Low Carbon China - Innovation Beyond Efficiency

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Information about Low Carbon China - Innovation Beyond Efficiency
Business & Mgmt

Published on February 21, 2014

Author: policysolutions

Source: slideshare.net


Radical innovation is essential to achieve green growth. This paper presents three case studies of business model innovation: fertilizer, lighting services and end-of-life treatment of tires. It makes the case that a culture of innovation is the basis for a low-carbon economy, which demands that we individually and collectively:
• Aspire to transformational, not incremental change;
• Adopt new behaviors and think differently.
English translation of Mandarin original (in press with the Chinese journal Plant Engineering Consultants)

  English  Translation     Low-­‐Carbon  China:  Innovation  beyond  Efficiency   ©2014  Anne  Arquit  Niederberger     1. Introduction     I  was  asked  to  address  the  subject  of  industrial  energy  efficiency  innovation  and  technology   cooperation.  However,  this  paper  stresses  the  need  to  go  beyond  energy  efficiency  and   focus  on  radical  innovation  to  bring  about  systemic  change  –  specifically  business  model   innovation  –  if  we  are  serious  about  green  growth.       Limiting  the  warming  caused  by  anthropogenic  greenhouse  gas  emissions  with  a  probability   of  >50%  to  less  than  2°C  (compared  with  the  period  1861–1880)  will  require  cumulative   CO2  emissions  from  all  anthropogenic  sources  to  stay  below  820  GtC  (3010  billion  tons  of   CO2).  Roughly  two-­‐thirds  of  this  carbon  budget  (445  to  585  GtC)  had  already  been  emitted   by  2011  (IPCC,  2013)  and  –  at  the  rate  of  emissions  recorded  for  2012  (9.7  GtC/y)  –  the   entire  budget  will  have  been  used  up  within  roughly  30  years.  This  simple  calculation   ignores  several  trends  that  could  shorten  this  timeframe,  including  continued  growth  in   emissions.       Driving  global  emissions  to  zero  on  a  30-­‐year  timescale  is  a  daunting  task  in  itself,  but  it  is   not  the  only  challenge  we  face.  UN  Secretary  General  Ban  Ki-­‐moon  has  said  that  “we  all   aspire  to  reach  better  living  conditions.  Yet,  this  will  not  be  possible  by  following  the   current  growth  model.  .  .  “  He  went  on  to  say  that  “we  need  a  practical  21st  Century   development  model  that  connects   Figure  1.    Key  Issues  of  our  Time   the  dots  between  the  key  issues  of   our  time”.  And  he  gave  some   examples  of  those  pressing  issues   (Figure  1).     What  he  referred  to  as  “connecting   the  dots”  is  about  associating,  and   associating  is  at  the  heart  of   innovation.  Because  these  societal   challenges  –  from  reducing  poverty   and  inequality  to  limiting  climate   change  and  its  impacts  and  ensuring   human  security  in  the  broadest  sense  –  are  linked  through  common  drivers  and  flows,   there  is  an  opportunity  and  a  necessity  to  innovate  the  technologies,  products,  services,   and  institutions  that  can  pave  the  way  for  improving  the  human  condition  in  a  balanced,   comprehensive  and  sustainable  fashion.  Air  conditioning  might  appear  to  be  a  reasonable   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   1    

