Hey everyone, welcome back! Meeting the rapidly rising energy demand with mostly or solely renewable energies is a huge challenge. So next to stimulating renewable energy uptake and reducing CO2 emissions, we will also have to reduce our overall energy consumption. Improving energy efficiency is an effective way to do this without sacrificing our living standards or development goals. We define energy efficiency improvements as a reduction of energy used per unit of energy services delivered. This could be a reduction in energy used to provide lighting to an office building. The energy service doesn’t change here, we just use less energy to provide it. A different way of looking at it would be that you can deliver more services with the same amount of energy. For instance, the improved efficiency of solar panels would result in more electricity produced per unit of incoming sunlight. So it is about making better use of energy! But how do we achieve this? Before we dive into efficiency policies, let’s take a step back first to get a broader picture of the opportunities we have.
Here, we see the greenhouse gas abatement cost curve, developed by McKinsey. It ranks relevant options to reduce emissions, from lowest to highest associated costs. The width of the bars are the abatement potential: the wider the bar, the more CO2 could be avoided. As you might have noticed, some of these options are covered by the renewable energy and CO2 policies we already discussed. For example; Solar, wind, geothermal energy and biofuels. But there are many more options, and a lot of them are not addressed by either CO2 or renewable energy policies. Many of them are actually related to improving energy efficiency. Switching incandescent light bulbs to LEDs, for example. Or improving insulation in buildings and using more efficient appliances. You might have noticed something else as well.
Why do the options on the left side show negative costs? This means, you would save money by implementing these options. LEDs, for instance, are more expensive than incandescent light bulbs. But the resulting savings in energy costs are much higher than the up-front investment. In other words: you save money by reducing your emissions, because you lower your energy bill! Sounds like a good deal, right? But… these options are still on the curve. So… why aren’t they realized yet? McKinsey’s abatement curve only reflects the financial aspect of realizing greenhouse gas abatement. But is that the whole story? Let’s have a look at an example, say, the introduction of electric cars. Which barriers need to be overcome to make them the standard vehicle? First, let’s consider the costs. Electric cars are expensive, both for the user and the producer. Car developers need to take risks in developing them, hoping that users are willing and able to spend more than on a conventional car. But there is more.
Just think of all the different actors involved! There is more than the drivers and the car manufacturers. A large-scale rollout of electric cars requires a charging infrastructure and how are both going to be coordinated? Parking garages, employees, governments, electricity network operators need to coordinate the development of such an infrastructure. Quite a challenge! And again there is more, if you think of all the physical interdependencies! With the charging infrastructure in place, you need to ensure that the electricity grid capacity is sufficient and that there is enough electricity generated when it is used. Parking spaces need to be adapted, which may temporarily disturb traffic and disfavor conventional cars. But we’re still not there: drivers need to adjust their driving behavior, charge regularly and plan their trips around the available charging infrastructure. Are they willing to do so? Ok, one thing is clear: There are many reasons why some of these innovations don’t drive themselves.
Just putting an electric car on the street won’t make it running. Barriers for all energy efficiency improvements can be grouped as we just did. This shows why a push or pull is needed here and there. So that’s where policies come into play! But which ones could we use to approach all these barriers for improving energy efficiency? There are so many different policies to promote energy efficiency, that it is easy to get lost. From petrol taxes to energy labels: there is a wide variety. I believe most of the policies out there can be assigned to one of the following five categories. I hope you find this overview useful: Financial instruments, information instruments, regulation, procedural instruments and voluntary instruments. Again, they can be best explained using examples.
Financial instruments are quite well known. As the name suggests, they are mainly to overcome financial barriers. Think of tax benefits, such as the Dutch government offered to buyers of electric cars. Or subsidies for renewable energy technologies. Or small grants for newly built energy efficient houses, like the German development bank made available to home owners. Information instruments aim at increasing awareness, especially among consumers. They primarily tackle behavioral barriers. When it comes to energy efficiency, labels and certificates are very common. In the EU, producers of certain appliances, for instance washing machines or fridges, are obliged to indicate their performance. But also in the construction sector, labeling is used increasingly. Consumers can therefore make a better informed buying decision. And in turn, producers develop more energy efficient products to accommodate their consumers’ wishes. Do you remember whether there was an energy label when you purchased your last TV or washing machine? And did you take the information into account? If there are already good and affordable options to improve energy efficiency, direct regulation can be an option too.
Energy performance standards and efficiency requirements are the most common instruments. It disallows the purchase or use of products performing worse than a certain standard. The ban of incandescent light bulbs in the EU is one example. Or the introduction of environmental zones in many cities where only clean and efficient cars are allowed in. Procedural instruments could be mandatory audits or energy management protocols at companies. They can be effective for things that companies normally don’t consider – just because it is not in their regular frame of mind. How many times, do you think, does a company look at their energy bills? This can help firms to keep track of their energy performance and optimize processes with regard to their energy efficiency. Lastly, voluntary instruments are a means of self-regulation. Industries or companies that are not regulated, yet, can set themselves targets and guidelines for improved efficiency performance. This works well for sectors in which energy efficiency improvements only pay off for a company if its competitors realize them as well.
The covenants in the paper industry are a prominent example. While energy efficiency improvements bear great potential, there are challenges as well. With so many different barriers that need to be addressed and so many different policy options, it is hard to get it right. But it does make it understandable that there are many policies in place. One of the challenges is that not all policies are compatible. Some might even be counteracting. Funds used to improve the efficiency of conventional cars could, for instance, then be undoing the support for developing electric cars. As you have seen with the example on electric cars, often many barriers apply and should be addressed altogether. If that is not the case, the policies that were implemented can be ineffective. That would waste what was spent on the policy in place and it may lead to delays. Another issue is that not all industries can be regulated easily.
The shipping and aircraft industry, for instance, can hardly be regulated due to their cross-border activities. The fact that it is difficult to get the perfect set of energy efficiency policies in place is no reason not to try: there are many examples where policies had larger effects than expected. They target a variety of barriers and there are more than only those affecting economic costs and benefits. Despite the challenges, energy efficiency improvements can greatly contribute to energy savings, CO2 emissions reductions, up-take of renewables, energy cost reductions, human health and the economy. I wish you all best of success with the exercises!.