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Linking green stimulus, energy efficiency and technological innovation: The need for complementary policies

Edward B Barbier Department of Economics & Finance University of Wyoming

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Outline

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    An overview and analysis of 2008-9 global green stimulus, especially low carbon and energy efficiency (LC/EE) measures.

A review of the key barriers to extending the cost-effective energy efficiency elements of current green stimulus packages into a long term strategy.

A discussion of the additional complementary pricing policies and programs, such as carbon pricing, emissions policies, further regulations, subsidy removal, etc., necessary for this strategy.

An assessment of the additional challenges facing and assistance required for emerging market economies, e.g. development assistance, reform of the Clean Development Mechanism (CDM), and the need for an emerging global carbon market.

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Green stimulus

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  Green stimulus is measured in terms of the additional fiscal commitments made by national governments during the 2008-9 recession in the form of spending plans or tax breaks.

Three broad categories of support: 

Energy efficiency

- Support for energy conservation in buildings; fuel efficient vehicles; public transport and rail; and improving electrical grid transmission.

– –

Low carbon power

hydro, wind and solar), nuclear power, and carbon capture and sequestration.

- Support for renewable energy (geothermal,

Water, waste and pollution control

pollution management and control, including water conservation, treatment and supply.

– Support for water, waste and 5/1/2020 Transatlantic Energy Efficiency

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Overview of green stimulus in 2008-9

    Of the $3.3 trillion allocated worldwide to fiscal stimulus over 2008-9, $522 billion was devoted to green expenditures or tax breaks (see Table 1 and Annex 1).

Almost all was by G20 governments.

Globally, green spending amounted to just under 16% of total fiscal stimulus and 0.7% of world GDP.

Support for energy efficiency was a prominent component of most green stimulus packages, amounting to $335 billion over 2008-9, or nearly two thirds of all green spending globally.

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Total Green Stimulus Spending by Country ($bn) United Kingdom France Saudi Arabia Australia Germany European Union Japan South Korea United States China Global total 5.8

6.2

9.5

9.9

13.8

22.8

43.3

59.9

0 100 117.7

200 218.0

300 400 500 514.3

600 5/1/2020 Transatlantic Energy Efficiency

South Africa United States Germany United Kingdom France Australia Norway China European Union South Korea Global share 0% Green Stimulus as a Share of Total Fiscal Stimulus 10.7% 12.0% 13.2% 16.3% 18.2% 22.7% 31.0% 33.6% 58.7% 78.7% 10% 15.8% 20% 30% 40% 50% 60% 70% 80% 90%

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Green Stimulus as a Share of Gross Domestic Product (GDP) France Norway Germany United States Japan Sweden Australia Saudi Arabia China South Korea Global share 0.0% 0.3% 0.4% 0.5% 0.9% 1.0% 0.7% 1.0% 1.3% 1.3% 1.7% 2.0% 3.0% 3.1% 4.0% 5.0% 5.0% 5/1/2020 Transatlantic Energy Efficiency

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Total Energy Efficiency Spending by Country ($ bn) Sweden United Kingdom France Australia European Union Germany South Korea Japan United States China Global Total 4.2

4.9

5.1

6.5

9.6

13.8

15.2

29.1

0 50 58.3

100 150 182.4

200 250 300 327.9

350 5/1/2020 Transatlantic Energy Efficiency

Energy Efficiency as a Share of Green Stimulus

100% 100% 100% 100% 100% 100% 100% 100% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Au st ria Be lgi um Ge rm an y In di a Isr ae l 88% 84% 84% Ita ly M ex ico Sw ed en So ut h Af Un ric ite a d Ki ng do m 83% 67% 65% 64% 56% 51% 50% 42% 30% 25% 0% 0% Ch in a Fr an ce Ja pa n Au st ra lia Gl ob al sh ar e No rw ay Ca na da Un ite d St Eu at ro es pe an U ni on In do ne sia So ut h Ko re a Po lan d Sa ud i A ra bi a Sp ai n 0%

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Green Stimul us ($ bn) Energy Effi ci ency ($ bn) 250 200 218.0

182.4

150 117.7

100 50 0 58.3

Ch in a Un ited Sta tes So uth K or ea 59.9

15.2

43.3

29.1

Ja pa n Eu ro pea n Un io n 22.8

9.6

Ger m an y 13.8

Au str al ia 9.9

Sa ud i Ar ab ia 9.5

6.2

Fr an ce Un ited K in gd om 5.8

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11 Source: Robins et al. (2010).

Notes: e = Estimated.

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ARRA Clean Energy Programs (through 12/31/09)

Energy efficiency Grid modernization Advanced vehicles and fuels Transit and high-speed rail

Total energy efficiency

Renewable generation Carbon capture and sequest.

Green innovation and training Clean energy equipment manuf.

