Rationale for policy interventions in sustainability transitions

Transcription

1 Rationale for policy interventions in sustainability transitions Timothy J Foxon Sustainability Research Institute, University of Leeds, Leeds, LS2 9JT, U.K. t.j.foxon@leeds.ac.uk From September 2015: SPRU, Jubilee Building, University of Sussex, Falmer, Brighton, BN1 9SL, U.K. Paper for 6 th International Sustainability Transitions (IST) Conference, SPRU, University of Sussex, August 2015 Abstract A sustainability transition will involve government, market and civil society actors in different roles, though which type of actor plays the dominant role in framing the logic of the transition is likely to influence the form and direction of any transition. In the author s previous work on transition pathways for a UK low carbon electricity system, the implications of this were explored by analysing potential market-led, government-led and civil society-led pathways (Foxon, 2013). Building on that analysis, this paper explores the rationale for policy intervention in sustainability transitions, and the implications of this for realising any of these pathways. Under the current dominant market-led framing, the rationale for policy intervention is typically framed as correcting for market failures, e.g. the UK Government s Carbon Plan states that The Government should help to tackle market failures and unblock barriers to investment to encourage growth in newer technologies (HM Government, 2011, p. 14). This approach starts from the view that markets deliver socially optimal and efficient outcomes, and so governments should only intervene to correct for failures that prevent markets from operating in this way. However, various authors coming from different perspectives have challenged this approach as a basis for action. Innovation system theorists have argued for systems failure as a basis for action (Smith, 2000; Edquist, 2001; Foxon, 2007). For example, Smith (2000) identified four areas of systemic failure, that could provide a rationale for policy intervention: failures in infrastructure provision and investment; transition failures; lock-in failures and institutional failures. Authors from a heterodox economics perspective have similarly argued that the rationale for investment in and valuation of infrastructure requires going beyond traditional market failures relating to externalities, public goods and natural monopolies. Brown et al. (2014) argue that characteristics of long-term infrastructure relating to uncertainty, overlapping and interacting systems, non-marginal effects and endogenous preferences require a more systems based understanding of rationales for policy intervention. Finally, innovation economists have argued that a market failure approach plays down the key role that public investments have played in many recent technological advances, including the internet and smart phones (Mazzucato, 2013). Mazzucato and Penna (2015) argue that a more long term, visionary mission-oriented policy approach is needed for framing policy interventions to meet societal goals, including the large-scale deployment of green technologies. The paper considers the implications of these arguments for policy interventions to promote a sustainable low carbon transition. It argues that the societal challenge of achieving a low carbon transition, and the complexity and systemic nature of changes to energy systems and infrastructures that this implies, requires a more systems based rationale for policy interventions. Finally, it speculates on whether this approach could be incorporated into the business case analysis of new large government funded projects (including strategic, economic, financial, commercial and management aspects of the case), increasingly being used by the UK Treasury (HM Treasury, 2013).

