Linking green stimulus, energ
y efficiency and technological
he need for complementary policies
Edward B Barbier
Department of Economics & Finance
University of Wyoming
February 8, 2011
Paper prepared for the
ean Commission DG 1 (External Relations)
Opportunities for Meeting Global Challenges in Energy Efficiency and Low Carbon
Presented at the Transatlantic Energy Efficiency Workshop, UC Berkeley School
of Law, Berkeley,
CA, February 11
The following paper
n overview and summary
, especially low carbon and
efficiency (LC/EE) measures, enacted during the 2008
An analysis of the e
ffectiveness of such stimulus measures on their own in achieving
including implementing necessary
A review of the key barriers to extending the cost
effective energy efficiency elements of
green stimulus packages into a long
of the additional complementary pricing policies and
, such as
carbon pricing, emissions policies, further regulations,
etc., which are
required to achieve long
energy efficiency and R&D goals.
An assessment of the additional challenges facing and assistance required for emerging
market economies, with a focus mainly on development assistance, post
Kyoto reform of
Clean Development Mechanism (
, and the nee
d for an emerging global carbon
In analyzing the link between green stimulus, energy efficiency and technological
this paper advances and explores
an important hypothesis
as the stimulus packages
enacted during 2008
9 are wound down, t
he energy efficiency elements
which typically have
the highest net benefits
should be continued. This paper finds that this hypothesis is plausible,
provided that energy efficiency policies are appropriately designed and executed, and more
, that they are supported by a range of
complementary pricing policies. These
wide pricing and regulatory policies, such as
carbon pricing, emissions pol
and additional regulatory incentives
; removal of fossil fuel subsidies; prescrip
tive and targeted
incentive programs; behavioral nudging; and combined or improved design of energy efficiency
economies may also need additional support, especially in the form of
technological and capital assistance, reform of the C
DM and the development of a global carbon
verview of green stimulus during the 2008
A unique feature of the global policy re
sponse to the 2008
9 recession wa
s that, as part of
their efforts to boost aggregate demand and growth, some g
overnments adopted expansionary
policies that also incorporated a sizable "green fiscal" component. Such measures were wide
support for renewable energy, carbon capture and sequestration, energy
efficiency, public transport and rail, and
improving electrical grid transmission
, as well as other
public investments and incentives aimed at environmental protection (
al. 2009 and 2010). Several studies have shown that such "green stimulus" policies could foster
e sustainable, low
carbon economic development in the medium term while creating
growth and employment in "clean energy" sectors (Barbier 2010a
b; Houser et al. 2009; Pew
Charitable Trusts 2009; Pollin et al. 2008; Renner et al. 2008).
Green stimulus measu
res can be separated into three broad categories
upport for energy conservation in buildings; fuel efficient vehicles;
public transport and rail; and improving electrical grid transmission.
Low carbon power
upport for re
(geothermal, hydro, wind and solar),
and carbon capture and sequestration.
Water, waste and pollution control
Support for water, waste and pollution management
and control, including water conservation, treatment and supply.
It is common to refer to two of these areas, low carbon power (LC) and energy efficiency
(EE), as comprising collectively the
sector of an economy (Barbier 2010a
Charitable Trusts 2009).
Green stimulus in
three areas is measu
red in terms of the additional fiscal
commitments made by
governments during the 2008
9 recession in the form of
spending plans or tax breaks.
Additional investments resulting from regulatory mandates, such
as renewable energy obligations, vehicl
e fuel use standards, or energy efficiency requirements,
are usually not included.
Table 1 summarizes the global green stimulus enacted by governments from September
2008 through December 2009.
Annex 1 provides a further breakdown of the major green
lus packages enacted during the recession, by region and country.
Of the $3.3 trillion allocated worldwide to fiscal stimulus over 2008
9, $522 billion was
devoted to green exp
enditures or tax breaks. Almost
green stimulus was by the
, which comprise the world's
largest and richest countries.
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
(see Table 1 and Annex 1), amounting to $335 billion over 2008
, or nearly two thirds
of all green spending globally
. Although the amounts vary from country to country, just under
two thirds of the green stimulus
went to energy efficiency. This
allocation appears to
reflect a general consensus that support for energy efficiency measures were a relatively
effective and fast way of creating jobs while curbing energy use during the recession (Barbier
b; Houser et al. 2009; Pew Charitable Trus
ts 2009; Pollin et al.
2008; Renner et al. 2008).
$87.1 billion of energy efficiency spending globally was for energy conservation in buildings,
$21.4 billion for developing fuel
les, $135.2 for
rail and public transport, and
improvements in electrical grid transmission
(see Annex 1)
amount spent on these different energy efficiency investments varied considerably from country
to country. For example, almost all of China's support for energy efficiency was
for grid and rail
improvements. In contrast, the European Union and the United States spent more on building
conservation than any other energy efficiency category.
The members of the G20 include 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany,
a, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United
Kingdom and the United States) plus the European Union.
Assessment of green stimulus and energy efficiency measures
At the 2008
Group of Eight (
summit in Hokkaido, Japan, leaders committed to
implementing the 25 energy efficiency recommendations of the International Energy Agency
The recommendations were aimed at seven priority areas: cross
s, lighting, transport, industry and power utilities.
The IEA estimated that
full implementation globally of the proposed actions could save annually around 9.2 exajoules
(EJ) of final energy consumption, or 8.2 gigatonnes (Gt) of carbon
emissions, by 2030. This
to around one fifth of projected
related emissions in 2030, or about twice the European Union's current yearly emissions.
9 recession provided further rationale for government
led efforts to boost
energy efficiency investments. As argued by the IEA (2009
, p. 2), "i
mprovements in energy
efficiency can deliver some of the largest and cheapest CO
Importantly in a time of
financial crisis, they can also often be imple
mented quickly and bring more
mployment than any other category of energy technology.
As noted previously, t
energy efficiency measures
featured prominently in
fiscal stimulus packages
adopted during the 2008
9 recession s
uggests support for this
view expressed by the IEA.
However, as we have also seen, not all countries adopted green
stimulus measures, and even those that did, varied in how much was spent on energy efficiency.
The purpose of the following section is to
assess in more detail, first, the e
xtent to which
green stimulus and energy efficiency measures were adopted as part of global economic recovery
efforts, and second, whether energy efficiency measures d
o have an advantage over other green
in terms of speed of disbursement, employment creation, and large and cheap
greenhouse gas reductions. In addition, the section concludes by examining whether energy
efficiency spending and tax breaks alone are sufficient to achieve long
term savings in
consumption and CO
As Figure 1 indicates, the United States and China accounted for over two thirds of the
global expenditure on green fiscal stimulus during 2008
9. The world's largest economy, the
European Union, cont
ributed substantially less to the global total. Total green spending by
Europe totaled only $57
; in contrast, the Asia Pacific region spent
Annex 1). The governments of key European economies, such France, Germany, and the
Kingdom, spent much less on clean energy and other environmental investments than the major
Japan and South Korea. Several G20 governments did not commit any
or very little,
funds to green stimulus, including the large eme
rging market economies of Brazil,
India and Russia (see Table 1).
