MEET THE CCG TEAM #1 Prof Sam Fankhauser

“To scale down dirty and to scale up clean”. Sam Fankhauser – Professor of Climate Economics and Policy at Smith School of Enterprise and the Environment – University of Oxford – discusses the work of CCG’s Economics and Policy team, its progress and what still needs to be done to implement successful solutions to the Climate Crisis. 

How did you come to be involved with CCG?

I became involved with CCG when I moved to Oxford University about three years ago in 2021.  That was year zero for CCG. I took it over from Cameron Hepburn who felt that I would be ideal for the role.   I had just stepped down as a non-executive director of CDC Group (now British International Investment).

What is the area of CCG activity you are looking after and what are the areas you’re focussing on?

Formally, I’m looking after Economics and Policy (or Workstream 5 as it’s known inside CCG) and under that title you can do a lot of things – Economics is a very broad subject and Policy is even broader. We distinguish ourselves from the rest of CCG, I think, by being less involved with the modelling side of things and being more focussed on microeconomic aspects. In fact, some of our programmes are not even Economics, they are more qualitative Social Science.

We are interested methodologically more in qualitative research, statistical approaches, and perhaps theoretical approaches rather than modelling.  In terms of content, we roam quite a bit, but broadly we explore two challenges: how to scale down dirty and how to scale up clean. We need to do both in a way that is compatible with maintaining prosperity and advancing development. So, we’re interested in entrepreneurship, energy policy, fiscal policy and economic policy.

What are the projects that are in hand at the moment? 

We have three areas of focus:  Energy and Climate Policy is being led by Sugandha Srivastav. In terms of scaling up clean, this set of projects is interested in support policies for renewable energy and understanding renewable entrepreneurship. On scaling down dirty, we look at the factors that slow down the transition from dirty to clean and the structural rigidities that protect coal and fossil fuels.  There are a lot of power purchase agreements – contracts between governments and power producers – that protect coal for as much as 20 to 30 years. There are also regulatory and institutional rigidities, like planning obligations, for example, which may not be the same for renewables and fossil fuels.  We also do some work on jobs – finding out about skills for clean and dirty jobs.  

The second area is Public Finance for Resilience and Nicola Ranger is the lead on that one.  This work started off in COVID right at the beginning of CCG.  Lots of money was being spent to keep the economy going during COVID, and we asked whether it was spent in a pro-climate way or not.  That evolved into a broader exploration of fiscal policy – not just crisis spending but regular spending, asking what fiscal expenditures do for mitigation and, increasingly, what they do to resilience. That’s primarily resilience to climate shocks but we also have a project that looks at resilience to food price shocks.

The third set of projects is on Entrepreneurship and Clean Innovation. That’s led by Phillipp Trotter, working alongside Aoife Brophy who is less directly involved in CCG but very much a part of this work within the Smith School team. What they are doing is identifying and studying, bottom up, clean entrepreneurship.  So, we have a big project to build a database of green entrepreneurs and so far, Phillipp and Aoife have found around 1000 agribusiness entrepreneurs in Africa. 

We’re now looking for clean tech entrepreneurs and once we have identified them, we want to study them to understand their motivations and ambitions as well as the challenges they face.  We’re also looking at business innovation in the process, so we we’ll be asking about what makes different business models succeed, what’s the reality of their business environment and so on.  We hope to fine evidence of really clever innovations and flexible ways of working.  

We are also in the process of integrating Data-to-Deal into our work, mostly in the second programme as it relates strongly to fiscal policy. For example, we look at financing gaps and financing terms for the clean transition.    

What have been the main successes of the workstreams so far?

We are very much research-orientated so a lot of what we do is aimed at fellow academics but also international policy makers. The Theory of Change is improving our understanding of certain processes and informing decision makers about them.  It isn’t the hands-on fieldwork approach that some of the other CCG workstreams have.  Part of that is because our work is often regional as opposed to country-specific; we work with big datasets like the entrepreneurship database, which is pan-Africa.

So, a key indicator of success is producing good papers that are well placed in strong journals, well-cited and ideally read by policy makers.  A great example is the two pre-COP pieces in Nature Energy that we produced in 2022 and 2023. Philipp Trotter deserves a lot of credit for both papers.   They were inclusive, impactful and well regarded.  The first one in particular had more than 50 authors from across Africa and we were pleased to get all those people to come along with us.

Another interesting engagement example is the work we did with British International Investment (BII). They came to us to understand the practicalities of a net zero portfolio target.  It was interesting because they didn’t just take our work and say: ‘this is interesting, we do that’. They did the opposite, in fact, and said ‘This is quite complicated and we’re not quite sure we can really do this”. That triggered a really good discussion inside BII and that was our impact, rather than the adoption of our advice.

