Disruptive Technologies and Sustainable Development: The Case of Fuel Cell Vehicles Paper for Policy Agendas for

Sustainable Technological Innovation, 3rd POSTI International Conference, London, United Kingdom, 1-3 December, 2000 Kerry-Ann Adamson and Tim Foxon Imperial College Centre for Energy Policy and Technology (ICCEPT), TH Huxley School of Environment, Earth Sciences and Engineering, Imperial College, 48 Prince's Gardens, London SW7 2PE Abstract This paper will explore the relationship between disruptive technologies and social paradigm shifts, with the aim of highlighting the need for managing these technologies to enable a move towards sustainable development. Disruptive technologies are those which require radical, discontinuous change from current technologies and, as such, are less likely to be pursued by companies which are market leaders in the current technology. The paper will focus on the case of fuel cell vehicles as a potential new disruptive technology and discuss the role that different actors could play in promoting these as a sustainable technology.

1. Introduction This paper looks at sustainable development from a technology perspective focusing on the prospect that disruptive technologies may help to meet the goals and targets set by national and supranational governments. The terminology of disruptive technologies comes from study of business management, and was defined by Christensen (1997) in his book The Innovators Dilemma as: Sustaining technologies improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Disruptive technologies bring to a market a very different value proposition than had been available previously. They under perform products in established markets, but have other features that a few fringe (and generally new) customers value. It follows from this that Sustaining technologies support traditional business models. Disruptive technologies enable the introduction of alternative business models to fundamentally change the way industries function (Draughon, 2000). These two different types of technology form the core of this paper. The aims of the paper are to: outline the effects of a disruptive technology, not just on the business environment; use the example of the future fuel cell vehicle to highlight how a disruptive technology could potentially change the automotive technological and business paradigm towards a more sustainable system; outline the difference between the formation of sustaining and disruptive technologies; and argue that, through the management of these disruptive technologies, there could be a more concrete move towards sustainable development.

2. Sustainable Development and Changing Relationships Although the idea of sustainable development first entered global consciousness with the publication of the Brundtland Report in 1987 (WCED, 1987), it seems that the radical nature of this idea is only now starting to be seriously addressed in national government policies and at the highest level in industry. The European Union (EU) has inscribed the pursuit of sustainable development as a key objective in the Treaty of Amsterdam in 1998, and, following the production of a national strategy in 1999, the UKs Department of Trade of Industry published its Sustainable Development Strategy in October 2000 (DTI, 2000). At the same time, sections of the business community which are increasingly feeling the need for a 'social license to operate' have begun to consider the possibility that sustainability may provide new opportunities instead of being seen as threat to business. To help this process along the World Business Council for Sustainable Development (WBCSD), an organisation of multinational companies, was created. The WBCSD runs a number of program areas, looking at ways of helping to work towards sustainable development (WBCSD, 2000). These policy and organisational changes highlight both growing acceptance of the concept of sustainable development and, arguably, the first moves towards a new relationship, as governments and businesses explore both separately and together how they can promote increasing sustainability. It is clear that the rate and direction of technological change will have a major influence on moves towards sustainability. In the next section, we explore the potential drivers for influencing technological change towards increasing sustainability.

3. Drivers for Change There are a number of potential drivers for change which create the possibility for disruptive technologies, such as fuel cell vehicles, to contribute towards achieving sustainable development, i.e. to become a sustainable technology. Two of these are government policy or legislation and consumer demand. A third driver, which will be outlined in the next section, is industry led. The first of these is the top-down policy drive towards sustainable development. This policy driver is likely to continue the trend towards forcing companies to decrease the impact that their products have on the environment throughout the life-cycle. The second is the bottom-up drive from customers who are increasingly demanding environmental attributes as well as the accepted levels of technical and economic attributes of the products and services they consume. Of course, these two drivers are not independent, as the overall policy context helps to determine individual customers preferences for environmental attributes, and the strength of public commitment to environmental objectives helps to determine the rate of policy development. We now consider these differing drivers in more detail, together with the third driver of the changing business pattern using the topical example of fuel cell vehicles. Policy drivers Sustainable development has been defined by the UK government as ensuring a better quality of life for everyone, now and for generations to come (DETR, 1999). This is interpreted as meeting four objectives at the same time, in the UK and the world as a whole: social progress which recognises the needs of everyone; effective protection of the environment; prudent use of natural resources; and maintenance of high and stable levels of economic growth and employment. The problem of climate change has been widely understood as the greatest threat to achieving sustainable development (RCEP, 2000). In 1997, industrialised countries agreed at Kyoto to

