Martijn G. Rietbergen

Energy-Efficiency Standards

The regulatory or ‘command and control’ approach has often been the preferred way of achieving objectives in environmental policy, even though the economic approach is becoming more important. The command and control approach consists of the promulgation and enforcement of laws and regulations, prescribing objectives, standards and technologies polluters must comply with. This preference for direct regulation is due to the theoretically high degree of precision and effectiveness possible for this type of instrument. However direct regulation can entail a large number of drawbacks and problems.

Subsidising the Adoption of Energy-Efficient Technologies: An Empirical Analysis of the Free-Rider Effect

Subsidies are intensively used to steer the adoption of energy-efficient technologies. Their cost-effectiveness is disputed for a variety of reasons. First, in a competitive economy, subsidies increase aggregate emissions, which is essentially caused by the income transfer implied by the subsidy (and the associated entry of new firms or enlargement of existing firms). Subsidies — in other words — do not provide an incentive to reduce aggregate utilisation of energy. Taxes are in this context a more effective instrument in the sense that they result in declining aggregate emissions (for example, Baumol and Oates, 1988). Second, taxes generate revenues that can be used to reduce other distortionary taxes and to increase welfare (see the literature on the double dividend as discussed in, for example, de Mooij, 1999). Third, subsidies involve administration costs that tend to be larger than those for tax measures. These costs increase with the specificity of the subsidy program. Fourth, subsidies are often considered to be inefficient since they involve free riders. In this context, free riders are defined as agents who make use of the subsidy, but would have undertaken the subsidised action anyway — and without any delay (see, for example, Train, 1994). We will use this definition throughout this chapter. Because of these free riders, large public expenditures can be required per unit of effect, raising an issue of feasibility of granting subsidies in the presence of fiscal constraints (for example, Jaffe et al., 2000).

Government Intervention Strategies in Stimulating the R&D of Energy-Efficient Technologies

Thus far, the attention in this book was directed to stimulating the adoption of commercially available technologies. Such options may prove sufficient to reach short and medium term targets. Reaching longer term targets, like those for a period of 50 to 100 years ahead requires not only the further adoption of the technologies mentioned, but also the development and adoption of innovative technologies. Blok et al. (1996a), De Beer (1998) and Martin et al. (2000) have shown that the long-term potential for energy-efficiency improvements in various energy-intensive manufacturing industries is considerable.

Instrument Choice and Energy-Efficiency Improvement by Firms: An Empirical Analysis

Environmental quality and resource management has become a prominent challenge in a modern economy. The complexity involved has prompted a series of diverse policy initiatives, ranging from market oriented instruments (like taxes, subsidies and tradeable permits) to command and control measures (ranging from voluntary agreements to standards). Some of these instruments were illustrated in Chapters 3–6 of this book and discussed in terms of their effectiveness and desirability when considered in isolation (see Tietenberg et al., 1999, for a general overview). In practice, many policy initiatives are hindered by much uncertainty (see, for example, Roberts and Spence, 1976, and Adar and Griffin, 1976), so that a clear choice for price-based instruments — as opposed to quantity-based instruments — is difficult to make.

A Framework for Analysing the Adoption of Energy-Efficient Technologies

Associated with economic development are increases in energy use and harmful emissions. Changes in total emissions can basically be decomposed into three components. The first component is associated with macroeconomic growth that, ceteris paribus, results in increased emissions. The second component is associated with structural change. As economies develop, their sector composition changes. Sectors are characterised by their own intensity and development of emissions over time. Changes in sector composition therefore, ceteris paribus, imply changes in macroeconomic emissions. The final component is technological change. Technological improvements tend to result in reduced emission-output ratios and thus, ceteris paribus, decrease macroeconomic emissions. Over the last decades, world-wide emissions have increased tremendously. These developments have, among others, resulted in concrete policy goals set out in the Kyoto protocol. These goals have prompted countries to develop policies oriented towards sustainable development, sustainable energy use and a reduction of emissions, such as CO2, CH4 and N2O. Adoption of energy-efficient technologies by firms is one of the most important and promising means to reach these environmental goals (see, for example, de Groot, 1999a).2 A key question in the development of policies is therefore how firms respond to policy measures aimed at stimulating adoption of energy-efficient technologies.

Policy Instruments for Technology Adoption: A Model for Analysing the Diffusion of Energy-Efficient Technologies

As we saw in previous Chapters, analysing the effectiveness of policy instruments in achieving improvements in energy-efficiency is a difficult task. It requires a careful analysis and description and a deep understanding of decision-making processes at the firm level and at the same time a careful analysis of general-equilibrium mechanisms that are especially relevant for understanding the economy-wide effects, including rebound-effects, etc.