2 1. Introduction Different possible sustainability transition pathways will involve government, market and civil society actors in different roles (Foxon, 2013), though, in any pathway, national governments will play an important in facilitating and/or driving change. This raises the question of the rationale for government action to promote transformative change for sustainability. Under the current dominant political and economic market-led framing, the rationale for policy intervention is typically framed as correcting for market failures, e.g. the UK Government s Carbon Plan states that The Government should help to tackle market failures and unblock barriers to investment to encourage growth in newer technologies (HM Government, 2011, p. 14). However, various authors coming from different perspectives have challenged this approach as a basis for action, and promoted the concept of systems failures as a complement or alternative to the market failure rationale (Bleda and del Rio, 2013). This paper examines these ideas, in relation to the call for a more long term, visionary mission-oriented policy approach for framing policy interventions to meet societal goals, including the large-scale deployment of green technologies (Mazzucato and Penna, 2015). Finally, it considers whether it recent broadening of the rationale used by the UK Treasury to evaluate the business case for new large government funded projects (including strategic, economic, financial, commercial and management aspects of the case) (HM Treasury, 2013) could provide an opportunity for the greater incorporation of systems thinking into government decision making and rationales for action to promote a sustainability transition. This draws on the author s earlier thinking, with colleagues, on a systems approach to sustainability innovation (Foxon et al., 2005a,b; Foxon, 2007; Foxon and Pearson, 2008), including a paper presented at the SPRU 40 th Anniversary conference (Foxon, 2006). 2. Systems thinking for sustainability transitions As discussed by Dodgson et al. (2011), despite the development of the National Innovation Systems (NIS) concept and its increasing use by international organisations such as the OECD, systems thinking is less applied in practice to inform innovation policy at a national level. This is partly due to the continuing dominance of neo-classical economic thinking, particularly amongst national treasuries, but also as the clarity of market failure justifications contrasts markedly with rather nebulous innovation system approaches (Dodgson et al., 2011, p. 1146). The market failure rationale argues that, conditions of perfect competition would lead to an efficient and socially optimal allocation of resources in an economy, and so policy intervention is only justified when these conditions fail to hold. Two widely accepted failures relate to the public good nature of knowledge (Arrow, 1962), and the problem of negative externalities, such as social and environmental impacts, that are not incorporated into market prices. This leads to justification for policy measures to increase investment in R&D for the production of new knowledge, and for internalisation of externalities, for example, by pricing carbon emissions through a tax or trading scheme. However, from the perspective of innovation systems as complex evolving systems, this provides an inadequate justification for action, as it neglects institutional factors, networking between actors, and fundamental uncertainties relating to innovation. It also implicitly assumes that these interventions are merely aiming to restore the efficient workings of markets, and that socially optimal outcomes simply reflect the sum of individual preferences. It leaves no space for the steering or guiding of innovation processes towards socially agreed goals, such as sustainability. Thus, a systems thinking perspective on innovation seems to be more compatible with justifying government action for the promotion of a sustainability transition. Useful work has done in this area examining technological innovation systems (TIS) for renewable energy technologies, in particular justifying policy actions to address systems failures in these systems (Foxon et al., 2005a), or to ensure the fulfilment of functions shown to be necessary for successful innovation systems (Jacobsson and Bergek, 2004; Bergek et al., 2008). However, this work does not enable a wider perspective on the role that innovation plays in economic systems, such as arguments relating to job creation, or to address how more strategic policy interventions should be justified to promote socially agreed goals, whilst trading off multiple social, environmental and economic aims.

3 Building on the evolutionary economic concept of socio-economic systems as complex, evolutionary and knowledge-based (Dopfer and Potts, 2008, 2009), Bleda and del Rio (2013) argue that policy interventions are justified to address systemic failures relating to knowledge coordination and knowledge creation. Deep and surface knowledge coordination failures relate to failures to coordinate necessary changes in institutions or behavioural practices with new technologies, such as changes in user routines needed for the adoption of plug-in hybrid electric vehicles, or failures in learning and adaptation processes that prevent the diffusion of a new technology. Knowledge creation failures would be addressed by keeping these knowledge coordination structures open to further development and change. This view thus puts greater emphasis on the need for policy actions to promote complementary institutional changes and enhancement of actors capabilities to respond to and drive change through entrepreneurial and adaptive activities. This gives a richer perspective for action, but further work is needed to show how this approach could inform particular policy interventions. As Bleda and del Rio (2013) acknowledge, these knowledge coordination failures for new technologies due to misaligned technical, organisational or institutional rules provides a similar, complementary perspective to that of misalignments between niche innovations and socio-technical regimes in the multi-level perspective on