    adaptation  to  a  warmer  world,  for  example,  but  conventional  technologies  can  exacerbate   the  problem  by  requiring  more  electricity  to  be  generated  by  combusting  fossil  fuels  and   are  in  any  case  out  of  reach  for  a  significant  share  of  the  global  population  without  access   to  power.     Error!  Reference  source  not  found.  aptly  illustrates  this  complexity  with  another  example:   China  has  managed  to  reduce  its  energy  and  carbon  intensity  significantly  over  the  past  two   decades.  But  total  CO2  emissions  nonetheless  rose  by  350%  over  the  same  period,  as  a   result  of  successful  poverty   Figure  2.    Percentage  Change  in  Critical  Indicators  1990  -­‐  2011   alleviation  efforts  and  population   growth.  This  means  that  –   although  “lower  carbon”  is  clearly   happening  today  –  a  truly  “low-­‐ carbon”  and  sustainable  economy   will  require  (disruptive)  innovation   and  solutions  that  do  not  yet  exist.     In  the  12th  Five-­‐Year  Plan  for   Economic  and  Social  Development   (2011  –  2015),  China’s  leadership   explicitly  highlighted  the   imperative  to  transform  the     economic  and  political  system  to   deliver  “higher  quality”  and  “inclusive”  economic  growth  that  is  balanced  and  sustainable.   And  the  plan  spells  out  key  strategies  and  targets  to  achieve  the  transition.  Of  particular   relevance  to  this  paper  is  the  emphasis  given  to  innovation,  including  a  specific  target  to   generate  3.3  patents  per  10,000  people  and  a  commitment  to  invest  in  seven  priority   industries  that  are  poised  to  make  a  contribution  to  green  growth,  while  moving  up  the   economic  value  chain:  energy  savings  and  environmental  protection;  new  energy;  clean   energy  vehicles;  biotechnology;  new  materials;  new  IT;  and  high-­‐end  manufacturing.  China   also  has  a  recent  history  of  establishing  its  own  and  hosting  global  corporate  R&D  centers.   But  will  China  manage  to  realize  a  sustainable  green  growth  model?  The  answer  will  be  of   existential  interest  to  us  all.       2. Innovation  Case  Studies     The  need  for  radical  new  business  models  is  illustrated  with  three  specific  examples  (Error!   Reference  source  not  found.).  The  first  is  fertilizer  production,  which  is  responsible  for   1.2%  of  global  CO2  emissions.  It  is  an  energy  and  carbon-­‐intensive  process,  with   hydrocarbons  serving  as  both  feedstock  and  energy  source.  And  chemical  fertilizer  is  a   major  and  uncertain  cost  factor  for  farmers,  due  to  global  market  price  volatility,  as  well  as   a  major  contributor  to  land  and  water  degradation.   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   2    

      The  second  example  is  the   Figure  3.    Industrial  Sector  Case  Studies   provision  of  lighting  services,   which  accounts  for  an  even   greater  share  of  global  CO2   emissions,  namely  6%.  Current   business  models  offer  bulbs  as   consumable  and  largely  throw-­‐ away  products.  Consumers   purchase  lamps/luminaires  from   retailers  and  pay  electric  bills  to   keep  the  lights  on.  Power   producers  have  a  tough  time     keeping  up  with  demand.   Efficient  lighting  options  that  could  cut  household  electricity  consumption  (especially  LED)   have  a  higher  purchase  price,  discouraging  their  widespread  adoption.       The  end-­‐of-­‐life  treatment  of  scrap  tires  is  the  third  case  study.  Tires  have  a  similar  calorific   value  to  high-­‐quality  coal.  Energy-­‐intensive  industries  (e.g.,  cement)  increasingly  incinerate   tires  as  a  supplemental  fuel  to  lower  fuel  costs  and  reduce  CO2  emissions.  In  all  three  cases,   business  model  innovation  can  deliver  better  results  for  people  and  the  planet  than  an   incremental  approach  that  strives  only  to  make  existing  processes  more  efficient  and  less   carbon  intensive.     Fertilizer  Production     China  is  the  largest  consumer  and  producer  of  nitrogen  (used  to  make  nitrogenous   fertilizers),  accounting  for  roughly  40%  of  global  production  capacity.  Emissions  from  the   production  and  use  of  synthetic  nitrogen  fertilizer  in  China  have  been  estimated  at  400–840   MtCO2e  in  2005,  accounting  for  a  staggering  8  to  16  %  of  China’s  total  energy-­‐related  CO2   emissions  (Kahrl  et  al.,  2010),  with  fertilizer  production  responsible  for  250  MtCO2e  of  the   total  (180  MtCO2e  due  to  embodied  energy  use  and  70  MtCO2e  from  fertilizer  synthesis).   The  fertilizer  manufacturing  status  quo  in  China  relies  on  anthracite  coal  as  the   predominant  feedstock  and  emits  roughly  9  tCO2  per  ton  of  N  fertilizer,  including  fertilizer   synthesis  and  embodied  energy  use  associated  with  the  coal  feedstock,  but  not  mining  or   transportation  emissions  (Kahrl  et  al,  2010).       But  its  global  warming  impact  is  not  the  only  concern;  synthetic  fertilizer  use  can  lead  to   poor  economic  and  other  ecological  outcomes.  Fertilizer  costs  have  become  one  of  the   largest  and  most  variable  expenses  of  producing  a  crop,  and  directly  affect  profits.  The   average  urea  price  in  China,  for  example,  was  15%  lower  at  the  end  of  June  2013  than  the   same  time  the  previous  year  (Error!  Reference  source  not  found.).       LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   3    