As shown in Figure 2, green stimulus measures and investments amounted globally to
around 16% of all fiscal stimulus spending during the recession. However, only a handful of
ted a substantial amount of their total fiscal spending to green investments. The
The eight countries comprising the G8 are Canada, France, Germany, Italy, Japan, Russia, the U
and the United States. The European Union is represented in the G8 but cannot host or chair.
The 25 energy
efficiency recommendations were prepared under the mandate of the G8 Gleneagles Plan of Action in July 2005.
most notable is South Korea, which allocated nearly 80% of its total expenditure to green
investments. China apportioned around a third of its total fiscal spending to gree
Around 60% of the European Union's fiscal stimulus was for green investments, but as indicated
in Figure 1, the overall size of this investment was relatively small. In comparison, whereas the
total expenditure on
comprised only 12% of total fiscal
spending. Overall, most G20 governments were cautious as to how much of their stimulus
spending was allocated to low
carbon and other environmental investments during the 2008
Perhaps most rev
ealing, however, was the share of green stimulus measures in gross
c product (GDP)
, as illustrated in Figure 3.
governments spent 1
investments during the recession.
With the exception of Sweden, all these
s were from the Asia Pacific region. L
, such as the
% of GDP planned by South Korea and
the 3% of
ption rather than the
The United States spent 0.9% of GDP on green stimulus, more than the globa
but the European Union spent only
0.2% of GDP (see Table 1).
Figure 4 indicates
the total energy efficiency spending by country in response to the
9 recession. China spent by far the most on these measures ($182 billion
), well over half
the global total ($328 billion).
The US also spent a considerable amount on energy efficiency
($58 billion), whereas the European Union allocated less than $10 billion to such measures. The
major Asia Pacific economies, Japan and South
Korea, spent more on energy efficiency than the
major European economies, Germany, France, the United Kingdom and Sweden.
confirms that energy efficiency measures had a prominent role in the total fiscal
stimulus packages of some countries. China
, the European Union and South Korea spent at least
20% each on energy efficiency. Other European countries, such as Norway, France, the United
Kingdom and Germany also devoted around 13 to 17% of their total fiscal stimulus to energy
efficiency. In contr
ast, despite its large expenditure on green stimulus, the United States
allocated only 6% of its total fiscal spending to energy efficiency measures (Table 1).
The perceived effectiveness of energy efficiency measures as a cost
effective and quick
o creating jobs while reducing energy use and GHG em
issions is reflected in Figure 6
Many countries that adopted green stimulus packages during the 2008
9 recession tended to
focus almost exclusively on energy efficiency measures. Although 42% of the Eu
green stimulus was
devoted to energy efficiency,
individual European countries allocated much
more. For example, the entire green stimulus packages of Austria, Belgium, Germany, Italy and
Sweden consisted of investments aimed at improving e
The United Kingdom
allocated 84% of its green stimulus to energy efficiency, France 83% and Norway 56%.
Although energy efficiency investments amounted to
84% of China's green stimulus, they were
only half of green spending in the Unite
Figure 7 shows the ten economies with the largest green stimulus depicte
d in Figure 1,
and compares this spending
to their energy efficiency investments.
Even among these ten
with smaller green stimulus packages tended to focus
y on energy
The only exception was Saudi Arabia, which spent its green stimulus
entirely on water supply and management.
five economies with
, such as China, the United States,
Japan and European Union,
sizable investments in
low carbon power
and waste, water and pollution control.
erformance of energy efficiency stimulus
An analysis by HSBC Global Research
the disbursement of energy
other components of global green stimulus packages (Robins et al. 2010). The
is indicated in Figure 8.
Green stimulus spending is likely to
continue through 2012, but with the
bulk of the spending occurring in 2010. Energy eff
iciency investment follows this trend.
$56 billion of spending on energy efficiency occurred in 2009, which nearly triple
$165 billion throughout 2010 before
tail off to $
92 billion in 2011. By 2012, only
$11 billion will
or spending on
energy efficiency from the
However, the speed of disbursement of energy efficiency measures appears to be only
slightly faster than other green stimulus. As indicated in Figure 6, around 64% of all gl
green stimulus packages were devoted to energy efficiency.
But energy efficiency comprised
just 68% of green funding in 2009, and its
final share is likely
to be 67% in 2010, 63% in 2011
and 41% in 2012
(see Figure 8)
the rate of disbursement
of energy efficiency spending
has been fairly constant, and in the early years, consistent with its share of overall stimulus
packages enacted over 2008
green stimulus spending
not appear to be
frontloaded with ener
gy efficiency measures.
Individual countries have also varied considerably in how quickly they have spent their
green stimulus (Robins et al.
2010). China accelerated its green spending in the first
half of 2009, and then slowed down in the seco
nd half. It spent an estimated $67 billion of its
green stimulus over 2009. In contrast, Australia, Canada, France and the United States started
slowly but ended 2009 with a faster rate of disbursement.
South Korea spent $2.3 billion of its
us steadily throughout 2009. The European Union has been one of the slowest
economies to deliver on its green stimulus spending.
Administrative delays and political
considerations appear to have been the major reason for the slow disbursement of funds,
specially in the European Union, Germany and the United Kingdom. However, poorly
developed programs have also been a factor. For example, in Australia, the Home Insulation
Program helped to insulate over 915,000 homes in 2009, but had to be suspended in
along with the solar hot water rebate program, because of safety concerns (Robins et al. 2010).
Some indication of the success as well as the difficulties of implementing energy
efficiency measures as part of stimulus spending can be gained by
a specific country example.
One of the few green stimulus programs that has been analyzed
in detail is the American
Recovery and Reinvestment Act.
American Recovery and Reinvestment Act
American Recovery and Reinvestment
the United States
billion to retrofit buildings, expand mass transit and
freight rail, construct a “smart” electrical grid transmission system and expand renewable energy
Additional investments in water infrastr
ucture resulted in a $94.1 billion green stimulus
(see Annex 1)
Total green spending under the ARRA
0.7% of US GDP
around 2 million jobs
Houser et al. (2009) analyzed a green recovery progra
m for the United States that
contained many of the same stimulus measures as enacted in the ARRA.
decreased cost and consumption of energy from the entire program have the potential to save the
US economy an average of US$450 million p
er year for every US$1 billion invested. In addition,
every $1 billion in government spending would lead to approximately 30,000 job
reduce annual US greenhouse gas (GHG) emissions
by 592,600 tons between 20
12 and 2020.