transitions (Geels, 2002). Weber and Rohracher (2012) also suggest combining insights from innovation systems and multilevel perspective in a comprehensive failures framework to provide justification for policies to promote transformative change. They propose that four types of market failure: information asymmetries, knowledge spill-over, externalisation of costs and over-exploitation of commons, and four types of system failure, identified from an innovation systems perspective (Woolhuis et al., 2005): infrastructural failure; institutional failures; interaction or network failures; and capabilities failure, should be complemented by four types of transformational failures, relating to goal-oriented transformative change. These are directionality failure, relating to specification of the direction of transformative change; demand articulation failure, relating to lacking of attention to user needs to enable the uptake of new innovations; policy coordination failure, relating to a lack of coordination between innovation and other policies, such as sectoral policies or tax policies; and reflexivity failure, relating to the need for an open and discursive approach to address complexity, uncertainty and ambiguity inherent to innovation and change. There are clearly overlaps and complementarities here with the concepts of knowledge coordination failures and knowledge creation failures proposed by Bleda and del Rio, which could usefully be explored. There appears to be a risk, though, that this perspective could again be criticised for providing an unclear guide for policy actions, compared to the relative simplicity of the market failure framework. As Weber and Rohracher (2012) acknowledge, the whole formulation in terms of failures is problematic, as it suggests comparison to an ideal market or system, but they argue that the notion of failures is so pervasively used in policy-making as well as in economics that it would be very challenging to use a completely different language (Weber and Rohracher, 2012, p. 1042). This suggests that policy guidance for promoting transformative change may well need to challenge fundamental concepts and language, rather than being presented in terms of a more general failures framework. 3. Alternative rationales for policy interventions In this section, we discuss three alternative rationales for policy interventions to promote sustainability transitions: innovation systems failures ; systems of provision failures and mission oriented policy approach. This aims to identify useful building blocks for an alternative approach to guiding transformative change for sustainability from a complex evolving system perspective Innovation systems failures As discussed above, the systems of innovation approach leads naturally to a rationale for policy intervention based on systems failures. This was clearly articulated by Edquist (2001), who argued that systems failures may be defined in terms of two conditions for public intervention in a market economy:

4 (a) a problem must exist, i.e. a situation in which market mechanisms and firms fail to achieve objectives that have been socially-defined, through a public policy process; and (b) the state and its agencies must also have the ability to solve or mitigate the problem effectively (i.e. the issue of potential government and bureaucratic failure must be addressed). This would still seem to be a useful starting point. To apply this in practice, Edquist (2001) advocated undertaking concrete empirical and comparative analyses of innovation systems to identify systems failures that could be rectified. Similarly drawing on innovation systems approaches, K. Smith (2000) identified, in addition to market failures relating to the under-provision of knowledge, four areas of systemic failure, which could provide a rationale for policy intervention: (1). Failures in infrastructure provision and investment: Both physical infrastructures, such as for energy and communications, and science-technology infrastructures, such as universities, technical institutes and regulatory agencies, are important parts of innovation systems. However, because of their large scale, indivisibilities and very long time horizons of operation, they are unlikely to be sufficiently provided by private investors, and so there is a case for public support for infrastructure provision. (2). Transition failures : Because existing firms, especially small firms, are necessarily quite limited in their technological capabilities and horizons, they are likely to experience great difficulties in responding to technological changes. These changes may be due to developments outside firms area of expertise, changes in technological opportunities or patterns of demand which push the market into new areas of technology, or major shifts in technological regimes or paradigms. Public policies may be used to help firms to cope with such changes. (3). Lock-in failures: Path dependence, leading to lock-in of existing technologies, arises because of system or network externalities, combined with the fact that technologies are closely linked to their social and economic environment. Hence, new technologies must compete not only with components of an existing technology, but with the overall system in which it is embedded. Similarly, industries and socio-economic systems can get locked-in to a particular technological paradigm. This requires public policies to generate incentives for new technologies or technological systems, and to overcome barriers created by the prevalence of incumbent technology or system. (4). Institutional failures: The set of public and private institutions, regulatory systems and the policy system creates a framework of opportunities and barriers to innovation by firms. Hence, the performance of these institutions and systems in regard to innovation should be monitored and assessed, and if they are judged to be creating unnecessary barriers, this would provide a rationale for policy changes or interventions. These failures most clearly relate to systems failures in the Weber and Rohrachher (2015) framework, but the transition failures are more aligned to the transformational directionality failure.