    Energy$Management$ Systems$ Fuel$switch$coal$!$ natural$gas$ Best$Practice$ Technologies$are$30%$ more$energy$efficient$ $ $ 1.6&–&3.8&tCO2/t&ammonia& Source:  Specific  emissions  derived  from  IFA  (2009)   Transformational& 94%$of$the$energy$ consumed$by$the$ fertilizer$industry$is$used$ for$ammonia$synthesis$ Only$25$–$33%$of$ greenhouse$gas$ emissions$from$fossil$ fuel$combustion$(rest$ feedstock)$ $ 2&–&5&tCO2/t&ammonia& Incremental& Status&Quo& Figure  4.    Status  quo,  Incremental  and  Transformational  Approaches  in  Fertilizer  Production   $ Cornucopia$BioRefinery$ New$business$model:$ Entire$ear$of$corn$!$ Food$(oil/protein$from$ germ)$+$Fertilizer$(bran/ cobs$gasified)$+$Fuel$ (endosperm$fermented)$ & BioAmmoniaTM&is&net& carbon&negative&       Although  China  is  among  the  most   Figure  5.    Average  Urea  Price  (China)   expensive  producers  of  nitrogen   fertilizer,  national  policies  to  facilitate   development  of  the  chemical  fertilizer   industry,  direct  income  subsidies  to   farmers  and  heavy  taxes  to  limit   exports  have  distorted  markets  and   encouraged  farmers  with  the  means   to  purchase  fertilizer  to  over-­‐use  it.   This  contributes  to  acid  rain,  water   pollution  and  the  increasing     Source:  China  National  Chemical  Information  Center   frequency  of  red  tides.     Such  policies  also  discourage  entrepreneurs  from  seeking  better,  more  holistic  approaches   to  transition  to  sustainable  agricultural  models  that  better  maintain  ecosystem  health  and   farmer  welfare.  Instead,  the  incremental  approach  calls  for  large  chemical  companies  to   implement  energy  efficiency  and  fuel  switching  measures.  Under  such  a  scenario,  emissions   could  be  cut  by  roughly  25%,  but  there  is  not  much  room  to  go  further,  due  to  the   continued  use  of  fossil  fuels  as  a  feedstock,  which  accounts  for  over  70%  of  the  total   emissions  from  nitrogen  fertilizer  production  in  China.  Modern  plants  are  rapidly   approaching  the  theoretical  minimum  energy  consumption,  making  it  difficult  to  get  below   3.8  tCO2/tNH3  with  coal  as  the  feedstock  (IFA,  2009).       Only  a  transformational  approach  –  inspired  by  the  imperative  of  and  opportunities  to   address  multiple  challenges  simultaneously  –  can  eliminate  emissions  altogether  (Figure  4).   SynGest  is  a  US-­‐based  start-­‐up  company  that  has  adopted  a  completely  new  business   model,  driven  by  thinking  about  the  best  way  to  use  corn,  while  benefitting  farmers.  The   process  can  use  any  source  of  untreated  biomass,  and  its  calorific  value  is  irrelevant  for   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   4    