The employment gains represent a 20 percent increase in jobs creation over more traditional
illustrates the relative impacts per billion dollars spent of the energy efficiency,
low carbon power and convention
al stimulus investments analyzed by Houser et al. (2009).
These impacts are depicted in terms of speed of implementation, employment creation, and
reductions in US energy costs, oil imports and GHG emissions. As the table shows,
be implemented relatively quickly,
and have moderate to
high employment impacts.
Although energy efficiency measures have more varied impacts on
energy cost, import and GHG reductions
, these impacts for some programs are also sig
The ARRA incorporated some versions of the clean energy measures indicated in Table
2. For example, the Act appropriates $5 billion for the Weatherization Assistance Program to
pay up to $6,500 per dwelling to assess and reduce a household's e
nergy bills (CEA 2010
additional $3.2 billion is allocated to the Energy Efficiency and Conservation Block Program to
subsidize energy conservation programs of US states.
Similar measures under the Act bring the
total support for energy conservation
to nearly $20 billion.
The ARRA also provides $10.5
billion to modernize
the electricity grid, $6.1 billion to promote advanced vehicles and fuels
technologies, and $18.1 billion for mass transit and high
speed rail (See Table 3).
The US Council
mic Advisors (CEA) releases quarterly reports assessing the
of the ARRA in terms of actual spending and job creation
. However, only the
report breakdowns these impacts
various clean energy programs
depicted in Table 3.
Only 5.7% of the clean energy funds were actually dispersed by
the end of 2009. Although the rate of disbursement for ene
rgy efficiency programs (6.4%) wa
better, it was
still surprisingly low given expectations that these
programs could be
implemented relatively quickly (see Table 2).
For example, the Weatherization Assistance
Program actually spent only $500 million over 2009, and the Energy Efficiency and
Conservation Block Grant just $85 million.
efficiency funding accounted
for around 68% of the clean energy outlays in 2009.
Due to updated cost estimates, CEA (2010b) revised the total amount apportioned from
the ARRA to clean energy to $94.8 billion compared to the $90.2 billion indicated in Tabl
Nevertheless, the rate of disbursement continues to be slow. For example, through the end of the
Quarter of 2010 (Sept 30, 2010), only $57.7 of clean energy spending had been obligated, and
$25.9 billion (27.3% of the total) had been spent (CEA
Unfortunately, the recent
quarterly reports do not indicate the disbursement by type of clean energy investments, such as
In Houser et al. (2009)
, employment effects
are measured in job
years, or the number of full
time equivalent jobs
lasting one year.
The clean energy programs implemented under the ARRA saved or created nearly 52,000
jobs in 2009, and induc
ed perhaps an additional 11,000 jobs (see Table 3).
contributed a large proportion to this employment creation (70%).
By 2012, clean energy
stimulus under the Act could create or save 720,000
years of employment, with energy
ency accounting for 455,000 job
By the end of the 3
Quarter of 2010, clean energy
investments were estimated to have saved or created 224,800 jobs (CEA 2010c). This suggests
that the total job
year estimates for 2012 are in reach, despite the sl
ow disbursement of clean
energy investments, including energy efficiency.
One important spin
off of the ARRA was the US "Cash for Clunkers" program, the
Consumer Assistance to Recycle and Save (CARS), which is discussed in Box 1.
CARS was not
t of the ARRA, but was enacted separately in June 2009.
ergy efficiency stimulus
, as suggested by
proponents (see Houser et al. 2009 and Table 2).
was implemented quickly, within
, and it generated significant reduction in fuel consumption, GHG emissions
and air pollution, while at the same time stimulating economic growth and creating employment.
But as outlined in Box 1, there is considerable disagreement about t
he amount of overall
economic and environmental benefits generated by CARS, with the range of net benefits ranging
from a loss of $1,600 per vehicle to a gain of $400 per vehicle. In addition, as the program was
taking $2 billion initially alloc
ated under the ARRA for long
term renewable energy
loans. Thus, any resulting reduction in low carbon power generation must be included as an
additional cost of CARS.
Summary and conclusion
of green stimulus
There is an emerging consensus that
the green stimulus spending by G20 governments
during the 2008
9 recession did not amount to a concerted global green recovery effort
2010a, b and d;
Bowen and Stern 2010;
Strand and Toman 2010)
The main problem is too
much reliance on short
m green stimulus measures and not sufficient adoption of
complementary pricing and regulatory measures to provide incentives for long
in clean energy, including the adoption of energy efficiency, and for spurring the necessary
A good example of the problem is illustrated by the ARRA, which
billion to retrofit buildings, expand mass transit and freight rail, construct a “smart” electrical
grid transmission system and expand renewable energy
throughout the United States
we have seen, the ARRA promises to
massive savings in energy, oil imports and GHG
emissions by 2030, as well as create 720,000 job
years of employment by 2012.
But the original
plans that were the "bluepri
nt" for the ARRA called for
a comprehensive cap
trade system to
and the removal of fossil fuel subsidies
to finance and improve the
effectiveness of the proposed clean energy investments (Podesta et al. 2007; Pollin et al. 2008)
o far, these additional policies have failed to materialize, and without them, the current stimulus
to private investment and job creation in green sectors may be largely temporary.
As Houser et
in their assessment of many low carbon and e
nergy efficient stimulus measures
contained in the ARRA:
"A green stimulus is no replacement for comprehensive climate and
energy policy. Even the most aggressive short
term spending will have only a modest impact on
US greenhouse gas emissions and depend
ence on foreign sources of energy."
Unfortunately, this outcome could be the norm across countries. Without additional
policy measures, some of the
green spending by the
G20 will be wasted;
its impact on
term investment and job creation in gre
en sectors will be restricted by ongoing fossil fuel
subsidies and other market distortions, as well as the lack of effective environmental pricing
policies and regulations
(Barbier 2010a, b and d; Bowen and Stern 2010; Strand and Toman
many clean energy investments are still too costly compared to conventional
energy sources. Fossil fuel subsidies further distort this cost competitiveness. The lack of
policies and regulations to include the costs of carbon emissions and pollution also
lowers the market price of using conventional energy. Evidence from the United States suggests
such "direct emission" policies are critical for spurring private investment and induced
technological change in clean energy sectors
Strand and Toman (2010) also maintain that there may also be a trade
off between short
run and long
run growth, environmental and employment impacts of green stimulus programs.
Given such trade
offs, the promotion of green projects on short
stimulus grounds may
prove to be a second
best alternative from an environmental perspective, in particular if it helps
to reduce “locking in” more fossil fuel energy
intensive and less clean capital stock in the longer
Included in Strand and Toman's
analysis is an assessment of the possible short versus long
term gains of
energy efficiency measures contained in current green stimulus packages.