5 3.2. Systems of provision failures Authors from a heterodox economics perspective have similarly argued that the rationale for investment in and valuation of infrastructure requires going beyond traditional market failures relating to externalities, public goods and natural monopolies. Drawing on a systems of provision framework (Fine, 2002; Bayliss et al., 2013), Brown et al. (2014) argue that characteristics of longterm infrastructure, which give rise to problems with investment in and valuation of infrastructure, require a more systems based understanding of rationales for policy intervention. These include: (1) Systematicity: Infrastructure is identified as those systems or networks that provide goods and services that are in some sense basic or fundamental; that is, they are necessary for economic activity to take place and for people to participate in society (Brown and Robertson, 2014, p. 8). This commonly includes systems for provision of energy, water, mobility, housing services etc, which typically consist of both physical components, e.g. pipes and wires, and institutional components, e.g. market and regulatory frameworks, designed to enable effective and efficient provision of these services to users. Because of physical and institutional interconnectivities and the public good (largely nonrival and non-excludable ) nature of this provision, Brown et al. (2014) argue that infrastructure is best understood as a system of systems serving the wider socioeconomic system as a whole, rather than any one private actor. This implies that infrastructure investment requires systems-level rather than individual project-based appraisal. (2) Uncertainty: Uncertainty is particular relevant for infrastructure investment because of the long duration of most infrastructure usage. In a neo-classical perspective, uncertainty is usually understood as calculable risk, in which it is possible to assign probabilities to future events. In the 1930s, Knight argued that, in many cases, investment and innovation involves deep or fundamental uncertainty, in which it is not possible to anticipate or assign probabilities to future events. This distinction was taken up by Keynes, in his argument that investors follow their animal spirits, i.e. intuition and guesswork, because the future is fundamentally uncertain. (3) Non-marginal effects: The systemic character of infrastructure means that it can be thought of as a bridge between micro and macro level economic analyses. This means that infrastructure may have non-marginal effects, i.e. influencing macro level variables, such as the rate of economic growth, as well as micro level variables, relating to allocation within the economy. This can be seen in agglomeration effects, i.e. efficiencies that arise from clustering of economic activities, enabled by infrastructure provision. A particularly relevant example for sustainability transitions is that of climate change mitigation, where growth paths may be influenced by investment in low carbon technologies and systems. This suggests the need for analysis of dynamic and systemic efficiency, rather than static efficiency. (4) Endogenous preferences: Standard valuation techniques such as stated or revealed preferences, based on neo-classical approaches, assume that user preferences are fixed and exogenous. However, over the long lifecycle of infrastructure, it is likely that preferences, norms and cultures of consumption are moulded by what is provided. The phenomenon of suburbanisation in the 1950s and 1960s shows how preferences relating to mobility, housing and quality of life were shaped by the provision of new transport infrastructures, enabled by access to cheap oil. These failures clearly relate to systems failures from an innovation systems perspective, but, because of the long-term nature of infrastructure provision, they are also highly relevant for thinking about transformational failures.