achieve an average 5.2% reduction in their emissions of 6 greenhouse gases from 1990 levels by the period 2008-2012. Following internal negotiations, the overall reduction target of 8% for the EU bubble, was re-distributed, with revised targets ranging from -21% for Germany and Denmark, -12.5% for the UK to +13% for Ireland and +27% for Portugal. All EU countries are currently producing programmes detailing how they intend to meet these targets. The transport sector is likely to be of particular concern in all countries, as it is currently the fastest growing source of greenhouse gas emissions in most industrialised countries (DETR, 2000). These programmes are likely to include combinations of incentives, e.g. for energy efficiency improvements; taxation, e.g. the UKs Climate Change Levy on the business use of energy; voluntary agreements, e.g. the agreement of car manufacturers with the EU to reduce the average CO2 emissions from the fleet by 2008 to 140 g/km (ACEA, 1998; DGXI, 1998). This may be achieved through an increase in the average fuel efficiency of new cars, or by any other technological means; and carbon emissions trading schemes, e.g. the voluntary trading scheme set up by the UK Advisory Committee on Business and the Environment, due to come into operation in Spring 2001. Though transport is of concern at all levels within the EU, the current focus of the sustainable development strategies covers a range of areas - economic, e.g. improving resource efficiency, social, e.g. tackling poverty and social exclusion, and environmental, e.g. reducing greenhouse gas emissions. Customer drivers The heart of the argument of Bower and Christensen (1995) is that disruptive technologies introduce a very different package of attributes from the one that mainstream customers historically value. The attributes of a disruptive technology that will in future be valued by the consumer are very difficult for companies to predict with accuracy. This is one reason that Christensen (1997) highlights for the fact that companies often fail to spot the true future market potential for disruptive technologies, as they listen closely to the current wants of their customer base. The strength of the value that the customer will in future place on broadly environmental attributes is dependent on a number of factors. These may include: how the environmental attributes affect the overall price of the product; whether one particular attribute can be given more weight by the consumer, e.g. whether carbon neutrality is weighted more important than noise pollution; the geographical location and the socio-economic conditions of the consumer. Each industry and product has a range of attributes that the consumer values differently. For example in the automotive industry, the reduction of the CO2 levels from internal combustion engine vehicles, mentioned above, is marketed not according to its decreasing effect on the environment but because it represents an increase in vehicle range. To summarise, although sustainable development may be viewed by the public as desirable, and in future it is likely that this will impact on product choice, it is currently difficult for companies to predict which attributes of a disruptive technology their customers will find desirable in the future. The next section focuses on how the development of Carbon Trading, one of the mechanisms agreed upon at Kyoto, could be used to make the light duty transport sector more sustainable by potentially helping the market penetration of a particular disruptive technology, fuel cell vehicles.

4. Industry Drivers, Sustainable Mobility and Fuel Cell Vehicles The current automotive technological and business paradigm is for automotive manufacturers to build and then sell an internal combustion engine car (ICE) to the private consumer. This paradigm has lasted for over 100 years but recently a number of questions have been raised as to how long this technological paradigm can last and what will be the effects of a technological paradigm shift on the business paradigm. This section looks at these questions, drawing on the results of my PhD thesis (Adamson, 2000) looking at the potential for fuel cell vehicles (FCV). Fuel cells combine hydrogen and oxygen in a catalytic reaction to produce electrical energy with water as a "waste product". Most of the major automotive manufacturers are currently undertaking intensive research and development into the use of fuel cells to power vehicles. Already, fuel cell powered buses and taxis are in operation and the first commercial fuel cell powered car is expected to be released in 2004 (Brandon and Hart 1999). Direct hydrogen fuel cell vehicles are a disruptive technology as they have an importantly different attribute from conventional ICE vehicles, zero CO2 emissions. We argue that they have the potential to create a new business paradigm in the automotive industries and that, by the creation of this new paradigm, there will potentially be a window of opportunity to move towards sustainable mobility. Sustainable transport mobility, which has no agreed upon definition at EU level, can be thought of as having the following points: "Allows the basic needs and development of individuals, companies and societies to be met safely and in a manner consistent with human and ecosystem health, and promotes equity within and between generations; is affordable, operates efficiently, offers choice of transport mode, and supports a vibrant economy, and regional development; limits emissions and waste within the planets ability to absorb them, uses renewable resources at or below their rates of generation, and, uses non-renewable resources at or below the rates of development of renewable substitutes and minimises the use of land and the generation of noise." (EC, 2000a) The World Business Council on Sustainable Development project Sustainability Mobility 2030, which is industry led, has the following aims: to assess the global impacts of current transportation modes (land, sea and air) and to develop visions of future mobility. The project also aims to provide a strategic direction for the diversified transportation and oil industries, creating ideas for next-generation systems which address societal, environmental and economic concerns (WBCSD, 2000). This project is co-chaired by GM, Shell and Toyota, with active members including BP, DaimlerChrysler, Ford and Volkswagen, who are the main actor manufacturers involved in developing the fuel cell vehicle and producing the fuels to power it. The final report of this project will be produced in 2003, with an interim report to be released in time for the 3rd Earth Summit Rio+10 in 2002.