Their evaluation of these measures is summarized in Table 4. Although energy efficiency
measures on t
he whole fare better than other green stimulus,
even among energy efficiency
measures, there are "few obvious candidates for triple
win policies, with simultaneously strong
benefits for short
term economic recovery, longer
term growth, and long
benefits" (Strand and Toman 2010, p. 23).
However, the authors also emphasize that pricing
reforms, including taxation and removing energy
related price distortions, can not only provide
increased incentives for long
term private investment
an energy and technological
innovation but also help finance ongoing investment in energy efficiency and other green
measures with less of a public debt burden. Similar arguments in favor of complementary
policies for long
term green investments are put f
orward by Barbier (2010a,d).
To summarize the key findings of this section, e
nergy efficiency played
a prominent role
in current green stimulus enacted during the 2008
9 recession. Although
the new energy
efficiency investments are
likely to continue unt
il 2012, eventually spending will be completely
disbursed. Some studies have questioned the effectiveness of green stimulus, including energy
efficiency. They are unlikely to be a substitute for the use of complementary pricing policies to
As the stimulus
spending enacted during 2008
the energy efficiency elements should be continued, provided that they are appropriately
designed and executed. In addition,
they should be
supported by a range of complementary
pricing policies, from carbon pricing, emissions policies and additional regulatory incentives to
ensure the effectiveness of long
term energy efficiency policies.
Towards a long run strategy
If the energy efficiency elements of current green stimulus p
ackages are to be continued,
and possibly even expanded, into a long
term strategy, then key institutional, political and
market failures need to be addressed. Recent assessments of long
term energy efficiency
strategies point to some of these problems.
They fall generally into three categories:
barriers to implementing cost
effective energy efficiency policies
barriers faced by consumers and firms in adopting cost
effective energy efficiency
barriers to financing cost
effective energy effic
iency measures, especially in developing
For example, the International Energy Agency (IEA) has evaluated the progress of both
IEA member countries and the G8 in implementing the 25 energy efficiency recommendations
from the 2005 Gleneagles Pla
n of Action (IEA 2008, 2009b and 20
; Jollands et al. 2010).
The overall consensus, as summarized in IEA (20
), is that, although considerable progress
has been made in adopting energy efficiency policies and innovative financial instruments, no
ry has fully or substantially implemented more than 57% of the relevant IEA
recommendations, and two countries
(Poland and Spain)
report less than 10% implementation.
, p.12) concludes that the principle
the full range of cost
energy efficiency policies has not been adopted is that "energy efficiency continues to face
pervasive barriers including lack of access to capital for energy efficiency investments,
insufficient information, principal
agent problems and externality
costs that are not reflected in
energy prices." The full range of information, market and technological barriers are summarized
in Table 5.
Table 5 indicates that
one of the key barriers to widespread adoption of energy efficiency
measures over the long
related price distortions, which
artificially lowers the cost
of inefficient energy use and technologies. Energy efficient measures that would otherwise
effective still face
a competitive market disadvantage.
As discussed in the pr
were considered a major obstacle to the effective implementation
of energy efficiency and other green stimulus measures. The perverse incentives arising from
such distortions will continue to be an obstacle
to any long run strategy for energy efficiency.
energy efficiency paradox
is defined as the
inclination of households and firms to require very high internal rates of return in order to make
energy efficiency inv
Ansar and Sparks 20
Tietenberg 2009; Gil
linghan et al. 2006;
Popp 2010). The factors often cited for this paradox are the various information and behavioral
barriers listed in Table 5.
caused by such barriers can be extreme
ly high. A
survey of studies in the US shows that the average implicit discount rates by households and
firms making energy saving investments range from 0.26 to 3.00 with a median of 0.67, which is
well above the range for plausible risk
t rates in standard net present value
analysis (Ansar and Sparks 2009).
In the United States, attempts to address the energy efficiency paradox have focused on
providing better information through certification by the federal government, such as the Energ
Star program, or by private organizations, such as the Leadership in Energy and Environmental
Design (LEED) program for buildings (
Dixon et al. 2010;
Gillingham et al. 2006;
2009). The Energy Star program is a certified labeling scheme for mo
re energy efficient
appliances, heat pumps, furnaces, thermostats and similar products purchased by consumers and
LEED establishes standards for the design, construction and operation of energy
saving green buildings. Although they provide ad
ditional information, these labeling programs
leave the level of energy efficiency to the purchaser of the product or building. To eliminate
inefficient choices from the feasible set of purchas
ing options, the US has also
or average energy
efficiency standards for buildings and products.
In developing economies, many energy
investment projects with favorable
internal rates of return remain unfunded because of the lack of effective financing programs and
delivery mechanisms. What
is needed is usually
a combination of additional
that can either realize
the potential efficiency gains
operating cost savings.
is a persistent problem not only in low income
countries but also emerging market economies in Asia, including China and India
and Cropper 2010; Carmody and Ritchie 2007;
Chandler and Gwin
Taylor et al. 2008
u et al. 2009). The factors often cited for t
lack of financing
d delivery mechanisms for
energy efficiency in developing economies
are the market organization and technological
barriers listed in Table 5.
The role of complementary policies
Complementary policies are critical to overcoming the key barriers to long
widespread energy efficiency adoption in all economies. Such policies are also important for
ensuring the success of continuing the cost
effective energy efficiency elements of current green
stimulus packages into a long
mentary policies include:
wide pricing and regulatory policies
, direct emissions
and energy efficiency resource standard
Removal of fossil fuel subsidies
eliminates perverse incentiv
es in energy markets and
provides an immediate source of financing for long
term energy efficiency strategies.
e.g., targeted subsidies
tradable white cert
priced based behavioral interventions, such as home energy
use reports, information on energy
efficient products, energy efficiency promotions
ombined/improved design of
efficiency with other clean energy or government investment programs
wide pricing and regulatory policies
wide pricing and regulatory policies have an important role to place in
run technological innovation that
are necessary for low
carbon investments and
improved energy efficiency in an economy.
Carefully targeted public investment, especially in
support of R&D and other complementary infrastructure, not only boost shortfalls in private
investment during a cre
constrained recession but also have the capability of inducing
technological innovation necessary for widespread adoption of low
carbon power and energy
efficiency in the economy (see Box 2). But "technology
push policies", such as research and
) subsidies, public investments and other initiatives, mainly deal with one
type of market failure affecting induced innovation in low carbon technologies and energy
the inability of private investors’ to appropriate all the knowledge
gains generated by
second market failure stems from the climate change externalit
associated with the
combustion of fossil fuels
and other economic activities that generate greenhouse gas (GHG)
emissions. Public investments and expenditures in
support of private R&D cannot address this
second market failure. Instead, technology
push policies and investments must be supplemented
, such as carbon pricing,
to ensure that
take into account cl
imate change externalities. As discussed in Box 2,
both types of policies
direct emissions and technology
are necessary to promote induced
and energy saving
by the private secto
r in the long run
Studies for reduci
ng greenhouse gas emissions in the United States
, Europe and other
show that combining the two policies substantially lower the costs of meeting
targets compared to relying just on a technology
push approach, such
a R&D subsidy for low
rbon energy options
and energy efficiency
Blesl et al. 2010;
Pew Charitable Trusts 2009; IEA
2009b and 2009c; Goulder 2004; Fischer and Newell 2008; Popp 2010).
