay, we create the platform. This is where you can source it. This is how easy it is. By the way, there's actually subsidy available for this. Did you know that?" Because people often don't even know the money is there, but they don't know how to get the money.

Tim Hampton:

It certainly sounds like an area very ripe for behavioural insights teams to opt in, opt out rather opt in and those sorts of things.

Jonatan Pinkse:

Yeah.

Tim Hampton:

Just one final question. Has your work looked into biodiversity issues or is it really focused on the climate change side of things?

Jonatan Pinkse:

Recently I've moved in that direction with a colleague of mine, Rajat Panwar from the US. He lives in a state of Oregon where they have a lot of trees, so he works on forestry, and I've learned a lot more about biodiversity and deforestation via him. That's really the next stage, I would say. There is more attention now for biodiversity and deforestation because of the climate crisis, but at the same time you see that the climate crisis is almost crowding out attention for these other issues. When we talk about sustainability, we now very often talk about climate as if it's one and the same, which is not necessarily the case. For example, today was an intriguing article in the Financial Times about the case of Norway where it was nature versus climate, which I had to read in details. What do they mean?

What they're doing they want to do deep sea mining for materials that allow them to further scale up green technology needed for the whole climate crisis. They also want to do it so they're no longer relying on China for these kind of things, but they had to do it with deep sea mining and were destroying basically biodiversity in these areas in their local sea. Now it became nature versus climate, which is a trade-off that never anyone realised was we thought, "But it was the same." No, it's different here, and here they basically said, "We're willing to sacrifice nature to tackle climate change." And then you can really ask yourself, "Okay, how does that work? What does that mean?" So, biodiversity is becoming crucial in this case, in that you really need to start protecting it as well.

And that you can't just assume, "Oh, we tackle or climate change, so we have tackled that as well." No, it very often needs other kinds of policy interventions and so forth and you really, especially when it's about deforestation, you have to be very careful that you're not have some kind of colonial mindset. We need to solve this in Amazon, we need to solve this, from a Dutch perspective, Indonesia, we have to be very careful in the Netherlands for example, talking about that. You need to have a lot more realisation of indigenous communities, how do they operate? And so, I would say it just makes it way more complex. This is why many people shy away from it, but it's the next thing you really need to start thinking about.

Tim Hampton:

That's awesome. Thanks Jonatan. Unfortunately, we have run out of time, so first of all, thank you, Jonatan, particularly the energy and colour that you bring to your presentation and even more impressive given you've been up for 18 hours, so thank you so much for that. Thank you very much to everyone for joining us today. Near a couple hundred participants I think, so that was fantastic and for the questions that have come through.

Our next seminar on this series is Thursday the 6th of July. It's going to be a special panel presentation organised jointly by New Zealand Treasury and New Zealand Productivity Commission and Motu Research. The session will be focused on reviewing our domestic productivity drivers and income growth and implications for the future, so really building on that productivity in a changing world. It'll be a hybrid event, so you are welcome to join us in person here, but also online will be offered.

Let me now close and farewell you with a whakataukī, a Māori proverb, Jonatan, which says that discussion, learning, understanding, and knowledge underpin the wellbeing of all people.

[Tim speaking in te reo Māori] Mā te kōrero, ka mōhio. Mā te mōhio, ka mārama. Mā te mārama, ka mātau. Mā te mātau, ka ora te iwi. Haumi e, hui e, tāiki e!

Thank you once again Jonatan. Really appreciate it and thank you everyone else for participating today. Ka kite anō.