Lighting the Way: Toward a Sustainable Energy Future

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  • 4.1 Policy options

    Governments have many options for advancing a sustainable energy agenda. Table 4.1 provides a basic taxonomy of policy approaches, along with numerous specific examples: it is intended to suggest the breadth and variety of strategies that are available and is by no means exhaustive. Importantly, most of the policy options noted in the table could be applied to promote solutions on both the supply and the end-use side of the energy equation. Within the broad category of ‘carrots’ are policies that rely on positive incentives to stimulate desired activities or technologies; examples include grants, loan guarantees, subsidies, or information and technical assistance programs. Efforts to raise public awareness, provide training (especially to energy professionals), and educate building designers and architects can also help to advance a sustainable energy agenda. Public infrastructure investments, while they do not exactly constitute an incentive, are included here because such investments can help overcome economic or technical obstacles that would otherwise impede the adoption of new technologies. For example, efficient, long-distance electricity transmission systems can open new markets for renewable energy resources while sophisticated metering networks could help homeowners and businesses manage their energy consumption more efficiently.

    Policies that create positive incentives tend to be politically popular (or at least relatively uncontroversial) but usually require government to expend revenues, often with uncertain results. Like nearly all policy options, they impose opportunity costs on society (in the sense that the money spent could be put to other uses). But because those costs are diffuse and borne by taxpayers, they are often, in a political sense, hidden. The effectiveness of voluntary, incentive-based or information-based programs depends on the scale of the resources that are brought to bear and on how efficiently those resources are deployed: targeting social spending so that it achieves maximum public benefits at lowest cost is often a significant challenge. Subsidies, for example, can be quite effective in accelerating the adoption of certain technologies. But subsidies can also be inefficient (to the extent that they benefit households or industries that do not need them) and difficult to remove, unless an eventual phase-out is part of the policy from the























    outset. Also, subsidies that are too large discourage innovation to lower costs and can freeze development

    One issue that has not been solved is how to more closely couple capital investments in energy-efficient commercial and residential building budgets with savings that would be accrued in operation and maintenance costs. In industrialized countries, additional investments are seldom made unless the pay-back time is less than one to two years; and in developing countries, the initial cost dominates virtually all investment decisions. If the payback time on energy efficiency investments were extended to 6–10 years, the building industry would be transformed. Regulations such as energy-efficient building codes are a partial solution; access to low-cost capital targeted for energy-efficiency investments in both new construction and in building retrofits is also needed.

    Governments also have the option of deploying policy ‘sticks’ to compel changes in technology and behavior. This category of approaches can achieve desired results more expeditiously and more efficiently (that is, at lower net social cost), and typically does not involve large outlays from the public treasury. Some options, like fuel taxes, actually generate revenues. Removing subsidies to conventional energy sources or ensuring that energy prices reflect external costs and benefits can also produce effective results by shifting the market incentives for different technologies. (The failure to include externalities in market prices by itself often constitutes a form of subsidy for entrenched technologies.) Not surprisingly, however,policies that are perceived as raising prices are also more likely to confront organized political resistance from affected interests and to give rise to concerns about the potential for regressive impacts on poor households and for adverse effects on industry competitiveness. Many of these concerns can be ameliorated by careful policy design, but it will also be critically important to educate the public and foster greater awareness of the energy-sustainability challenge so as to build political support for difficult policy choices.

    Policymakers should also recognize that energy markets are extremely volatile, and hence quite sensitive to supply disruptions and/or manipulation. A significant number of energy technology investments initiated during the spike in oil prices that began in the mid-1970s were wiped out when the cost of oil dropped to US$20 per barrel in 1980s and remained at that level for most of the 1990s (Figure 4.1). The private sector is less likely to make long-term investments in new energy technologies if there is a real possibility that the price of oil will again decline from current













    Figure 4.1 The development of crude oil prices over the last three decades

    Note: Shown are nominal (not inflation-adjusted) spot prices for Brent crude.

    Source: Platts, 2007.

    levels of US$60–70 per barrel to below US$30 per barrel. Indeed, existing stakeholders in a given industry have sometimes sought to protect their economic interests against a threatening new technology by dropping the price of their product before the infant competition can advance too far down the learning curve.

    Science and technology policies are not individually identified as distinct options in Table 4.1, though nearly all of the examples listed could be used to directly or indirectly spur the development and deployment of more sustainable energy technologies. Clearly, public support for research and development (included under policy ‘carrots’ in Table 4.1) is among the most important tools available to government for influencing future energy developments. Because of its importance and complementarity with other policy options, however, publicly funded research and development (R&D) is included with a broader discussion of the role of science and technology in the second half of this chapter.