Although the optimal
portfolio of policies invariably includes
some form of emissions price
and subsidies for
technology R&D and learning, carbon pricing and direct emissions policies are generally the
most efficient policy option if only a single economy
wide policy can be adopted. For example,
Fischer and Newell 2008, p. 160) conclude from the
ir analysis of the US electricity sector: “We
find that for anything beyond very small emissions reduction targets, the emissions price is the
most efficient single policy for reducing emissions, since it simultaneously gives incentives for
fossil energy p
roducers to reduce emissions intensity, for consumers to conserve, and for
renewable energy producers to expand production and to invest in knowledge to reduce their
Removal of fossil fuel subsidies
Globally, fossil fuel consumption subsidies amou
nted to $557 billion in 2008
(IEA/OPEC/OECD/World Bank 2010). Production subsidies accounted for an additional $100
billion. Together, these subsidies account for roughly 1% of world GDP.
Such fossil fuel consumpt
ion and production subsidies are an add
itional market failure
ing improved energy efficiency
in economies. By artificially lowering the cost of using
fossil fuels, such subsidies deter consumers and firms from adopting energy efficiency measures
that would otherwise be
the absence of any subsidies.
perverse incentives w
ould therefore boost energy savings substantially. For example, phasing
out all fossil fuel consumption and production
subsidies by 2020 could result in a 5.8% reduction
in global primar
y energy demand and a 6.9% fall in greenhouse gas emissions
(IEA/OPEC/OECD/World Bank 2010)
The financial savings could
be redirected to
funding the continuation of many of the
energy efficiency programs initiated during by governments during the 200
noted above (see Table 1 and Annex 1), the
energy efficiency component of green stimulus
packages amounted to $335 billion over 2008
9, which is only about half of the estimated annual
cost of global fossil fuel consumption and productio
Prescriptive and targeted incentive programs
New energy efficient products and technologies usually are more expensive
. As a result, a variety of prescriptive and targeted incentive programs
have been develop
ed to entice consumers to purchase the new products and firm
to invest in the
new technologies by
lowering their relative costs
or stipulating an energy efficiency
. Such incentive programs include
targeted subsidies and rebates, energy
funded energy efficiency programs
and tradable white certificates
Cappers and Goldman 2010;
Gillingham et al. 2006;
del Río 2010;
and Felder 2010).
Targets for energy efficiency in the Un
ited States and Europe are increasingly being set
through energy efficiency portfolio standards (EEPS). These standards stipulate that some
portion of energy demand must be met through improved energy efficiency or how much energy
efficiency potential mus
t be installed. Minimum or average energy efficiency standards for
buildings and products, which were discussed above, are one example of EEPS.
utilities to meet explicit energy savings goals through l
egislative or regulatory mandates is
Over half of US states have some form of EEPS, and they are increasingly
being used in a number of European countries for setting energy efficiency targets (Cappers and
Goldman 2010; del Río 2010;
Dixon et al. 2010;
tenberg 2009; Transue and
New incentive programs are increasingly being used to improve the cost
meeting the energy efficiency targets mandated by EEPS. For example, in the United States,
funded energy efficiency programs are becoming a pop
ular method of meeting such
fuel based electricity generation
. However, because of the time it takes for the
energy savings to be reflected in utility bills, the way in which such programs account for a
recover costs from ratepayers can
have an important influence on incentives (Cappers and
Goldman 2010). Most utilities prefer charging annually for energy efficiency program costs in
order to minimize their perceived regulatory risk for the potential disallowance or under
recovery of pro
gram costs in future years. But this cost recovery strategy means that it takes
some time before the cost savings from improved energy efficiency are realized and average
customer bills begin to fall. However, if energy efficiency costs are amortized ove
r a multi
period, then the ratepayers
will realize bill savings much more quickly, and will be more likely to
support and participate in the program.
Tradable white certificates are another incentive mechanism increasingly used in Europe
and the Unite
d States to energy efficiency targets in electricity generation. Energy suppliers or
distributers are required to meet a certain energy
saving target among end
users. The energy
savings are measured, verified and certified through the issuing of a white
certificate. The value
of the tradable white certificate (TWC) in terms of kilowatt hours (kWh) of energy savings is
calculated against a baseline
. Certificates can either be earned through actual energy saving
activities and investments
of by acquiring
s from others who have saved more energy than
necessary to achieve compliance
TWCs are considered more cost effective in the long run than current subsidy or rebate
programs, which generally target the most reduction in energy efficiency per dollar or
expended (Tietenberg 2009
; Transue and Felder 2010
Rather than government or regulatory
agencies determining which technologies to support with pre
set rebates or subsidies, a TWC
program allows the market to establish the most cost
effective way f
or end users to achieve
energy savings. In addition, b
y allowing end users to choose currently whether to invest in
saving energy or purchase certificates from others,
a TWC scheme
allows them time consider
making investments that minimize the present val
ue of the costs of energy savings. However,
rebate or subsidy requires less upfront cost to implement, setting up a TWC scheme inevitably
require higher program cost outlays.
Another advantage of r
is that they can be used to encourage consumers
energy efficient products.
Rebate payments are either employed as once
off payments at the
time of sale or as a post
in coupon. According to Transue and Felder (2010, p. 103),
rebates are popular incentives
because they require relativ
ely straightforward implementation,
rely on simple economic principles, and when structured properly transform target markets to
eliminate future rebate needs….In the EEPS case, rebate payments cover incremental cost
differences between efficient and ineff
iciency measures, removing incentives to purchase
traditional technologies and stimulating demand for efficient ones.”
base behavioral interventions also have a role to play in encouraging
households to overcome many
of the barriers that prevent them from adopting existing energy
saving technologies, such as better insulation, fuel
efficient vehicles and efficient appliances and
(Allcott and Mullainathan 2010; Dietz et al.
2009). Evidence suggests
ehavioral nudging may be even more cost
effective if initiative through a package of energy
efficiency incentive programs and policies.
As summarized by Dietz et al. (2009), t
effective interventions typically (
) combine several
policy tools (e.g.
