IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change Emission-reduction policies for energy supply

Subsidies, incentives and market mechanisms presently used to promote fossil fuels, nuclear power and renewables may need some redirection to achieve more rapid decarbonization of the energy supply.

Subsidies and other incentives

The effects of various policies and subsidies that support fossil-fuel use have been reviewed (IEA, 2001; OECD, 2002b; Saunders and Schneider, 2000). Government subsidies in the global energy sector are in the order of 250–300 billion US$/yr, of which around 2–3% supports renewable energy (de Moor, 2001; UNDP 2004a). An OECD study showed that global CO2 emissions could be reduced by more than 6% and real income increased by 0.1% by 2010 if support mechanisms on fossil fuels used by industry and the power-generation sector were removed (OECD, 2002b). However, subsidies are difficult to remove and reforms would need to be conducted in a gradual and programmed fashion to soften any financial hardship.

For both environmental and energy-security reasons, many industrialized countries have introduced, and later increased, grant support schemes for producing electricity, heat and transport fuels based on nuclear or renewable energy resources and on installing more energy-efficient power-generation plant. For example, the US has recently introduced federal loan guarantees that could cover up to 80% of the project costs, production tax credits worth 6 billion US$, and 2 billion US$ of risk coverage for investments in new nuclear plants (Energy Policy Act, 2005). To comply with the 2003 renewable energy directive, all European countries have installed feed-in tariffs or tradable permit schemes for renewable electricity (EEA, 2004; EU, 2003). Several developing countries including China, Brazil, India and a number of others have adopted similar policies.

Quantitative targets

Setting goals and quantitative targets for low-carbon energy at both national and regional levels increases the size of the markets and provides greater policy stability for project developers. For example, EU-15 members agreed on targets to increase their share of renewable primary energy to 12% of total energy by 2010 including electricity to 22% and biofuels to 5.75% (EU, 2001; EU 2003). The Latin American and Caribbean Initiative, signed in May 2002 included a target of 10% renewable energy by 2010 (Goldemberg, 2004). The South African Government mandated an additional 10 TWh renewable energy contribution by 2013 (being 4% of final energy consumption) to the existing contribution of 115 TWh/yr mainly from fuel wood and waste (DME, 2003). Many other countries outlined similar targets at the major renewable energy conference in Bonn (Renewables, 2004) attended by 154 governments, but not to the extent that emissions will be reduced below business as usual.

Feed-in tariffs/Quota obligations

Quota obligations with tradable permits for renewable energy and feed-in tariffs have been used in many countries to accelerate the transition to renewable energy systems (Martinot, 2005). Both policies essentially serve different purposes, but they both help promote renewable energy (Lauber, 2004). Price-based, feed-in tariffs (providing long price certainty for renewable energy producers) have been compared with quantity-based instruments, including quotas, green certificates and competitive bidding (Sawin, 2003a; Menanteau et al., 2003; Lauber, 2004). The total level of support provided for preferential power tariffs in EU-15, in particular Germany, Italy and Spain, exceeded 1 billion € in 2001 (EEA, 2004).

Experience confirms that incentives to support ‘green power’ by rewarding performance are preferable to a capital investment grant, because they encourage market deployment while also promoting increases in production efficiency (Neuhoff, 2004). In terms of installed renewable energy capacity, better results have been obtained with price-based than with quantity-based approaches (EC, 2005; Ragwitz et al., 2005; Fouquet et al., 2005). In theory, this difference should not exist as bidding prices that are set at the same level as feed-in tariffs should logically give rise to comparable capacities being installed. The discrepancy can be explained by the higher certainty of current feed-in tariff schemes and the stronger incentive effect of guaranteed prices.