    fertilizer  production.  This  offers  farmers  the  prospect  of  reducing  or  eliminating  expenses   for  chemical  fertilizers,  as  well  as  a  new  income  stream  (selling  agricultural  waste  as  a   renewable  raw  material  for  organic  fertilizer  production),  while  eliminating  the  pollution   caused  by  open  burning  of  agricultural  waste  and  even  improving  soil  quality  (the  process   produces  a  small  amount  of  the  soil  conditioner  biochar).  The  SynGest  process  yields  an   impressive  slate  of  end  products,  including:   • Anhydrous  ammonia  fertilizer  (0.1  ton  per  year  for  each  acre  of  corn,  plus  a   transportable  fuel  that  is  the  perfect  carrier  of  hydrogen);   • Food  grade  corn  oil  and  high  protein  food  for  human  consumption;   • Riboflavin  rich  dry  stillage  (animal  feed);   • Butanol  (drop-­‐in  fuel  for  internal  combustion  and  diesel  engines);   • Biochar.     The  SynGest  technology  can  also  address  issues  that  have  arisen  in  conjunction  with   growing  and  distilling  corn-­‐based  ethanol,  which  uses  immense  amounts  of  water   (contributing  to  river  and  aquifer  depletion),  energy  (some  scientists  argue  that  more   energy  goes  into  making  a  gallon  of  ethanol  than  is  contained  in  that  gallon)  and  fertilizer   production  and  use,  adding  to  harmful  runoff.  As  pointed  out  by    Zhao  Youshan,  Director,   Commercial  Petroleum  Flow  Committee,  China  General  Chamber  of  Commerce:  “Livestock   breeders  in  China  are  facing  feed  shortages  as  ethanol  fuel  makers  –  prompted  by   government  subsidies  of  roughly  1,900  yuan  ($279)  per  tonne  of  ethanol  they  produce  –   have  rushed  to  buy  corn.”  SynGest’s  syngas  technology  can  make  optimal  use  the  whole   ear  of  corn  to  produce  the  “3  Fs”  (food,  fertilizer  and  fuel)  simultaneously.  This  eliminates   the  food  vs.  fuel  dilemma  and  produces  net  carbon  negative  ammonia  fertilizer.     Lighting  Services     The  second  example  of  business  model  innovation  is  lighting  (Figure  6).  Until  the  advent  of   compact  fluorescent  lamp  (CFL)  technology,  the  status  quo  had  been  incandescent,  throw-­‐ away  technology  with  a  luminous  efficacy  of  roughly  15  lumen/W.  CFLs  are  four  times  more   efficient  than  incandescent  lamps,  and  quality  bulbs  can  operate  as  long  as  15,000  hours,   but  the  introduction  of  the  technology  did  not  lead  to  any  major  upheaval  in  the  lighting   market.  In  fact,  consumer  reaction  to  early  CFL  technology  was  often  negative,  due  to  the   poor  quality  and  performance  of  products,  as  well  as  concerns  about  the  mercury.  The   resulting  market  spoilage  effect,  combined  with  the  current  much  lower  price  of  CFLs,   makes  it  hard  for  solid-­‐state  lighting  technology  –  with  its  longer  lifetime  and  higher  retail   price  –  to  penetrate  the  market.     LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   5    

    Consumers*purchase* inefficient*lamps/ luminaires*from* retailers*and*pay*high* electric*bills* * 14&lumen/W* Incandescent*!*CFL* technology* No*change*in* manufacturer*or*utility* business*model* Slow*uptake*of*LED* and*widening*energy* supply*gap* * 60&lumen/W& Transformational& Replacement*bulbs* are*mass*market* consumables* Incremental& Status&Quo& Figure  6.    Status  quo,  Incremental  and  Transformational  Approaches  to  Lighting  Services   Inefficient*!*LED* technology* Utilities*integrate*LED* technology*into*their* business*model** LED*as*infrastructure* * * 90&lumen/W*   Source  luminous  efficacy:  http://www.designingwithleds.com/ledfluorescentincandescent-­‐efficacy-­‐table/     CFLs  brought  an  incremental  improvement  in  efficiency,  but  not  a  fundamental  market   transformation.  Since  2008,  a  growing  number  of  countries  have  begun  to  adopt   regulations  to  phase-­‐out  inefficient  incandescent  techology,  including  China,  where  a  ban   on  the  import  and  sale  of  all  incandescent  lamps  above  100W  came  into  force  on  1  October   2012  (further  restrictions  on  smaller  lamp  sizes  will  come  into  force  later).  These  policies   are  driving  a  profound  transition  in  the  lighting  market,  with  rapid  advances  in  solid-­‐state   lighting  technology  (Climate  Group,  2012;  McKinsey,  2012;  World  Bank,  in  press).     The  fact  that  LEDs  are  long-­‐lived  and  contollable,  makes  them  well  suited  as  an  integral   component  of  electrified  building  systems,  rather  than  as  a  throw-­‐away  consumer  good.   We  have  already  seen  this  trend  in  the  off-­‐grid  segment,  as  solar  home  system  providers   offer  super-­‐efficient  LED  lights  as  part  of  the  package.  For  energy  service  companies   (ESCOs),  LED  lighting  has  already  become  a  standard  component  when  working  with   government  and  commercial  customers,  including  LED  streetlighting,  indoor  lighting  and   controls.  Grid  electricity  suppliers  have  sometimes  resorted  to  large-­‐scale  programs  to   distribute  CFLs  as  a  short-­‐term  fix  to  severe  supply  shortages,  but  LED  technology  presents   an  opportuntity  for  them  to  be  more  proactive  (World  Bank,  in  press).  Africa’s  largest   utility,  Eskom,  began  distributing  LED  downlights  free  of  charge  under  its  Switch  and  Save   Residential  Mass  Rollout  and  has  received  authorization  to  invest  ZAR  834  million  in   residential  LED  programs  in  the  2013/14  –  2017/18  period.       Even  without  funding  earmarked  for  demand-­‐side  management  programs,  utilities  in   developing  countries  could  expand  their  business  model  by  directly  installing  LEDs  with   new  electricity  connections  and  making  it  easy  for  their  customers  to  replace  inefficient   lighting.  It  could  be  particularly  attractive  for  utilities  in  Africa  to  consider.  According  to  a   2013  analysis  by  the  International  Monetary  Fund,  effective  power  tariffs  are  set  30%   below  the  historical  average  cost  of  supplying  electricity  in  sub-­‐Saharan  Africa  on  average   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   6    