, information, persuasive
appeals, and incentives)
to address multiple barriers to behavior change; (
marketing, often featuring a combination of mass
media appeals and participatory, community
that rely on social netw
orks and can alter community social
norms; and (
address multiple targets (e.g., individuals, communities,
Such programs can
households and can
in the average
d by 2% (Allco
tt and Mullainathan 2010)
Combined/improved design of energy efficiency programs
A number of pilot programs and experiments have been co
nducted to try and improve
effectiveness of the energy efficiency programs introduced during t
Some of the innovations that have shown the greatest potential involve merging energy
efficiency with other clean energy or government investment programs, such as c
energy efficiency house weatherization and other programs wi
cost mortgage provision for
poor households (Nevin 2010);
combining energy efficiency and smart grid programs (Jackson
2010); combining energy efficiency and renewa
ble energy electricity programs
del Río 2010).
e, Nevin (2010)
proposes an energy
efficient housing stimulus strategy
that could (
) create jobs quickly; (
) reduce home energy bills by 30 to 50%; (
home values and reduce foreclosures; (
) reduce lead poisoning among children
; and (
lement regulatory reforms that provide incentives for cost
effective energy saving
investments in homes.
The suggested program involves combining the “lead
replacement from the ARRA, the Making Home Affordable plan to reduce home
and the home weatherization program of the Department of Energy and Housing and Urban
Nevin maintains that such a combined program could help to halt the
decline in home prices, given recent evidence that home value incre
ases by around $20 for every
dollar reduction in annual utility bills. In addition, providing federal funding for window
replacement and other home weatherization in any home purchased from the inventory of
foreclosed homes would target such equity
ing investment to neighborhoods hardest hit
Jackson (2010) finds that combining basic appliance and energy efficiency building
standards with smart grid improvements are much more effective than relying on the latter
In particular, targeting the most energy
encouraging a 20% participation rate in a smart grid program reduces peak hour electricity use
by 33% more than relying on a 50% smart grid participation program on its own. As the l
a much more expensive program, combining both energy efficiency and smart grid programs are
therefore likely to be more cost effective.
Combining renewable energy promotion and energy efficiency initiatives is also likely to
lead to greater syner
gies between energy and cost savings.
Cappers and Goldman (2010) find
that regulations that require
electricity generating utilities to adopt
energy efficiency and
renewable energy portfolio standards simultaneously are likely to be the least
reducing fossil fuel energy use.
del Río (2010) also finds considerable energy and cost savings
occur in Europe when energy efficiency measures are added to support schemes to encourage
more electricity produced with renewable energy sources.
nteractions are particularly
strong when tradable green certificates
certificates that are issued for every Megawatt hour
(MWh) of electricity generated from renewable energy
are employed using relative quotas.
the quota is set in terms of percent
age of overall energy distribution and use, then the energy
efficiency scheme has the potential to reduce electricity demand and production, thus affecting a
utility’s renewable energy requirement. The result is an increase in the uptake of energy
ncy measures, reduced electricity demand and more rapid attainment of energy saving
targets. The combined policy also provides an incentive for technical innovation and cost
reductions in energy saving technologies.
Assistance to developing economies
In order to implement widespread and effective energy efficiency interventions, many
developing economies will require substantial assistance in o
vercoming the skills, technological
and capital gap
that they face.
This gap is the principal cause of the ma
rket organization and
technological barriers identified in Table 5 that lead to underinvestment in energy efficiency
projects that have favorable rates of return. Targeting development assistance in these areas
should therefore be a pri
ority for the Unite
and other major
to improve the adoption of energy efficiency in low income and emerging market economies.
For example, many developing economies face a serious “capital gap” in private and
public financial investments t
hat will constrain them from implementing a long
Access to financing is a major constraint if developing economies are
expected to invest in
such a strategy
Even before the current economic crisis, official
sistance contributed US$5.4 billion annually to all energy projects worldwide,
which is below the estimated US$8.3 billion in annual low carbon energy investments needed
just for the Asia
Pacific region and the $30 billion required for all dev
eloping regions (UN
ESCAP 2008; Wheeler
In some large emerging market
economies, notably in Asia,
ufficient capital is available from the private sector, both in terms of private investments within
developing countries and financing from global an
d regional capital markets, but only if there is
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
(Carmody and Ritchi
e 2007; Taylor et al. 2008
; UN ESCAP 2008
In addition to the “capital gap” there is also a substantial “skills and technological gap”
for low and middle income economies in adopting
technologies. Many developing econom
ies spend little on research and development (R&D) on
these technologies and have a chronic shortage of workers with the complementary skills need to
develop and apply low
carbon technologies. Instead, most low and middle income countries,
with possibly t
he exception of China
, India and perhaps a few other large emerging market
with some domestic capacity in some clean technologies, are highly dependent on the
importation and transfer of techn
ologies and skills developed elsewhere. It is recognized that the
transfer of new technologies and skills facilitates the development of an indigenous technological
capacity and workforce that enables future innovations and long
term adoption of low
technologies. But most developing economies lack even the minimum R&D capacity and skilled
workforce capable of attracting the transfer of many
(Ockwell et al. 2008)
The Clean Developmen
t Mechanism (CDM)
is increasingly viewed as an important
mechanism for solving some of the constraints to reducing the carbon dependency
, the CDM has achieved success in securing the financing
and transfer of
carbon technologies in developing countries, and
above all, in effectively creating a global trading market.
There are concerns
the current system
to establish a long
term global price signal for carbon
First, its projects tend to be concentrated in a handful of large emerging market
, such as China
Brazil and Mexico. Low
income economies and particularly
Saharan African countries host very few CDM projects.
Second, most of the expected certified emission reduction (CER) credits earned by 2012
are from mainly large
scale projects, such as inciner
ation of greenhouse gases, grid
renewable electricity generation, fuel switching, reducing transmission losses, and capturing
fugitive methane emissions. Important sectors, such as transportation, building and construction,
afforestation and ref
scale rural energy projects and energy efficiency, are
poorly represented in the current CDM project portfolio.