The potential advantages offered by green certificate trading systems based on fixed quotas are encouraging a number of countries and states to introduce such schemes to meet renewable energy goals in an economically efficient way. Such systems can encourage more precise control over quotas, create competition among producers and provide incentives to lower costs (Menanteau et al., 2003). Quota-obligation systems are only beginning to have an effect on capacity additions, in part because they are still new. However, about 75% of the wind capacity installed in the US between 1998 and 2004 occurred in states with renewable energy standards. Experience shows that if certificates are delivered under long-term agreements, effectiveness and compliance can be high (Linden et al., 2005; UCS, 2005).

Tradable permit systems and CDM

In recent years, domestic and international tradable emission permit systems have received recognition as a means of lowering the costs of meeting climate-change targets. Creating carbon markets can help economies identify and realize economic ways to reduce GHG emissions and other energy-related pollutants, or to improve efficiency of energy use. The cost of achieving the Kyoto Protocol targets in OECD regions could fall from 0.2% of GDP without trading to 0.1% (Newman et al., 2002) as a result of introducing emission trading in an international regime. Emission trading, such as the European and CDM schemes, is designed to result in immediate GHG reductions, but CDM also has long-term aspects, since the projects must assist developing countries in achieving sustainable development (see Chapter 13). The CDM successfully registered 450 projects by the end of 2006 under the UNFCCC by the Executive Board with many more in the pipeline. Since the first project entered the pipeline in December 2003, 76% of projects belong to the energy sector. If all the 1300 projects in the pipeline at the end of 2006 are successfully registered with the UNFCCC and perform as expected, an accumulated emission reduction of more than 1400 MtCO2-eq by end of 2012 can be expected (UNEP, 2006).

Information instruments

Education, technical training and public awareness are essential complements to GHG mitigation policies. They provide direct and continuous incentives to think, act and buy ‘green’ energy and to use energy wisely. Green power schemes, where consumers may choose to pay more for electricity generated primarily from renewable energy sources, are an example of combining information with real choice for the consumer (Newman et al., 2002). Voluntary energy and emissions savings programmes, such as Energy Star (EPA, 2005a), Gas Star (EPA, 2005b) and Coalbed Methane Outreach (EPA, 2005c) serve to effectively disseminate relevant information and reduce knowledge barriers to the efficient and clean use of energy. These programmes include public education aspects, but are also built on industry/government partnerships. However, uncertainties on the effectiveness of information instruments for climate-change mitigation remain. More sociological research would improve the knowledge on adequacy of information instruments (Chapter 13).

Technology development and deployment

The need for further investments in R&D of all low-carbon-emission technologies, tied with the efficient marketing of these products, is vital to climate policy. Programmes supporting ‘clean technology’ development and diffusion are a traditional focus of energy and environmental policies because energy innovations face barriers all along the energy-supply chain (from R&D, to demonstration projects, to widespread deployment). Direct government support is often necessary to hasten deployment of radically new technologies due to a lack of industry investment. This suggests that there is a role for the public sector in increasing investment directly and in correcting market and regulatory obstacles that inhibit investment in new technology through a variety of fiscal instruments such as tax deduction incentives (Energy Policy Act, 2005; Jaffe et al, 2005).

Following the two oil crises in the 1970s, public expenditure for energy RD&D rose steeply, but then fell steadily in industrial countries from 15 billion US$ in 1980 to about 7 billion US$ in 2000 (2002 prices and exchange rates). Shares of IEA member-country support for energy R&D over the period 1974–2002 were about 8% for renewable energy, 6% for fossil fuel, 18% for energy efficiency, 47% for nuclear energy and 20% on other items (IEA, 2004b). During this period, a number of national governments (e.g. US, Germany, United Kingdom, France, Spain and Italy) made major cuts in their support for energy R&D. Public spending on energy RD&D increased in Japan, Switzerland, Denmark and Finland and remained stable in other OECD countries (Goldemberg and Johannson, 2004).

Technology deployment is a critical activity and learning from market experience is fundamental to the complicated process of advancing a technology toward economic efficiency while encouraging the development of large-scale, private-sector infrastructure (IEA, 2003h). This justifies new technology deployment support by governments (Section 4.5.6).