    (excluding  South  Africa).  In  addition,  technical  line  losses  average  25%  and  the  average   collection  rate  was  only  85%,  with  as  many  as  60%  of  poor  households  not  paying  their   electricity  bills  (IMF,  2013).  Under  such  conditions,  and  given  the  sub-­‐Saharan  Afican   average  electricity  tariff  of  USS  0.17/kWh,  every  kWh  of  power  used  represents  a  fiscal  loss.     Let  us  take  the  example  of  a  community  of  100,000  minimum  access  households  living  in  an   urban  slum  in  Africa  (Table  1),  each  of  which  would  use  65  kWh/y  of  electricity  to  power  a   single  40W  incandescent  lamp  and  share  a  60W  TV  with  three  other  households  for  three   hours  per  day.  Assuming  that  60%  of  these  low-­‐income  households  had  illegal  electricity   connections  and  did  not  pay  for  their  electricity,  the  utility  would  lose  just  over  US$1   million  each  year  on  the  electricity  supplied  (or  US$11  per  household),  as  a  result  of  30%   underpricing,  60%  non-­‐paying  customers  and  25%  line  losses     Table  1.    Impact  of  an  “LED-­‐Fueled”  Efficiency  Power  Plant   Source:  The  author,  to  be  included  in  World  Bank  (in  press)       If  the  utility  instead  outfitted  these  grid-­‐connected  households  with  a  single  high-­‐quality   LED  that  delivered  the  same  450  lumens  using  only  7.5  Watts  at  a  cost  of  US$10  per  bulb   (“LED  Current  Technology”  scenario),  the  financial  gains  to  both  the  utility  and  the  paying   customers  would  be  significant.  The  utility  benefits,  because  losses  associated  with  meeting   electricity  demand  are  avoided  as  demand  is  reduced,  and  because  of  the  assumption  that   the  share  of  households  that  can  afford  to  pay  their  electric  bills  increases  from  40%  to   70%.     In  addition,  the  electricity  consumption  of  these  100,000  households  would  decrease  by   55%,  immediately  freeing  up  enough  energy  (3.6  GWh/y)  to  double  the  number  of   customers  served  or  the  amount  of  energy  that  a  household  could  afford  to  purchase,  with   the  same  installed  capacity.  Better  results  could  be  achieved  under  an  “LED  2015   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   7    

    Technology”  scenario,  based  on  expected  technology  advances  in  the  next  few  years  (i.e.,   LEDs  that  cost  US$5/bulb  and  use  3.5  W/450  lumen).   A  forthcoming  World  Bank  report  makes  the  case  that  utility  companies  in  Sub-­‐Saharan   Africa  could  become  profitable,  if  they  adapted  their  business  models  to  include   constructing  efficiency  power  plants  (EPPs)  by  outfitting  households  with  LEDs  (World   Bank,  in  press).  This  would  have  other  green  economy  benefits,  as  well:   • Households  would  see  dramatic  cuts  in  their  electricity  bills;   • Utilities  could  use  bulk  procurement  to  ensure  LED  quality  and  drive  down  prices;   • Peak  demand  and  grid  losses  would  be  reduced;   • Utilities  could  serve  more  households  and  businesses  with  the  same  installed   capacity.     Best  Use  of  Scrap  Tires     The  final  example  is  scrap  tires.  The  tire  industry  uses  70%  of  all  natural  rubber  produced   worldwide,  and  consumption  is  expected  to  double  within  the  next  30  years  (ETRMA,   2012).  Applications  that  recycle  or  recover  rubber  are  therefore  critical  to  preserve  this   valuable  resource  –  and  can  result  in  significant  greenhouse  gas  emissions  reductions.     Barring  specific  legislation,  tires  are  generally  treated  as  waste  at  end-­‐of-­‐life  and  either   discarded  or  sent  to  landfill  (Figure  7).  Countries  with  waste  and  resource  management   legislation  have  achieved  an  incremental  improvement,  by  encouraging  the  use  of  scrap   tires  for  civil  engineering  purposes  (e.g.,  shredding  tires  for  use  as  a  drainage  layer  in   landfills)  or  as  an  alternative  fuel  to  be  co-­‐combusted  in  cement  production.       However,  there  is  a  better  way:  material  recycling.  The  material  recycling  route  reduces   potential  greenhouse  gas  emissions  by  roughly  1  t  CO2e  per  ton  of  scrap  tires  recycled   relative  to  the  cement  kiln  co-­‐incineration  route  and  by  1.8  t  CO2e,  compared  with  civil   engineering  applications  (Arquit  Niederberger,  Shiroff  and  Raahauge,  2012).  Genan   Business  &  Development  A/S  has  developed  a  mechanical  grinding  processes  that   generates  only  1%  waste  from  scrap  tires,  with  recovered  materials  consisting  of  67%   rubber  powder  and  granulate,  18%  steel  and  14%  textile.  Recycling  avoids  several   processes,  in  particular,  production  of  virgin  polymers,  which  saves  about  50  GJ  per  ton  of   tires,  and  the  iron  fraction  eliminates  the  need  for  400  kg  of  iron  ore  (Arquit  Niederberger,   Shiroff  and  Raahauge,  2012).     LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   8    