How can fuel cell vehicles and sustainable mobility be linked together?

The main benefit from the use of a hydrogen fuel cell vehicle (H-FCV) is that it can be carbon neutral. Not only does it have zero tailpipe emissions but it also has no emissions of carbon dioxide (CO2). It is the only fuel that can be used in combination with the fuel cell vehicle technology that has this potential. Using hydrogen produced from natural gas could potentially kick-start the hydrogen production process but hydrogen from a renewable resource such as biomass, potentially a closed-cycle process, could have net zero CO2 emissions. This benefit is very much currently a benefit for the governments, in terms of helping to reach emission reduction targets, and not for the automotive industry, or the consumer. Therefore, there exists a window of opportunity for realigning of business strategy with government policy, creating a win-win situation for business and government. Vehicle leasing and Carbon Trading Though buying a vehicle outright is the norm in Europe, leasing of a vehicle in the US is an increasingly popular option. Leasing of the vehicle means that the company keeps outright ownership of the vehicle while the consumer pays for the benefits of use of the vehicle. In terms of fuel cell vehicles and their market launch, which is set for 2004, there are a number of important advantages, for the manufacturers to keep overall control of the vehicles and to lease them to the consumer. These are outlined below: Leasing of a vehicle spreads the risk between the manufacture and consumer. In terms of the launch of FCVs as a new product, this could highlight belief by the manufacturers in the quality of their product and remove some of the concerns of consumers over investing in the product. If all FCVs are leased, then no second hand market can develop in the product. Initially, this could have important positive safety implications as, until there is significant training and diffusion of knowledge, all repairs and maintenance of the vehicles will have to be done 'in house'. There are concerns that leasing of vehicles removes a 'moral hazard' to look after and maintain the vehicle. Again this could have safety implications. Development of a system of increasing / decreasing rent could be implemented so that careful looking after of the vehicle resulted in direct economic benefits for the consumer. The companies could more closely monitor the FCV fleet if they are still in some measure of contact with the vehicles. As initially refuelling facilities are more likely to be based in large urban conurbations, a system of trading in a FCV for an ICE vehicle for long trips, which would be out of range for a FCV, may alleviate some of the initial concerns over availability of refuelling points. Finally, by leasing of FCVs the auto-manufacturers have ownership of a commodity that could be important in the development of a CO2 tradable permit scheme for private transport, which is discussed below. If there was a move to the leasing of Fuel Cell Vehicles together with the predicted move towards increasing the number of ICEs leased (Golding, 1999), there is a potential for cost internalisation due to the increased profit margins. Companies keeping ownership of the vehicle and its technology are in effect renting out the right to pollute. This could provide a powerful incentive for companies to promote the development of a Carbon Trading scheme, as they would then own the right to trade the emissions savings due to the fuel cell vehicle. This in turn could promote the uptake of the HFCV. The European Commission has already produced a Green Paper on Greenhouse Gas Emissions Trading within the EU (EC, 2000b), which outlines a range of issues affecting the

potential for a EU wide trading scheme in the near future. The relevant one for the discussion here include: emissions allowances within the EU to be calculated on a CO2 -equivalent basis, to ensure compatibility with possible global emissions trading schemes under the Kyoto Protocol; companies involved in the scheme are the ultimate responsibility of the Party where the emissions sources are located; that emissions trading has the potential for benefits to the environment but must not cause a barrier to trade internally or externally. The Green Paper goes on to state that at present: allocating allowances, monitoring emissions and enforcing compliance of small mobile emitters, such as private cars, raise complex technical and administrative issues. Though it is understandable that the current EU private vehicle fleet would be difficult to monitor and regulate, an emission trading scheme of the type proposed here together with vehicle leasing could provide an opportunity to overcome some of these barriers. By taking part in a Carbon Trading scheme, the initial increased cost of a fuel cell vehicle can be internalised and by making a shift to leasing the automanufacturers could make a large step towards becoming providers of sustainable mobility.