6 3.3. Mission oriented policy approach The work of Marianna Mazzucato (2013) has explored the key role that public investments have played in many recent technological advances, including the internet and smart phones. She argues that this has been in spite of, rather than because of, conventional innovation policy arguments for intervention based on market failures. In her recent work (Mazzucato, 2015), she identifies four key limitations to the market failure theory, which are particularly relevant for policy frameworks and measures needed to dynamically create and shape new markets: (1) Directionality: envisioning and picking strategically: This relates to the need for interventions to address societal challenges, such as environmental problems. Given the key role that policy support has provided in shaping past technological trajectories, she argues that the problem now facing policy makers is how to provide direction to mobilise and manage innovation activities to address these challenges. (2) Evaluation: static vs. dynamic metrics: This relates to the mismatch between the dynamic character of economic development and the static tools and indicators used to evaluate policy. She argues for the need for indicators for transformative policy actions that, as Keynes (1926) put it, do those things that are not done at all by the private sector, because they are perceived as too risky or providing too low rewards. (3) Organisation: learning, experimentation and self-discovery: This relates to the self-fulfilling prophecy whereby the less big thinking that governments do, the less they are able to do, because this tends to result in reducing the skills and capacities available within the policy making community for doing this type of analysis. She argues that, if the public sector is to take a key role in envisioning and managing transformative change, then it requires the capacity to do this. (4) Risks and rewards: towards symbiotic public-private partnerships: This relates to the key role of the state as lead investor in high risk areas, such as the early development of the internet or current investments in green technologies, but where private actors have gone on to claim most or all of the rewards from these investments in the cases when they are successful. She argues that governments should retain a direct share of the profits from these cases in which it has stimulated winning innovations. These have clear overlaps with the transformational failures identified by Weber and Rohracher (2013), in particular, in relation to directionality failure. However, these are framed more directly as issues justifying strategic policy interventions, rather than as transformational failures at a systems level. They thus provide clearer policy guidance, though they say less about how governments can address the challenge of providing clear direction, based on socially agreed goals, whilst maintaining a reflexive, learning based approach in practice. Mazzucato and Penna (2015) argue that addressing these issues requires a more long term, visionary mission-oriented policy approach for framing policy interventions to meet societal goals, including the large-scale deployment of green technologies. 4. How can these alternative rationales be embedded in policy frameworks? This paper has argued that innovation systems and related approaches can provide a richer basis for the rationale for policy interventions to promote innovation to address societal challenges, such as promoting a sustainability transition, than a conventional market failure perspective. However, as we have seen, these approaches have been criticised for lacking the clarity of market failure justifications for action. To some extent, this is inevitable, as systems approaches present a richer

7 picture of the drivers and barriers to innovation, involving synergies, interactions and fundamental uncertainties, compared to a neo-classical picture of rational actors making risk-reward judgements. However, providing clear guidance for action is important, so we try here to synthesise some key questions for policy makers from these various approaches: (1) What are the goals for transformative change? The goals for transformative change should be clearly articulated. These should be formulated in terms of outcomes, rather than specific technology choices or processes, but need to be publicly agreed and, if possible, widely accepted. Given that there will always be a range of viewpoints and perspectives of different actors (Stirling, 2014), it may be asked how feasible is this. The UK government s objective of an 80% reduction in UK carbon emissions by 2050, compared to 1990 levels, gives insight into how this could be done. Following promotion by a coalition of green groups and sympathetic business leaders, this goal was agreed by the UK Parliament under the 2008 Climate Change Act with the support of the three main political parties. Significantly, this was institutionalised through the setting of 5-yearly carbon budgets by Parliament, on the advice of the Committee on Climate Change, consisting of experts on science, technologies and economics of climate change. Though this has, so far, retained mainstream support by the three party leaderships, this framework is seen as not robust (Lockwood, 2014), mainly, as a wider process to encourage the