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Linking green stimulus, energy efficiency and technological innovation:

The need for complementary policies

Edward B BarbierDepartment of Economics & FinanceUniversity of Wyoming

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Outline

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

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 - Support for renewable energy (geothermal, hydro, wind and solar), nuclear power, 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.

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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.

Total Green Stimulus Spending by Country ($bn)

514.3

218.0

117.7

59.9

43.3

22.8

13.8

9.9

9.5

6.2

5.8

0 100 200 300 400 500 600

Global total

China

United States

South Korea

Japan

European Union

Germany

Australia

Saudi Arabia

France

United Kingdom

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Green Stimulus as a Share of Total Fiscal Stimulus

15.8%

78.7%

58.7%

33.6%

31.0%

22.7%

18.2%

16.3%

13.2%

12.0%

10.7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Global share

South Korea

European Union

China

Norway

Australia

France

United Kingdom

Germany

United States

South Africa

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Green Stimulus as a Share of Gross Domestic Product (GDP)

0.7%

5.0%

3.1%

1.7%

1.3%

1.3%

1.0%

0.9%

0.5%

0.4%

0.3%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Global share

South Korea

China

Saudi Arabia

Australia

Sweden

Japan

United States

Germany

Norway

France

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Total Energy Efficiency Spending by Country ($ bn)

327.9

182.4

58.3

29.1

15.2

13.8

9.6

6.5

5.1

4.9

4.2

0 50 100 150 200 250 300 350

Global Total

China

United States

Japan

South Korea

Germany

European Union

Australia

France

United Kingdom

Sweden

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Energy Efficiency as a Share of Green Stimulus

83%

64%

56%50%

42%

30%25%

0%0%0%

51%

84%84%88%

100%100%100%100%100%100%100%100%

65%67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Austria

Belgium

German

yIndia

Israe

lIta

ly

Mexico

Swed

en

South Afri

ca

United K

ingdom

China

France

Japan

Australi

a

Global sh

are

Norway

Canad

a

United S

tates

Euro

pean U

nion

Indones

ia

South Ko

rea

Poland

Saudi A

rabia

Spain

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59.943.3

22.8 13.8 9.9 9.5 6.2 5.8

218.0

117.7

58.3

182.4

15.229.1

9.60

50

100

150

200

250

China

United St

ates

South KoreaJapan

European Union

Germany

Australia

Saudi A

rabiaFran

ce

United Kingdom

Green Stimulus ($ bn) Energy Effi ciency ($ bn)

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Relative Impacts of a US Green Recovery Program (per $ billion spent)

11

Program objectiveSpeed of

Implementation EmploymentEnergysavings

Energy security

Climate change

How quickly the money gets spent

Job-years created

Long-term energy cost reductions

Reductions in US oil imports

Direct emission

reductionsEnergy efficiencyHousehold weatherization Weatherize 377,000 homes High Moderate Low Moderate Moderate

Federal building retrofits Reduce Federal energy consumption by 8 trillion BTU

High Moderate Moderate Very low Moderate

Green school construction Improve efficiency of all new schools by 33%

Moderate Moderate High Very low High

Hybrid tax credit Additional purchases of 190,000 hybrids

Moderate Low Very low Very low Very low

Cash for clunkers 500,000 vehicles traded in Moderate Very high Moderate Moderate HighMass transit Decrease vehicle-miles traveled

by 18 million/yearHigh High Very low Moderate Very low

Smart metering Install smart meters on 4.4 million homes

Moderate High Very high Low Low

Low carbon powerProduction tax credit extension

1,500 megawatts of additional wind generation capacity

Low High High Low High

Investment tax credit increase

300 megawatts of additional solar power

Low High Low Very low Low

Carbon capture and storage demo projects

Fund the CCS component of a 500 MW demo project

Very low Moderate Low Very low Moderate

research and development Develop next generation battery technology

Very low Moderate Very high Very high Very high

Conventional stimulus programsTax cuts Increase consumer spending by

$333 millionVery high Very low -- -- --

Road investment Increase vehicle-miles traveled by 11 million/year

High Moderate Negative Negative Negative

Source: Robins et al. (2010).Notes: e = Estimated.

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

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Funds($ mn)

Outlaysa

($ mn)

Direct and indirect

jobs createda

Total jobs createda,b

Total job-years through

2012c

Energy efficiency 19,935 1,162 12,100 14,500 179,000Grid modernization 10,453 72 800 1,000 80,600Advanced vehicles and fuels 6,142 450 4,700 5,800 37,000Transit and high-speed rail 18,113 1,805 18,900 22,900 158,200Total energy efficiency 54,643 3,489 36,500 44,200 454,800Renewable generation 26,598 1,479 13,200 16,900 192,00Carbon capture and sequest. 3,400 4 -- 100 26,500Green innovation and training 3,549 123 1,500 1,700 32,200Clean energy equipment manuf. 1,624 14 200 200 9,500Other 408 12 200 200 3,700Total clean energy(energy efficiency share, %)

90,222(60.6%)

5,121(68.1%)

51,700(70.6%)

63,200(69.9%)

719,600(63.2%)

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

Type of effect

Program Short-term stimulus

Long-term growth

Greenhouse gas reductions

Environmental improvement

Energy efficiency retrofits High Medium Medium Medium

Energy efficiency improvements in new capital

Low/Medium Low/Medium High Medium/High

Green transport infrastructure

Low/Medium Low Medium/High Medium/High

Cash for clunkers Medium Low Low Low/Medium

Power grid expansion Low Medium/High Low/Medium Variable

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

Category Barrier Key problem associated with barrier Necessary condition

Information and behavioral barriers

Price distortion Costs associated with energy and incumbent technologies may not be included in their prices; energy and incumbent technologies may be subsidized

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

Information 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 information on energy efficient products.

Transaction costs Perceived costs involved in making a decision to purchase and use equipment outweigh perceived benefits.

Reduce transaction costs,

Bounded rationality Constraints on time, attention, and the ability to process information lead consumers to make less efficient and sub-optimal decisions

Reduce the constraints on consumers' decisions.

Market organization barriers

Finance The initial cost of a project may be higher than the finance threshold; poor or constrained access to funds.

Enhanced access to finance.

Inefficient market organization

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

Enhanced access to finance; better market organization; better designed policies

Poor regulation at national or international level

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

Improved regulatory framework, standards and implementation

Technological barriers Capital stock turnover rates

Sunk costs; tax rules or regulations that encourage long depreciation; inertia

Improve incentives to invest in energy efficient new capital

Uncompetitive market pricing and practices

Failure to benefit from scale economies, learning by doing, technological diffusion

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 - E.g., combining energy efficiency house weatherization and other programs with low-cost mortgage provision for poor households; combining energy efficiency and smart grid programs.

Assistance to developing countries

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

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

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.