Is it your team who take the work and use it to try to influence policy makers or is it other parts of CCG?

It’s a bit of both. We interact actively with other parts of CCG, but also use our own network.  Within CCG we work closely with Vivien Foster on Data-to-Deal, we work with Stephi Hirmer on quite a few of her projects and involve her in ours.  We will talk more to Julia Tomei as she ramps up the political economy work.  Workstreams 5 and 5c (Investment Pipelines) blend into each other a lot because they are both based in the Smith School. Alex Money (who leads 5c) is my office neighbour, so we naturally talk a lot.

What about this coming year – are there significant things you’re hoping to move forward in the next 12 months?

This year in a sense is the transition year between phases one and two of CCG. We’re continuing what we started, and we would like to bring to fruition some long-standing projects. The entrepreneurship database should be ready in time for COP 29. We plan to finally publish our paper on Climate policies that are context specific for developing countries. The motivation for that paper is that there’s a lot of literature about how one should do climate policy in industrialised countries, with work on carbon pricing and taxation, energy tariffs, clean subsidies and so on.  There’s much less written about how those instruments might travel to the context of our partner countries. For example, what is the role of carbon taxation in countries with large informal economies and a narrow tax base. Should countries with energy access problems make energy more expensive?  Or if you have complex proposals that need institutional capacity, like emissions trading, you need to find ways around that. So, we are surveying the literature on how context-appropriate climate policies might look for the Global South.

I noticed that in your career you have worked in two financial institutions – the EBRD and the World Bank – what do you think financial institutions are looking for to allow them to invest? There seems to be this gap where financial institutions have the money, but they don’t feel able to give it to the projects that need it. How do we solve that?     

Yes, it’s a conundrum.  I’ve spent half my career in development finance, and there was always that conundrum of ‘we have plenty of money to deploy but we don’t have the projects.’  It’s a very different narrative from the concerns about financing gaps in the climate negotiations. How to make sense of this disconnect is an interesting question and the answer has to do with the business environment in those countries as well as capacity gaps and risk perceptions.

Money doesn’t flow because investors are nervous, or they misunderstand the risks. The risks are real, we’re not denying that, but some investors are a little too risk averse.  That’s where organisations like BII and IFC can come in because they understand those markets better and have a healthier risk appetite and can take on some of those risks.

Then there’s an element of institutional capacity building so the business environment becomes more predictable and less risky, and the cost of capital comes down. When that happens, things like renewables become no-brainers because they’re just cheaper.

So, is the secret to create a sympathetic policy environment?

I think that’s a big part of it.  But also, the risk mitigation that can come from development finance – partly tangible, explicit derisking policies, such as currency risk instruments, and partly just “softer” support in which investors can go into a country alongside someone who has experience of the country and can problem solve for them.  

Who would play that role?

Development finance has a big part to play there.  So, in Zambia, say, this would mean an organisation like BII or IFC investing alongside commercial money.  But then also engaging with governments.  That’s the other thing that Development Finance Institutions tend to do, they have a link into government and can help with tariff reform and things like that.

Stepping away from CCG, you have been in the climate sector for many years.  What is your view of how the climate crisis is being addressed?

I have worked in this area for close to 34 years.  It’s a bit of a race – nature versus people if you will.  We’ve made big progress in some of the technological solutions that we need; the speed at which renewables and batteries have got cheaper, for example. Renewables are past the tipping point and electric vehicles are very close to it. 

We have also made huge progress in in public awareness.  30 years ago, I had to explain to my finance colleagues that ‘climate change’ wasn’t about changing the investment climate!  Fortunately, we don’t have to do that anymore, everybody gets it.  The financial ‘establishment’ gets it – IMF, World Bank, Ministries of Finance understand that we have to do something about the issue, and that is huge progress. 

But the other runner in the race, which is nature, has also moved fast and climate is changing faster and in a scarier way than we had thought it would.  We didn’t expect to be at 1.2 degrees warming by now and we didn’t expect to see some of the impact on glaciers for example that we’re starting to see.  So, it IS a race and nature is moving faster than us at the moment.

On the emissions reduction side, the big stumbling block and the thing I’d like to see changed is the political will. The solutions are pretty much there – ready on the shelf.  There are still some complicated issues like agricultural emissions, where we’re not 100% sure what to do, but for most emissions sources we know exactly what the technologies and behavioural solutions are.  They may be expensive or unpopular or complicated, but we have them.  So, it’s a question of the politics of doing it.

Sam was speaking to CCG’s Peter Allen