public to buy into this target, and the changes that it implies, was not undertaken. This indicates that, for both moral and practical reasons, public engagement with setting the goals for transformative change is important. (2) What systems and multi-level interactions need to be considered in realising transformative change? Given the fundamental uncertainties involved, it is not possible to rigidly define transition pathways to achieving transformative change. However, the systemic and multi-level interactions involved, and the potential for path dependencies and lock-in, mean that a whole systems and multi-sector perspective is needed. An approach of attempting to correct for individual market failures is likely to ignore these systematic interdependencies, which may lead to unintended consequences. An example of this is provided by the UK s Electricity Market Reform programme, embodied in the 2013 Energy Act. This introduces new policy measures, including contract for difference feed-in tariffs, to promote investment in low carbon electricity generation technologies to mitigate climate change, but also a capacity market to maintain generation capacity in the short-term to ensure security of supply. This has led to the perverse outcome of existing high-carbon coal-fired generation being kept open to maintain capacity in the short-term. Such tensions can not be completely eliminated, but taking a systems and outcome-based approach, rather than attempting to address individual market failures separately, could arguably lead to a more coherent policy mix. (3) What are useful indicators for successful transformative innovation? As Mazzucato (2015) argued, and is supported by a dynamic view of systems change, useful indicators for transformative innovation need to address the potential for government action to transform and create new investment landscapes. The argument that this would crowd out private investment is negated by the risk-averse nature of much private sector investment, as Mazzucato identified, but also by the complementary argument that the private sector can not be expected to deliver socially-agreed public goals, such as climate change mitigation. Here, public good rationales, as a safe climate can not be bought individually, interact with uncertainties and the dynamic nature of change. This implies that relevant indicators should be outcome-based, e.g. levels of deployment of renewable energy in future years, supported by input- and process-based indicators of activity that can enable this, e.g. levels of renewable R&D spending and support for demonstration projects. Distinctions between support needed for first take-up of new innovations, their widespread diffusion and the institutionalisation of successful innovation needs to be recognised in this context.

8 (4) What policy measures would be likely to create the innovative capacities and user demands needed to realise this transformative innovation? This is likely to require a mission-oriented innovation approach (Mazzucato and Penna, 2015), supported by a systems view of innovation that takes into account the innovative capacities of actors, including government, and measures to support the creation of user demands for new options. This would require greater levels of government involvement in directions of both production and consumption than is currently generally accepted. Again, in democratic societies, this can only be justified by wider public engagement leading to broadly agreed long-term goals for transformation. (5) How can public sector bodies develop and retain the capacities to provide clear policy guidance, whilst recognising the need to create space for private sector actors to drive innovation? Of course, there is still a key role for the private sector to drive innovation to deliver transformative change. A mission-oriented innovation approach can help to create technological trajectories (Dosi, 1982) which guide the direction of innovation. This requires entrepreneurs to think outside the box to produce new technological solutions which meet user needs whilst significantly reducing environmental impacts. It is important that innovation is understood here as comprising innovation in business strategies, institutions and user practices, as well as technologies (Foxon, 2011). The role of communities and users in driving innovation is also likely to be important. (6) What other changes in policy frameworks and measures would be needed to prevent these from blocking the promotion of socially valuable innovation? Whilst innovation policies are important, they need to be supported by other policies, including sectoral policies and tax policies, to promote transformative change and avoid policy co-ordination failures. At the moment, whilst innovation policies are trying to promote low carbon innovation, other policies are reinforcing support for high consumption and high carbon lifestyles. As Mazzucato and Perez (2013) argue a green transformation will require a complete redirection of the entire economy, away from the energy- and materials-intensive model inherited from the mass production techno-economic paradigm. This could involve linking low carbon innovation to circular economy ideas, in which products are designed to be reused or remanufactured at the end of their useful lives (Ellen Macarthur Foundation, 