    Figure  7.    Tire  End-­‐of-­‐Life  Pathways:  Co-­‐Incineration  vs.  Material  Recycling   BEST%USE%OF%SCRAP%TIRES?% !  Transformational! approach! ! Avoids!0.8!tCO2e/! t!scrap!tires!! compared!to!! co<incineration!! !!Incremental!approach! ! Arquit!Niederberger,!Anne,!Shiroff,!Samuel,!Raahauge,!Lars!(2012):!Implications!of!Carbon!Markets! for!Implementing!Circular!Economy!Models.!ICAE!2012!(Suzhou)! !     Advanced  tire  recycling  facilities  have  been  built  in  Europe  and  the  USA,  but  many   countries  still  encourage  co-­‐incineration  in  cement  plants,  which  makes  it  virtually   impossible  for  a  recycling  facility  to  operate  profitably.  In  China,  resource  scarcity  and   environmental  considerations  led  the  Ministry  of  Industry  and  Information  Technology  to   issue  “Guidance  on  comprehensive  use  of  old  tires”  at  the  end  of  2010,  which  laid  out   principles,  specific  objectives  (e.g.,  increasing  recycled  rubber  production  to  3  Mt  annually   and  rubber  powder  output  to  100  Mt)  and  policies.  With  the  rapid  development  of  the   national  economy  and  the  gradual  improvement  of  living  standards,  China  has  become  a   large  consumer  of  rubber  (accounting  for  >30%  of  global  consumption),  and  there  is  a  large   and  growing  gap  between  the  domestic  rubber  supply  and  demand  in  China  (>70%  of   natural  rubber  and  >40%  of  composite  rubber  was  imported  in  2011).  Since  2001,  tire   production  in  China  has  grown  over  15%  annually,  reaching  470  million  in  2012.       Were  the  240  million  end-­‐of-­‐life  tires  that  were  generated  in  China  in  2009  recycled,  rather   than  used  for  energy  recovery  or  civil  engineering  applications,  1.9  –  4.3  MtCO2e  emissions   could  be  avoided  (Arquit  Niederberger,  Shiroff  and  Raahauge,  2012).  And  there  are  other   alternatives,  as  well.  In  Europe,  Michelin  Fleet  Solutions  leases  tires  and  offers  tire   upgrades,  maintenance  and  replacement  to  optimize  the  performance  of  trucking  fleets   and  to  lower  their  total  cost  of  ownership.  With  this  business  model,  Michelin  can  collect   tires  when  they  wear  out  and  can  extend  their  technical  utility  by  retreading  or  regrooving   them  for  resale.  The  company  estimates  that  retreads,  for  example,  require  half  of  the  raw   materials  new  tires  do  (Nguyen,  Stuchtey  &  Zils,  2014).  On  the  R&D  front,  Pirelli  is   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   9    