Third, although the pipeline of projects coming through the CDM has
, the scale
of the mechanism needs to be increased
, so that it can deliver significantly greater finance and
emission reductions globally. In addition, scaling up may require a much simpler and more
transparent mechanism, such as sectoral benchmarks that enable entities to receive CER credits
ng a targeted emissions intensity per unit output or technological benchmarks, which
would allow the inclusion of
both energy efficiency improvements as well as
such as carbon capture and storage, second
generation biofuels or simple home p
A variety of proposals have been suggested for scaling up and reforming the CDM,
increasing its coverage of countries to more low
income and Sub
Saharan economies and
including more sectors and technologies in the mechanism
uding energy efficiency (Collier
et al. 2008; Hepburn and Stern 2008; Lloyd and Subbarao 2009;
Olsen and Fenhann 2008;
Schneider et al. 2008; Wheeler 2008)
. Such ideas should help the international community agree
on the best way to extend the CDM and glo
bal carbon market beyond 2012
preferably as part of
a global climate change agreement, and to include reforms of the mechanism to increase the
coverage of developing economies, the sectors and technologies and the overall financing of
energy efficiency pr
Many G20 governments included substantial energy efficiency measures as part of their
fiscal stimulus packages
that were implemented
in response to the 2008
measures included s
upport for energy conservation in buildin
gs; fuel efficient vehicles; public
transport and rail; and improving electrical grid transmission
. As this review has indicated,
many of the energy efficiency measures in these packages have some of the highest net benefits,
and thus should be continued
after the initial stim
ulus programs have
been fully disbursed by
run energy efficiency strategy will have reduc
unless it is
supported by a range of complementary pricing policies. These include economy
ing and regulatory policies, such as carbon pricing, emissions policies and additional
regulatory incentives; removal of fossil fuel subsidies; prescriptive and targeted incentive
programs; behavioral nudging; and combined or improved design of energy effi
Employing the right portfolio of policies and incentives have been shown to increase both cost
and energy savings considerably,
as well as promote induced
in low carbon
technologies and energy efficiency.
income and em
erging market economies face substantial technical and financial
barriers that lead to the underfunding of many energy efficiency investment projects with
favorable internal rates of return. There are two ways in which
the international community can
alleviate this bottleneck. First, major aid donors should target their assistance to developing
the skills, technological and capital gap that they face in implementing
energy efficiency measures over the long term.
of the CDM is necessary to
establish a long
term global price signal for carbon, and
to increase the coverage of developing
economies, the sectors and technologies and the overall financing of energy efficiency projects.
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, from September 2008 through December 2009
Green Stimulus (US$ bn)
Sources: Barbier (2010a); Robins et al. (2009) and (2010).
Support for renew
able energy (geothermal, hydro, wind and solar, nuclear power, and carbon capture and
Support for energy conservation in buildings; fuel efficient vehicles; public transport and rail; and
improving electrical grid transmission.
for water, waste and pollution control, including water conservation, treatment and supply.
Based on 2007 estimated Gross Domestic Product (GDP) in terms of purchasing power parity, from the
US Central Intelligence Agency The World Factbook, available
Only the direct contribution by the European Union
stimulus packages of
G20 EU countries: Austria,
the Netherlands, Poland, Portugal
. The non
EU countries in this group are Chile, Israel,
Malaysia, New Zealand, Norway, the Phili
ppines, Switzerland, Thailand and Vietnam.
Impacts of a US Green Recovery Program (per $ billion spent)
How quickly the
in US oil
Weatherize 377,000 homes
Reduce Federal energy
consumption by 8 trillion BTU
Improve efficiency of all new
schools by 33%
Hybrid tax credit
Additional purchases of
Cash for c
500,000 vehicles traded in
traveled by 18 million/year
all smart meters on 4.4
Low carbon power
Production tax credit
1,500 megawatts of additional
wind generation capacity
Investment tax credit
300 megawatts of add
Carbon capture and
storage demo projects
Fund the CCS component of a
500 MW demo project
Battery research and
Develop next generation
Conventional stimulus programs
Increase consumer spending by
by 11 million/year
Source: Adapted from Houser et al. (2009).
Clean Energy Spending and Job
Advanced vehicles and fuels
Transit and high
Total energy ef
Carbon capture and sequest.
Green innovation and training
Clean energy equipment manuf.
Total clean energy
(energy efficiency share, %)
Source: CEA (2010).
Through December 31, 2009.
Includes estimate of additional in
duced jobs created.
Estimated. A job
year is one person employed for one year.
Table 4. Short and Long
Term Effects of Various Energy Efficiency Stimulus Measures
Type of effect
Energy efficiency retrofits
improvements in new capital
Green transport infrastructure
Cash for c
Power grid expansion
Source: Strand and Toman (2010, Table 5.1).
Table 5. Barriers to Implementing Cost
Effective Energy Efficiency Policies
Key problem associated
Costs associated with energy and incumbent
technologies may not be included in their
prices; energy and incumbent technologies may
Remove price distortion
and subsidies; apply
Information on availability and nature of an
energy efficient product is not easily available
or accessible at time of investment
Improve accessibility and
availability of informati
on energy efficient
Perceived costs involved in making a decision
to purchase and use equipment outweigh
Reduce transaction costs
Constraints on time, attention, and the ability t
process information lead consumers to make
less efficient and sub
Reduce the constraints on
The initial cost of a project may be higher than
the finance threshold; poor or con
access to funds.
Enhanced access to finance.
Principal agent problems; established
companies may have market power to guard
Enhanced access to finance;
better market organization;
Poor regulation at
Regulations and codes not keeping pace with
development or leading to inefficient
framework, standards and
Sunk costs; tax rules or regulations that
encourage long depreciation; inertia
Improve incentives to invest
in energy efficient new
market pricing and
Failure to benefit from scale economies,
learning by doing,
Regulation and reform of
practices; improve scale
economies, learning by
doing and technological
Lack of familiarity with energy efficient
technology or insu
fficient human skills for that
Enhance skills and technical
Source: Adapted and modified from Jollands et al. (2010).
Total Green Stimulus by Country ($ billion)
Total Green Stimulus Spending by Country ($bn)
Gl obal total
Uni ted States
European Uni on
Austral i a
Saudi Arabi a
Uni ted Ki ngdom
Source: Based on Table 1.
Figure 2. Green Stimulus as
a Share of Total Fiscal Stimulus
Green Stimulus as a Share of Total Fiscal Stimulus
Gl obal share
European Uni on
Austral i a
Uni ted Ki ngdom
Uni ted States
South Afri ca
Source: Based on Table 1.
Figure 3. Green Stimulus as a Share of Gross Domestic Product (GDP)
Green Stimulus as a Share of Gross Domestic Product (GDP)
Gl obal share
Saudi Arabi a
Austral i a
Uni ted States
Source: Based on Table 1.
Figure 4. Total Energy Efficiency Spending by Country ($ billion)
Total Energy Efficiency Spending by Country ($ bn)
Gl obal Total
Uni ted States
European Uni on
Austral i a
Uni ted Ki ngdom
Source: Based on
. Energy Efficiency as a Share of Total Fiscal Stimulus
Energy Efficiency as a Share of Total Fiscal Stimulus
Gl obal Total
European Uni on
Austral i a
Uni ted Ki ngdom
South Afri ca
Source: Based on Table 1.
Figure 6. Energy Efficiency as a Share of Green Stimulus
Energy Efficiency as a Share of Green Stimulus
Source: Based on Table 1.
Figure 7. Comparison of Green Stimulus and Energy Effici
ency Spending ($ billion)
Green Sti mul us ($ bn)
Energy Effi ci ency ($ bn)
Source: Based on Table 1.