2013). (7) How can symbiotic public-private partnerships be created that fairly distribute the risks and rewards of innovation? Transformative change can not be delivered by governments, private sector actors or civil society working on their own, but will require the creation of public-private partnerships. As Mazzucato (2015) argues, governments should be able to retain a direct share of the profits from cases in which it has stimulated winning innovations. More widely, the involvement of civil society will be stimulated by a sense that they are sharing in the rewards of innovation, and that benefits are not just flowing out of local communities to distant private firms and investors. (8) How can a learning-based approach be pursued, that provides clear direction, based on socially agreed goals, whilst maintaining capacities for reflection and learning? Whilst socially agreed goals can play an important role, there will still be disagreements about these and the best ways to achieve them. Government failures involving investment in unsuccessful innovations will continue to be highlighted by actors opposed to any government intervention. However, as the above authors have shown, this does not mean that responsibility can be abdicated by government solely to the private sector. Whilst it is important to create space for private and civil sector entrepreneurship to generate new innovative solutions, government still needs to act to create positive directions for change, whilst accepting that publicly-supported innovation efforts will sometimes fail. A learning-based approach to identifying which forms of support work and how

9 to provide clear direction for the removal of support measures, e.g. by degression measures for reducing renewable energy feed-in tariffs, are important. Finally, we briefly consider the extent to which it may be possible to introduce these ideas into current policy processes. Investment in infrastructure provision is one area where many governments have recognised that clear direction and policy coordination is needed. The UK government has set up a special unit Infrastructure UK, within HM Treasury, which brings together civil servants and private sector commercial experts to coordinate and simplify the planning and prioritisation of investment in UK infrastructure. This provides guidance and helps set priorities for a National Infrastructure Plan (HM Treasury, 2014). The UK s public innovation agency, Innovate UK, also provides investment in scientific and technological innovations, working with the private sector. The core guidance for public sector bodies on the appraisal of publicly-funded policies, programmes and projects is provided by the Green Book (HM Treasury, 2003/2011). This frames the rationale for government intervention in terms of addressing market failures, and requires an economic case for intervention based on cost-benefit analysis of different options, as part of a business case for action. However, this business case also requires assessment of the strategic, financial (affordability), commercial (viability) and management (achievability) aspects of the case (HM Treasury, 2013). There is recognition within Infrastructure UK of the need for more systemic and new economic thinking to inform policy interventions. We contributed to work led by colleagues at Leeds (Brown and Robertson, 2014) that has informed new supplementary guidance to the Green Book on valuing systemic interdependencies and flexibility associated with future uses (HM Treasury, 2015). We would argue that further work would be useful to incorporate more systemic and new economic thinking in strategic cases for intervention, and that this should include valuation of social and environmental impacts, as well as economic impacts (Foxon et al., 2015). 5. Conclusions and ways forward This paper has argued that a combination of ideas from innovation systems theory, systems of provision theory and mission-oriented innovation approach can provide useful guidance for policy support for transformative change for sustainability. These approaches lead to new rationales for policy intervention that go beyond correcting for market failures. Building on these rationales, we have identified the following eight challenges that need to be addressed for governments to play a synergistic role with private sector and civil society actors to achieve transformative change: (1) What are the goals for transformative change? (2) What systems and multi-level interactions need to be considered in realising transformative change? (3) What are useful indicators for successful transformative innovation? (4) What policy measures would be likely to create the innovative capacities and user demands needed to realise this transformative innovation? (5) How can public sector bodies develop and retain the capacities to provide clear policy guidance, whilst recognising the need to create space for private sector actors to drive innovation? (6) What other changes in policy frameworks and measures would be needed to prevent these from blocking the promotion of socially valuable innovation? (7) How can symbiotic public-private partnerships be created that fairly distribute the risks and rewards of innovation? (8) How can a learning-based approach be pursued, that provides clear direction, based on socially agreed goals, whilst maintaining capacities for reflection and learning? In a sense, achieving acceptance of the need for transformative change may be the most difficult challenge, as it does not fit well with current views that market-driven change should always be preferred. However, as many authors have argued, promoting a green transformation to achieve a sustainability transition needs engagement and co-operation between governments, private sector actors and wider civil society. This requires providing clear directions in terms of desired outcomes that can inform innovation and entrepreneurial activities by firms, social group and users. As this