    collaborating  with  Genan  to  develop  a  de-­‐vulcanisation  process  that  permits  post-­‐ consumer  tires  to  be  used  as  a  milled  material  in  new  tires,  closing  the  virgin  rubber   material  loop.       3. Culture  of  (Disruptive)  Innovation     The  current  linear  economic  model  is  fundamentally  unsustainable,  regardless  of  how   efficient  it  becomes,  and  a  radical  shift  to  a  circular  economy  model  is  urgently  needed.  The   three  case  studies  presented  above  show  that  business  model  innovation  is  needed  to   achieve  low-­‐carbon  economies  –  and  they  suggest  that  changes  in  enterprise  business   models  can  transform  entire  industries  and  catalyze  broader  systems  change.     Conceptually,  China’s  leadership  is  quite  advanced  in  its  circular  economy  thinking.  Closed-­‐ loop  material  use  along  with  industrial  symbiosis  –  co-­‐locating  or  connecting  industries  so   that  a  waste  or  co-­‐product  from  one  becomes  an  input  to  another  –  have  become  common   considerations  in  planning  economic  development  zones.  Yet  government  intent  is  not   enough.       A  culture  of  innovation  is  the  basis  for  a  low-­‐carbon  economy.  This  demands  that  we   individually  and  collectively:   • Aspire  to  transformational,  not  incremental  change;   • Adopt  new  behaviors  and  think  differently.     Business  model  innovation  to  achieve  long-­‐term  sustainability  has  often  come  from   startups,  as  in  the  SynGest  example.  It  is  much  more  challenging  to  transform  a  working   business  model,  due  to  vested  interests.  However,  it  is  the  incumbent  fossil  thermal   electricity  generators  and  chemical  and  petrochemical  industry  that  need  to  decarbonize   on  a  massive  scale.  Government  attempts  to  correct  the  failure  of  markets  to  properly  price   resource  depletion  and  greenhouse  gas  emissions  have  therefore  universally  been  too   timid.  They  may  have  encouraged  operational  efficiency,  but  they  have  failed  to  encourage   fundamental  changes  in  business  models.  Researchers  have  found  that  –  in  the  absence  of   substantial  innovation  –  the  financial  performance  of  firms  declines  as  their  environmental,   social  and  governance  (ESG)  performance  improves  (Eccles  &  Serafeim,  2013).       Companies  can  only  create  profitable  opportunities  to  transition  to  circular  economy   models,  if  they  invent  new  products  processes,  and  business  models.  In  addition  to   removing  barriers  to  change  (e.g.,  incentive  systems  and  investor  pressure  that  emphasize   short-­‐term  performance),  therefore,  it  will  be  critical  to  nurture  the  behaviors  and  skills   that  set  innovative  entrepreneurs  &  managers  apart  from  execution-­‐oriented,  results-­‐ driven  managers  (Table  2).       LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   1   0  

    Table  2.    Innovator's  DNA   Questioning   Observing   Networking   Experimenting   Associating   Asking  questions  that  challenge  common  wisdom   Scrutinizing  customer,  supplier,  and  competitor  behaviors  to  identify  new  ways  of   doing  things   Meeting  people  with  different  ideas,  backgrounds,  and  perspectives   Constructing  interactive  experiences  that  provoke  unorthodox  responses  to  see  what   insights  emerge   Connecting  the  unconnected  across  questions,  problems,  or  ideas  from  unrelated  fields   Source:  Christensen,  Dyer  &  Gregersen  (2011)     These  skills  and  behaviors  have  been  referred  to  as  the  “innovator’s  DNA”  (Christensen,   Dyer  &  Gregersen,  2011),  and  they  can  be  encouraged.  Engineers  have  an  established   capability  to  deliver  incremental  innovation;  radical  innovations,  however,  require  new   knowledge  and  skills.  CAPEC  is  well  positioned  to  advocate  for  changes  in  the  way  in  which   engineers  are  educated  and  trained,  as  well  as  to  foster  a  culture  of  innovation  among   Chinese  plant  engineers.  As  called  for  in  the  UK  context  (Royal  Academy  of  Engineering,   2012),  CAPEC  can  consider  including  the  responsibility  of  engineers  to  address  radical   innovation  and  drive  the  innovation  economy  in  its  professional  competency  and  training   functions.  It  can  serve  a  liaison  function  between  institutions  of  higher  education  and   employers  to  encourage  greater  focus  on  radical  innovation  through  engineering.     Transformational  innovations  are  essential,  if  China  is  to  achieve  the  12th  Five-­‐Year  Plan   vision  of  an  “ecological  civilization”,  which  Hu  Jintao  has  suggested  can  be  realized  by   pursuing  development  “…in  a  scientific  way  that  puts  people  first  and  is  comprehensive,   balanced  and  sustainable”.  Yet  individual  corporate  actions  on  their  own  won’t  suffice  to   create  a  circular  economy  at  scale,  given  the  systemic  nature  of  the  barriers  (Nguyen,   Stuchtey  &  Zils,  2014).  Government  policymakers  must  focus  society’s  attention  on   transformational  change;  this  will  inspire  enterprises  and  individuals  to  innovate  the   stepping  stones  of  an  enduring,  high-­‐quality  development  path.  There  is  a  real  danger  that   a  well  intentioned  rush  to  achieve  incremental  improvements  could  actually  hinder  the   transformational  approaches  needed  to  support  circular  economy  models  and  green   growth  (Arquit  Niederberger,  Shiroff  &  Raahauge,  2012).         Author:     Anne  Arquit  Niederberger,  Ph.D.   Affiliation:   Principal,  Policy  Solutions   Contact:   www.policy-­‐solutions.com     This  paper  is  the  English  translation  of  a  paper  to  be  published  in  Mandarin  in  the  journal  Plant   Engineering  Consultants,  based  on  a  presentation  at  CAPEC’s  2013  International  F orum  on   Low-­‐Carbon  Industry  and  Green  Economy,  held  in  Beijing  on  20  November  2013.   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   1   1  

