Lighting the Way: Toward a Sustainable Energy Future

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  • 4.2 Policy choices in context

    The best mix of strategies for promoting sustainable energy objectives will vary depending on a given country’s policy priorities; its financial, institutional, and technical capacities; its political and regulatory traditions and market structure; and other factors. For many wealthy, industrialized countries, the chief objective will be to maximize cost-effective, energy-efficiency improvements; accelerate the adoption of low- and non-carbon technologies; and address energy-security concerns (especially related to dependence on oil and natural gas and nuclear non-proliferation). Policies well-suited to advancing these objectives are likely to include standards, environmental regulations, and market-based programs (such as a carbon tax or emissions-trading program.

    The situation for developing countries, by contrast, is likely to be complicated by additional imperatives and constraints. To the extent that some sectors of the economy and segments of the population consume energy in much the same way as in industrialized countries, developing countries may share similar objectives—and confront similar opportunities—in terms of addressing energy-related environmental externalities and energy-security concerns. For this reason, policies aimed at promoting alternative fuels, low-carbon technologies, or improved efficiency are needed as urgently in developing countries as in industrialized countries.

    In these situations, pricing or other policies can be used to promote investments in energy efficiency and alternative technologies. Where price signals are used to discourage consumption and/or produce more sustainable technology choices, it may be necessary to ameliorate potentially regressive impacts on lower-income households; this can often be accomplished using a variety of policy mechanisms. At the same time, other policies— such as appliance and equipment standards—can help to ensure that, as developing economies industrialize, they ‘leapfrog’ to cleaner, more efficient technologies. Countries that are rapidly expanding their stock of buildings, infrastructure, and capital assets have a unique opportunity to ‘build in’ improved energy performance at lower cost and with greater long-term benefits than would be possible if energy and environmental liabilities are addressed only as an afterthought.

    The list of available policy options is long and lends itself to virtually endless variations, as indicated in Table 4.1. Most of these options have strengths and disadvantages. And it is unlikely that a single policy will achieve all desired objectives. A policy designed to create a consistent, economy-wide price signals for reducing greenhouse gas emissions (such as a carbon tax or cap-and-trade program) may not be sufficient to ensure that all cost-effective efficiency opportunities are captured or to overcome barriers to entry for new technologies. Complementary policies (such as vehicle and appliance efficiency standards) may be appropriate. Subsidies or tax credits used to stimulate innovation should be invoked with built-in ‘sunset’ clauses.

    Often, thoughtful policy design can overcome some of the drawbacks of a particular approach, producing hybrid strategies that combine the best features from multiple options. A portfolio standard can be used to require that a specific percentage of electricity production is derived from renewable or non-carbon resources while still allowing the market to sort out what mix of those resources would meet that requirement most cost-effectively. Similarly, innovative mechanisms such as a ‘reverse auction’—in which providers of clean energy bid for a share of some available limited-term incentive pool based on the minimum subsidy required to successfully compete in the market—can help to maximize the benefits achieved using scarce public resources. In addition, trading or averaging can be used to implement an efficiency standard while incorporating some of the flexibility and cost-reduction benefits associated with market-based programs.

    Individual countries will, of course, need to evaluate their options and their priorities and decide on a mix of approaches that suit their specific circumstances. Even as different countries pursue different approaches, however, it is likely that significant benefits can be achieved by maximizing coordination and information-sharing, where feasible. For example, manufacturers that sell products all over the world may benefit from harmonized efficiency or emissions standards while certain economic sectors, such as marine shipping and aviation, may be most effectively regulated at an international level. Similarly, the ability to trade well-defined and reliably-documented emission-reduction credits across national boundaries could allow for significant cost reductions in reducing global greenhouse gas emissions while providing an important mechanism for facilitating technology transfer to poorer nations.

    An important related question arises: how can companies be encouraged in rich countries to share advanced technologies—both end-use and supply technologies—with developing countries? Businesses are not charities and requiring them to share intellectual property at below ‘market value’ will discourage investment in the development of new technologies. On the other hand, without subsidizing the cost, superior technology alternatives may go unused in such countries as China and India. It would therefore be useful to explore options for providing low-cost access to intellectual property related to sustainable energy technologies and practices. For example, it might be possible to devise a mechanism for compensating intellectual-property holders from an international fund established by wealthier countries.