10 also requires reorientation away from current energy- and materials-intensive practices, which will create losers as well as winners amongst current businesses, this is likely to need high levels of public support for this change in democratic societies. Whilst many argue that current systems are failing to deliver social and environmental goals, and innovation systems and mission-oriented approaches can help us to better understand how systemic change can be promoted, more work is needed, not least to create a public mandate for transformative change. Acknowledgements This paper builds on research carried out under the 'Realising Transition Pathways: Whole Systems Analysis for a UK More Electric Low Carbon Energy Future' Consortium Project [Ref.: EP/K005316/1], and the ibuild: Infrastructure BUsiness models, valuation and Innovation for Local Delivery project [Ref.: EP/K012398/1], funded by the UK Engineering and Physical Sciences Research Council (EPSRC), as well as earlier work under the Policy drivers and barriers for sustainable innovation project, funded by UK Economic and Social Research Council (ESRC) Sustainable Technologies Programme. The author would like to thank colleagues on those projects. However, the views expressed here are those of the author alone, and do not necessarily reflect the views of the collaborators or the policies of the funding body. References Arrow, K (1962), Economic welfare and the allocation of resources for invention, in Nelson, R. (Ed.), The Rate and Direction of Inventive Activity, Princeton University Press, Princeton, pp Bayliss, K, Fine, B and Robertson, M (2013), From Financialisation to Consumption: the System of Provision Approach Applied to Housing and Water, FESSUD Working Paper Series, no 2, Bergek, A., Jacobsson, S., Carlsson, B., Lindmark, S., Rickne, A. (2008), Analyzing the functional dynamics of technological innovation systems: a scheme of analysis, Research Policy 37, Bleda, M and del Rio, P (2013), The market failure and systemic failure rationales in technological innovation systems, Research Policy 42, Brown, A, Passarello, M V and Robertson, M (2014), The Economics of Infrastructure in Brown, A, and Robertson, M (eds.), Economic Evaluation of Systems of Infrastructure Provision: concepts, approaches and methods, ibuild/leeds report, University of Leeds, Brown, A, and Robertson, M (eds.) (2014), Economic Evaluation of Systems of Infrastructure Provision: concepts, approaches and methods, ibuild/leeds report, University of Leeds, Dodgson, M, Hughes, A, Foster, J and Metcalfe, S (2011), Systems thinking, market failure and the development of innovation policy: the case of Australia, Research Policy 40, Dopfer, K., Potts, J. (2008), The General Theory of Economic Evolution. Routledge, London. Dopfer, K., Potts, J. (2009), On the theory of economic evolution, Evolutionary and Institutional Economics Review 6 (1), Dosi, G (1982), Technological paradigms and technological trajectories: a suggested interpretation of the determinants and directions of technical change, Research Policy, 11 (3), pp Edquist, C (2001), Innovation policy a systemic approach, in The Globalizing Learning Economy, Archibugi, D and Lundvall, B-A (eds.), Oxford University Press. Fine, B. (2002), The World of Consumption: The Cultural and Material Revisited, London: Routledge.

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12 Smith, K (2000), Innovation as a systemic phenomenon: Rethinking the role of policy, Enterprise & Innovation Management Studies, Vol. 1, No. 1, pp Stirling, A (2014), Transforming power: social science and the politics of energy choices, Energy Research & Social Science, 1. pp Weber, K M and Rohracher, H (2012), Legitimizing research, technology and innovation policies for transformative change: Combining insights from innovation systems and multi-level perspective in a comprehensive failures framework, Research Policy 41, Woolthuis, R., Lankhuizen, M., Gilsing, V. (2005), A system failure framework for innovation policy design, Technovation 25, Biography Dr Timothy J. Foxon is Reader in Sustainability and Innovation at the Sustainability Research Institute, School of Earth and Environment, University of Leeds, UK. His research explores technological and social factors relating to the innovation of new energy technologies, and co-evolution of technologies and institutions for a transition to a sustainable low carbon economy. He has published over 50 academic journal papers and book chapters, a co-edited book, and been lead or co-author on a number of reports for UK and international policy-makers. In September 2015, he will join SPRU at the University of Sussex as Professor of Sustainability Transitions.