  4.   References   Arquit  Niederberger,  A,  Shiroff,  S,  and  Raahauge,  L,  2012:  Implications  of  Carbon  Markets   for  Implementing  Circular  Economy  Models.  White  Paper,  ICAE  2012  (Suzhou).   Christensen,  C.M.,  Dyer,  J.,  and  Gregersen,  H.,  2011:  The  Innovator's  DNA:  Mastering  the   Five  Skills  of  Disruptive  Innovators.  Harvard  Business  Review  Press.   Climate  Group,  2012:  Lighting  the  Clean  Revolution:  The  Rise  of  LEDs  and  What  it  Means  for   Cities.  London:  The  Climate  Group,  61  pp.   Eccles,  R.,  and  Serafeim,  G.,  2013:  The  Performance  Frontier:  Innovating  for  a  Sustainable   Strategy,  Harvard  Business  Review  91  (5),  50–60.   ETRMA,  2012:  End-­‐of-­‐Life  Tires  –  A  Valuable  Resource  with  Growing  Potential  (2011   Edition).  Brussels:  European  Tyre  and  Rubber  Manufacturers’  Association.   IFA,  2009:  Energy  efficiency  and  CO2  emissions  in  ammonia  production,  Feeding  the  Earth   (Issue  Brief).  International  Fertilizer  Industry  Association,  Paris.   IMF,  2013:  Energy  Subsidy  Reform  in  Sub-­‐Saharan  Africa:  Experiences  and  Lessons,  pre-­‐ publication  draft.  Washington,  D.C.:  International  Monetary  Fund.     IPCC,  2013:  Summary  for  Policymakers.  In:  Climate  Change  2013:  The  Physical  Science  Basis.   Contribution  of  Working  Group  I  to  the  Fifth  Assessment  Report  of  the  Intergovernmental   Panel  on  Climate  Change  [Stocker,  T.F.,  D.  Qin,  G.-­‐K.  Plattner,  M.  Tignor,  S.K.  Allen,  J.   Boschung,  A.  Nauels,  Y.  Xia,  V.  Bex  and  P.M.  Midgley  (eds.)].  Cambridge  University  Press,   Cambridge,  United  Kingdom  and  New  York,  NY,  USA.   Kahrl,  F,  Li,  YJ,  Su,  YF,  Tennigkeit,  T.,  Wilkes,  A.,  and  Xu,  JC,  2010:  Greenhouse  Gas  Emissions   From  Nitrogen  Fertilizer  Use  In  China.  Environmental  Science  &  Policy,  13(8),  688-­‐694.   McKinsey,  2012:  Lighting  the  way:  Perspectives  on  the  Global  Lighting  Market.,  2nd  Edition.   McKinsey  &  Company,  57  pp.   Nguyen,  H.,  Stuchtey,  M.,  and  Zils,  M.,  2014:  Remaking  the  industrial  economy,  McKinsey   Quarterly,  February  2014.   Royal  Academy  of  Engineering,  2012:  Educating  Engineers  to  Drive  the  Innovation  Economy.   London:  The  Royal  Academy  of  Engineering,  28  pp.   World  Bank,  in  press:  Market  Transformation  for  Energy  Efficient  Lighting:  Focus  on  Africa.   Washington,  D.C.:  The  World  Bank.   LOW-­‐CARBON  CHINA:  INNOVATION  BEYOND  EFFICIENCY   1   2  

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