Figure 8. Disbursement of Global Green Stimulus Spending
Source: Robins et al. (2010).
Notes: e = E
Box 1. Was CARS a Clunker?
As part of the fiscal stimulu
s efforts implemented during t
Consumer Assistance to Recycle and Save (CARS) Act was signed into law on June 24, 2009.
Popularly known as "Cash for Clunkers", the program provided a subsidy payment to owners
who traded in their ve
hicles to purchase or lease a new, more fuel
efficient vehicle. The credit
amount was either $3,500 or $4,500, depending upon the amount of improved fuel efficiency.
CARS appropriated an initial $1 billion, which was then increased by $2 billion in Augus
CARS ran from July 1 through November 1, and paid out a total of $2.
85 billion in
vouchers. The National Highway and Traffic Safety Administration (NHSTSA) estimates that
nearly 680,000 older vehicles were replaced by more fuel
average payment per
owner was $4,209,
and the average improvement in fuel efficiency per
vehicle was 9.2 miles.
The NHSTA (2009) estimates that 49% of the new vehicles were
manufactured domestically, and that CARS resulted in a $3.8 bil
lion to $6.8 billion increase in
GDP, with over 60,000 jobs created or saved. The gains in vehicle fuel efficiency are estimated
fuel consumption over the next 25 years by 824 million gallons, leading to a decline in
greenhouse gas (GHG) emission
s of 9 million metric tons. The reduction in GHG emissions is
estimated to generate a social benefit of
$278 million over 25 years (in 2008 $).
In addition, the
in air pollutants, including carbon monoxide (CO), volatile organic
nitrogen oxides (NO
), fine particulate matter (PM2.5) and sulfur dioxide (SO
is expected to yield additional benefits of $345 billion over the next 25 years (in 2008 $).
However, CARS has also been criticized as being economically inefficien
t. For example,
Abrams and Parsons (2009)
argue that, although taxpayers are paying the full subsidy of $4,209
per vehicle, the net consumer surplus of the payment is only $1,600 for each owner ($2,600
average value of the subsidy less the $1,000 average
value of a clunker). The
cost per vehicle then is $2,600. In comparison, they estimate the environmental benefits of
CARS from the improvements in fuel efficiency to be only $596 per vehicle for reductions in
GHG emissions and air polluti
on. As a result, there is a net social cost of around $2,000 per
vehicle, and with around 700,000 vehicles sold, a total welfare loss of around $1.4 billion.
Ching et al. (2009) counter that Abrams and Parsons have neglected to include in their
the $2,000 per year benefits in gasoline savings per owner and the $300 in scrap value
per clunker. Added to the $596 environmental benefits, there is now a benefit per vehicle trade
of $3,000, or a net social gain of $400 per vehicle. In addition, Ching
et al (20
) argue that the
boosts to GDP and employment should not be ignored, which the NHSTA (2009) suggest are
significant. There may be additional benefits of CARS from encouraging improvements in
technology for future fuel efficient vehicles.
intended impact of CARS was how it was funded. Robins et al. (2009) point out
that $2 billion was siphoned from the American Recovery and Reinvestment Act (ARRA)
allocation to for long
term loans for renewable energy. Thus, one of the additional costs of
CARS must be any resulting reduction in low carbon power generation from this reallocation
ide Policies and Induced
Innovation in Low Carbon and Energy
highlights the role of
o types of economy
wide policies in
induced technological change to reduce carbon dependency
through improved energy efficiency
and adopting low
induced technological innovation
can be efficiently
in the long run
combining “direct emission pol
icies”, such as a cap
and other emission pricing policies
push policies", such as research
and development (
and other policies
for encouraging private sector
ectly (see table below)
he boost to private sector R&D and
the gains from learning
doing as the firms become more familiar
with new low
and energy efficient
products and processes
lead to long
run cost reductions and
For example, d
irect emissions policies
, such as carbon taxes and cap
prices of fossil fuels and of energy sources
derived from them, such as electricity. Firms
that utilize these fuels might find it w
orthwhile to invest
more R&D aimed at developing
alternative production processes that reduce fossil fuel consumption,
since discovery of such
processes could now yield significant cost savings. Technology
push policies such as subsidy
programs can also in
duce technological change by
stimulating additional R&D.
evidence that such R&D
has led to large cost reductions in many important energy
For example, he cites a N
ational Research Council (NRC)
39 R&D programs
efficiency and clean
these programs taken together
yielded an annual rate
of return of over 100 percent
. Increased utilization of new products, processes and technologies
in turn stimulates learning
doing. The result is furthe
r cost reductions in adopting low
A typical estimate is that, for relatively new technologies,
costs fall by 20 percent
for every doubling of cumulative experience.
Based on these findings, Goulder argues that there is strong rationale
for employing both
direct emissions and technology
push policies simultaneously, even when the associated cost
reductions from induced technological change are uncertain. The rationale stems from two
market failures in private adoption of low
and energy efficiency innovation
First, private investment in R&D tends to be sub
optimal as a result of the inability of private
investors to appropriate all the returns to R&D.
Some of the knowledge stemming from R&D
spills over and benefits
other than the investing firm. As a result, in the absence of public
intervention, investments in R&D tend
to fall short of the amount which would maximize social
net benefits. This provides a rationale for technology
push policies, including subsidi
es to R&D.
Second, current economic
fuels generally exceeds socially efficient levels
because market prices of these fuels fail to capture
s are well
below the full social cost, the
um of private and external cost. This
promotes dependence on fossil fuels that is excessive in terms of
provides a compelling rationale for direct emissions policies
such as carbon taxes
bring the prices of
fossil fuels more in line with their social cost.
Goulder concludes that both types of policies
direct emissions and technology
are necessary to promote induced technological change to reduce carbon dependency.
Studies for reducing gre
enhouse gas emissions in the United States show that combining the two
policies substantially lower the costs of meeting targets compared to relying just on a
push approach, such a R&D subsidy for low
carbon energy options
Public policies for
inducing innovation in energy efficiency and low
Direct emissions policies
Subsidies to R&D in
sector R&D in clean energy
trade for greenhouse gas (GHG)
financed technology competitions
Subsidies to GHG emission abatement
Strengthened patent rules
Adapted from Goulder
Annex 1. Major Green and Economic Stimulus Plans by Country and Region, from
September 2008 through December 2009
Nation Building and Jobs Plan
NDRC Stimulus Package
Pckg to Safeguard People's Daily Lives
Countermeasures to Economic C
Second Supplementary Budget
Green New Deal
Economic Recovery Plan
Prebudget Report 2009
Other EU states
Economic Action Plan
Home Economics & Emp
Emergency Economic Stabilization Act
American Recov and Reinvest
Sources: Robins et al. (2010) and Table 1.
Includes India and Thailand stimulus.
Includes Argentina and Chile stimulu