5. Understanding Disruptive Technologies Long term forecasting of technological trends, innovation and paradigm shifts has been gaining acceptability and prominence as a science over the last few years within multinational companies and governments, as well as within the academic community. The aim of this section is to briefly look at two very different methods of forecasting and then discuss the process of technological revolution, for disruptive technologies, as opposed to the current mainstream thinking of technological evolution. Techniques such as Road Mapping and Visioning are being used increasingly to try and explore the possible shape of things to come. Visioning, used by the Pentagon and other high level US governmental departments (Ronis, 1999), is a technique in which differing scenarios of long term future family life are created. Once the 'family unit' has been outlined the sphere of interest is expanded to explore the family's life to see what type of technology would be useful, desirable and socially acceptable (Ronis, 1999). Road mapping is a management tool in which a company sits down and defines 'triggers' of change, in legislation or technological innovation etc, and creates targets to meet them. Once these targets have been set down, the technology needed to meet the targets is worked out and these are broken down into components. By working back down the chain, the companies are able to see where synergies may lie and to calculate lead times for change (PA Consultants, 1998). Technological evolution vs technological revolution of disruptive technologies The field of study in technological change has over the past few years witnessed an increase in the use of terminology and theories from the evolution arena, the best example being the 'Darwinian' model of technological change. During the late 1980's, a number of studies and books were published exploring and elaborating on this idea. Hinnels (1995) outlined Langrishs (1995) five point Darwinian model for 'non-biological' as well as biological change. The five points are: competition; variety;

some mechanism for ensuring the transmission of the attributes of fitness to a new generation; some mechanism for the production of novel entities; and potential for change in the rules of fitness.

Hinnels went on to show that competition from rival firms and new legislation could be thought of as changes in the rules of fitness and, in the case of the white goods industry, that this helped to push the incorporation of environmental factors into products to make them successful. This, therefore, is a mechanism for the production of novel entities and transmission of these attributes to a new generation. As with Darwinian technological change theory, the alternative theory involving disruptive technologies has its basis in the evolution debate. Discussion of the punctuated equilibrium theory of evolution can be found in many different media and at different levels, ranging from the academic to the mystic to the religious. This contentious theory was originally published in 1972 (Eldridge and Gould 1972) with Niles Eldridge and Steven J. Gould arguing that gaps in the fossil record may not in fact be evidence of current imperfect records, but rather that evolution may have proceeded by a series of discontinuous jumps. A technological analogy of punctuated equilibrium which was discussed in Bowonder et al (1995) is the Internet. The Internet was not born out of small continuous, easily traceable, incremental steps but a combination of a number of discontinuous leaps forward in computer and telecommunications technology. Ojha, et al (1997) noted that it was Kuhn who, in 1970, first hypothesised that scientific progress moved in discontinuous jumps. Kuhn showed that science exhibited long periods during which the scientific theories were evolving incrementally and then there would be a period of 'revolution', as opposed to 'evolution', in which the old theoretical paradigm1 is replaced by an entirely new one which was often incompatible with the old. Like the discussions on sustainable development there are a number of different definitions of punctuated equilibrium, each slightly, but importantly, different. For this discussion, the definition of punctuated equilibrium that will be used is Gersick's (1991) as quoted in Ojha et al (1997): relatively long periods of stability (equilibrium), punctuated by compact periods of qualitative, metaphoric change (revolution) which Gersick goes on to say that: the interrelationship between these two modes is explained through the construction of a highly durable underlying order or deep structure. For technological dynamics, this underlying order or deep structure can be usefully understood as saying that society is change averse, and will usually change existing technology only incrementally and gradually before turning to a new paradigm caused by a disruptive technology. Due to the nature of disruptive technologies requiring radical change, we argue that their formation is analogous to the theory of punctuated equilibrium change of technology.

Kuhn defines paradigm as "the entire constellation of beliefs, values and techniques, and so on shared by a given community" (Kuhn, 1971)

6. Conclusion The above examples help to show how the implementation of the concept of sustainable development could help to create a new context for technological innovation and diffusion, by creating new relationships between governments, businesses and customers. We argue that disruptive technologies, as exemplified by fuel cell vehicles, not only present a challenge to companies to understand the changing needs of their customer base, but also create an opportunity for the promotion of new business strategies which could help to move forward societal and policy goals of sustainability. In particular, we argue that the leasing of fuel cell vehicles by companies to provide mobility services to their customers shows how a disruptive technology can change the business landscape in favour of increasing sustainability. The idea that a move towards service provision enabled by technological change could help to stimulate changes towards enhanced sustainability has also been discussed in Foxon (2000). In conclusion, to use the language of Christensen (1997), sustaining technologies which support traditional business models are unlikely to facilitate a change to social, economic and environmental sustainability, whereas what are now seen as disruptive technologies may, in the long run, be recognised as sustainable technologies.

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