Best Practice Report

Index

6. Low-carbon energy

Develop policy portfolios that deliver on energy access and security along with climate change mitigation and social benefits. Regulation and price incentives are most effective when coupled with strong financing programs to support innovation.

Policy portfolios can achieve energy access and security targets along with climate change mitigation and social benefits. The energy system is the source of approximately 60 percent of total current greenhouse gas (GHG) emissions (IPCC, 2011); and hence a fundamental area for green growth policy. Moving from fossil-fuel based growth to green-energy based growth, while simultaneously providing energy security and access to clean and safe fuels for people currently lacking access to electricity is a tremendous challenge. However, lessons from existing approaches indicate that it is possible to design policy portfolios to achieve energy access and security targets along with climate change mitigation and other environmental and social goals.

Green growth and low-carbon energy policy portfolios generally aim at decreasing the share of fossil fuels, increasing the share of renewable energy sources, boosting energy efficiency in industry, buildings, and transport, and extending electrification in rural areas. Currently at least 138 countries have renewable energy targets and 127 have renewable energy support policies, with more than two-thirds of these targets and policies found in developing economies. Feed-in tariffs and renewable portfolio standards are the most commonly used approaches (REN21, 2013). However, especially in developing countries, these and other policy tools are often implemented in isolation, rather than as part of wider green growth policy portfolios.

Regulation and price incentives are most effective when coupled with strong programs to support innovation. Based on a review of existing policies mainly in G20 countries, ClimateWorks Foundation (Harvey and Segafredo, 2011) highlights a number of best practices for low-carbon energy policies. It illustrates how prices and incentives, performance standards and support for innovation, research and development can complement and reinforce each other, accelerating deployment of low-carbon energy technologies and lowering costs.

Two interesting examples of countries that have successfully implemented comprehensive energy policy portfolios are Germany and Thailand. The German case
(Case 9) demonstrates the effectiveness of combining incentivizing, mandating and enabling policies in an ambitious and consistent national policy portfolio covering renewable energy and energy efficiency.

In order to ensure robustness, green energy policy portfolios must build public awareness of the benefits of those policies and maintain consensus on policy implementation plans, particularly as consumers will often face energy price increases. The German experience also illustrates that, in order to secure support for such policies, which may raise consumer prices, it is important to build public awareness of the benefits of these policies. The gradual introduction of reforms and the role of stable institutions, have been important to ensure robustness of policies in Germany, helping to build and maintain public support and awareness of the policy benefits – a lesson that is echoed in, for example, the experience with energy policy portfolios introduced in the UK and Canada, as well as in the case of Thailand (see Case 10). However, such an ambitious policy generates significant costs for taxpayers and energy consumers. The combination of a strong financing institution and ambitious regulations are among the key success factors for the effectiveness and efficiency of the German energy policy. These aspects make it challenging to closely replicate the approach in other countries.

Overcoming political economy challenges, which prevent reform of fossil fuel subsidies and the introduction of carbon taxes, would greatly facilitate the move towards low-carbon green growth. As illustrated earlier in this section, subsidies for renewable or low-carbon energy generation, such as feed-in tariffs, are widely used as incentivizing policy tools to internalize the costs and benefits of externalities. The two other key policy tools for “getting prices right” – reform of fossil fuel subsidies and carbon taxes – despite their attractiveness in terms of economic efficiency gains and revenue raising potential, face substantial political economy challenges.

Despite attention to reforming fossil fuel subsidies, efforts to date show mixed results and fossil fuel subsidies continue to soar at USD 1.9 trillion per year, equivalent to 2.5% of global GDP, or 8% of total government revenues (IMF, 2013). As a recent IMF report finds, fossil fuel subsidies are particularly damaging in how they aggravate fiscal imbalances, and crowd out priority public spending and private investment. Fossil fuel subsidies also encourage excessive energy consumption, artificially promote capital-intensive industries, reduce incentives for investment in renewable energy, and accelerate the depletion of natural resources (IMF, 2013).

Several countries are pursuing policies to increase taxes on polluting activities and to use those tax revenues to reduce other taxes, such as income taxes, that can distort labor supply and saving decisions (Pearce, 1991). To support transitions and overcome opposition to environmental taxes and subsidy reform, governments are using revenues to address social concerns and to reduce tax burdens in different ways. Indonesia, for instance, removed diesel subsidies for industries and used the budget savings for poverty alleviation programs. Thailand (Case 10) used a tax on petroleum products to provide low-interest loans for renewable energy. Germany introduced an eco-tax and at the same time restructured taxes to stimulate job creation and green investment by reducing labor costs and providing incentives for energy efficiency (UNEP, IMF, and GIZ, 2012).

 

Case 9: Germany’s Renewable Energy Policy Framework

The Government of the Federal Republic of Germany has implemented policies to promote the development and uptake of renewable energy, since the beginning of the 1990s. The approach combines feed-in tariffs, for renewable electricity; investment subsidies and low interest loans targeting renewable heat; and quota obligations and tax exemptions targeting biofuels. The keys to its success are the combination of instruments and the design of the feed-in tariff that offer long-term and predictable revenues to renewable energy investors. It has been effective in stimulating a rapid and large deployment of renewable energies in Germany – the share of renewables in final electricity consumption increased from 4% in 1990 to about 25% in 2013. This has also supported the development of global supply chains for renewable technologies, bringing their costs down more broadly (OECD, 2012b).

Case 10: Energy Policy in Thailand

The Government of Thailand has gradually implemented a policy portfolio of fiscal, regulatory, and enabling policies to support the uptake of energy efficiency and renewable energy. Policy measures include skills development programs, support to universities and research institutions for technology improvements, use of income tax breaks and import duties exemptions on equipment, and the establishment of a revolving fund for low-interest loans to renewable energy projects financed through a tax on petroleum products. Key factors enabling implementation include (i) alignment with priorities for energy security, inclusiveness and market development; (ii) gradual expansion of the programs to ensure robustness; and (iii) involvement of civil society and small private energy suppliers.