Other

Total clean energy (energy efficiency share, %) 12 Funds ($ mn)

19,935 10,453 6,142 18,113

54,643

26,598 3,400 3,549 1,624 408

90,222 (60.6%) Outlays ($ mn) a

1,162 72 450 1,805

3,489

1,479 4 123 14 12

5,121 (68.1%) Direct and indirect jobs created a Total jobs created a,b

12,100 800 4,700 18,900

36,500

13,200 - 1,500 200 200

51,700 (70.6%)

14,500 1,000 5,800 22,900

44,200

16,900 100 1,700 200 200

63,200 (69.9%) Total job-years through 2012 c

179,000 80,600 37,000 158,200

454,800

192,00 26,500 32,200 9,500 3,700

719,600 (63.2%)

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Program

Energy efficiency retrofits Energy efficiency improvements in new capital Green transport infrastructure Cash for clunkers Power grid expansion

Short-term stimulus

High Low/Medium Low/Medium Medium Low

Type of effect Long-term growth Greenhouse gas reductions

Medium Medium Low/Medium Low Low Medium/High High Medium/High Low Low/Medium

Environmental improvement

Medium Medium/High Medium/High Low/Medium Variable

13 Source: Strand and Toman (2010, Table 5.1).

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Barriers to Implementing Cost-Effective Energy Efficiency Policies (Adapted from Jollands et al. 2010) Category

Information and behavioral barriers Market organization barriers Technological barriers

Barrier

Price distortion Information Transaction costs Bounded rationality Finance Inefficient market organization Poor regulation at national or international level Capital stock turnover rates Uncompetitive market pricing and practices

Key problem associated with barrier

Costs associated with energy and incumbent technologies may not be included in their prices; energy and incumbent technologies may be subsidized Information on availability and nature of an energy efficient product is not easily available or accessible at time of investment Perceived costs involved in making a decision to purchase and use equipment outweigh perceived benefits.

Necessary condition

Remove price distortions and subsidies; apply appropriate market based instruments.

Improve accessibility and availability of information on energy efficient products.

Reduce transaction costs, Constraints on time, attention, and the ability to process information lead consumers to make less efficient and sub-optimal decisions The initial cost of a project may be higher than the finance threshold; poor or constrained access to funds.

Principal agent problems; established companies may have market power to guard their positions.

Regulations and codes not keeping pace with development or leading to inefficient outcomes.

Sunk costs; tax rules or regulations that encourage long depreciation; inertia Failure to benefit from scale economies, learning by doing, technological diffusion Reduce the constraints on consumers' decisions. Enhanced access to finance.

Enhanced access to finance; better market organization; better designed policies Improved regulatory framework, standards and implementation Improve incentives to invest in energy efficient new capital Regulation and reform of uncompetitive pricing practices; improve scale economies, learning by doing and technological diffusion.

Technology and skill specific barriers Lack of familiarity with energy efficient technology or insufficient human skills for that technology Enhance skills and technical know how.

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The role of complementary policies

    

Economy-wide pricing and regulatory policies

– e.g., carbon pricing, direct emissions policies and energy efficiency resource standards.

Removal of fossil fuel subsidies

- eliminates perverse incentives in energy markets and provides an immediate source of financing for long-term energy efficiency strategies.

Prescriptive and targeted incentive programs

– e.g., targeted subsidies and rebates, efficiency standards, tradable white certificates.

Behavioral nudging

– Non-priced based behavioral interventions, such as home energy-use reports, information on energy-efficient products, energy efficiency promotions, etc.

Combined/improved design of energy efficiency programs

energy efficiency and smart grid programs.

- E.g., combining energy efficiency house weatherization and other programs with low-cost mortgage provision for poor households; combining 5/1/2020 Transatlantic Energy Efficiency

Assistance to developing countries

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   Many developing economies face a serious “capital gap” in private and public financial investments that will constrain them from implementing a long-term energy efficiency strategy.

Most developing economies lack even the minimum R&D capacity and skilled workforce capable of attracting the transfer of many energy efficiency and low-carbon innovations.

There is also the need for a stable regulatory framework for investment in the developing economy, favorable market conditions and incentives, and reduced uncertainty regarding the long-term price signal for carbon .

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Reform of the Clean Development Mechanism

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    CDM projects tend to be concentrated in a handful of large emerging market economies (e.g. China, India, Brazil and Mexico). Most of the expected certified emission reduction (CER) credits earned by 2012 are from mainly large-scale projects (e.g., GHG capture and incineration, renewable electricity generation, fuel switching, reducing transmission losses;

energy efficiency

is poorly represented.

The scale of the mechanism needs to be increased significantly to deliver greater finance and emission reductions globally.

Scaling up requires more simple technological benchmarks for approval, which would also facilitate energy efficiency projects.

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Conclusions

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     Energy efficiency measures were prominent in fiscal stimulus spending during the 2008-9 recession.

Those energy efficiency elements with the highest net benefits should form the basis for a long-term strategy.

However, the effectiveness of the strategy in overcoming key barriers will require complementary policies.

Developing economies will require additional assistance to overcome critical skills, technological and capital gaps.

Reform of the CDM is necessary to establish a long-term global carbon price and promote energy efficiency in the developing world. 5/1/2020 Transatlantic Energy Efficiency