POLICY TOOLS
As recognised by the OECD (2001) in considering innovation and the environment, “there is no guarantee
that innovations will appear when and where they are most needed, or at a price that reflects all
environmental and social externalities associated with their deployment. Governments need to create a
policy environment that provides the right signals to innovators and users of technology processes, both
domestically and internationally; to fund basic research; and to support private initiatives in an appropriate
manner.”
This section considers what policy tools governments could – or even should – use to facilitate or speed
technical change. Some are specifically oriented towards innovation – like financing research and
development. Others might be oriented towards technical change through dissemination of existing
technologies; they could aim at reducing CO2 emissions (or fulfilling other purposes of energy policies),
or
at inducing technology improvements from “learning-by-doing”. Other policy tools are less specific: they
deal directly with emissions. Nevertheless, they are likely to have (and might be more specifically shaped
so as to have) indirect effects on technical change and innovation.
4.1 Subsidising R&D
Research and development subsidies are a traditional area for government policies. Results from R&D
efforts have many characteristics of public good – in particular when investing companies face difficulties
in ensuring excludability due to spillover effects. As such, markets often undersupply them. This is all the
more true at early stages of technological development, when success is uncertain.
Innovation theory suggests that spillover is the main reason for under-investment in research and
development efforts by private firms. However, international spillovers are starting to be seen as a
potentially positive feedback for R&D on environmental control technologies. For example, renewable
energy technologies that are competitive in the markets of the OECD economies may also have large
global benefits, allowing low-cost emissions reductions in developing countries (Clarke & Weyant, 2003).
Despite the recent private-sector support for “social responsibility” and “sustainability” reporting, and the
acknowledgement by many major private-sector players that “clean” technologies will form one of the
important markets of tomorrow, private-sector R, D&D. efforts, although increasing, have been relatively
limited (IEA, 2002g). Conversely, government funding of R, D&D, while reduced below levels of the
1980s, is a often chosen as a key element in national GHG mitigation policy – and is especially frequent in
North America where such measures represent close to a quarter of newly implemented policies (IEA,
2002g).
In analysing innovation in relation to environmental policies, the OECD (2001) suggests that government
should “support long term basic research through funding and efforts to build capacities
… and applied
research activities when they are clearly in the public interest (e.g. protection of public health and
environment) and unlikely to be provided by the private sector by:
� Co-operating with the private sector to develop and diffuse new technologies.
� Facilitating public-private and inter-firm collaboration with the innovators of cleaner
technologies and practices.
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� Seeking out opportunities for greater international collaboration on research especially on
issues critical for sustainable development.
� Allowing competition among technologies that can meet the same policy objective, and equal
access to “learning opportunities” (e.g., protected niche markets and similar schemes) by
foreign as well as domestic investors.”
Developing advanced technologies requires not only applied research and technology refinement, but also
the innovation that stems from advances in basic science. Knowledge flowing from basic research is what
will feed the development of new approaches that could reduce clean technology costs. It could also lead
to new, unforeseen technologies and novel approaches to providing energy services. Effective linkages
between basic science and applied technology will be important to ensure that these opportunities are
opened up (IEA, 2003d).
Figure 3. IEA Government Energy R&D Budgets, 1974-2001
0
2000
4000
6000
8000
10000
12000
14000
16000
1974
1977
1980
1983
1986
1989
1992
1995
1998
200
US$ Million, 2001 Prices and
1
Exchange Rates
Conservation
Fossil Fuels
Renewable Energy
Nuclear Fission
Nuclear Fusion
Power and Storage
Other
Source: Data reported to the IEA by IEA Member countries
Current levels of energy R&D investment are unlikely to be adequate given the magnitude of the climate
challenge. Energy R&D investments in IEA Member countries peaked in 1980 and declined substantially
thereafter (see Figure 3). While spending on conservation is at historic levels, spending on renewable has
been lower in recent years than in the period 1977 to 1986. Greater and sustained commitment is needed to
energy technology R&D, to technology demonstration, to the underlying basic sciences and to market
uptake of new technologies, in order to ensure that low-carbon and low-cost technologies are available
when needed.
4.2 Technology and performance standards
There are situations where technology and performance standards could prove an effective tool to
disseminate effective and environmentally friendly technologies. For example, a recent IEA study looking
at the energy consumption of appliances provides clear evidence that standards can address one area of
market failure (IEA, 2003c). This case seems to be a textbook application of market failure theory. Most
households and small business do not care much about electricity costs – and those who do may not have
the correct information on how to make savings – or the resources to make even the small up-front
investments required.
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The conclusion of this work suggests that residential appliance and equipment policies should be
strengthened to target the least life-cycle cost for each appliance class. This would allow cost-effectively
improving the energy efficiency of residential appliances. In the case where such policies might be applied
in IEA member countries, such policies might save as much as 322 MtCO2 per year by 2010 – equivalent
to taking over 100 million cars off roads in IEA countries. Setting such standards at a more stringent levels
– for example if they also accounted for the additional value of externalities such as reducing climate
change and local environmental damages –
would lead to greater benefits.
A softer kind of standard may be provided when the mandate is to give information to consumers rather
than set limits on manufacturing. These often take the form of labels. Labels directly address the market
failure arising from the lack of information of end-use consumers. They have already proven effective in
most Member countries for appliances, sweeping the least efficient ones out of markets (IEA, 2003c).
While technology and performance standards may prove invaluable in promoting efficient end-use
technologies at the end-user level, their application is much more controversial from the industry
perspective. Such concerns arise from clear economic principles: standards are usually considered more
costly than market-based solutions. There are two reasons for this: (1) regulators cannot accurately know
the abatement cost curves of all industries (which have little interest in letting them know – even when
such curves are known by the industries themselves); and (2) even if costs are known, implementing
efficient reductions risks being perceived as unfair and faces strong opposition. As a result, command-andcontrol regulations tend to force firms to take on similar shares of the pollution-control burden, regardless
of the costs.
Another objection to standards is that they are often set at a more stringent level for new plants than for
existing plants. While such differentiation seems legitimate – it is sometimes much costlier to adapt old
plants than new plants to new standards – one possible perverse effect is to raise the costs of new plants
and drive companies to prolong the lifetime of older, sometimes much more polluting installations.
One solution to these objections is to seek to create markets through performance-based standards. The
output-based option in the current tradable permit scheme in the UK or the dynamic target option
suggested for countries (Baumert et al., 1999; Philibert & Pershing, 2000) are representative of tradable
performance obligations. Such tradable performance standards combine the efficiency properties of
market-based instruments with the technology focus of performance standards; such approaches are
particularly appropriate when reducing the output is not an option for achieving the target.
Mandatory technology requirements could help eliminate the least efficient technologies from markets and
promote the more efficient ones that are already available. However, they are usually ill-suited to
stimulating technical innovation, as they do not give any incentive to the development of even more
efficient technologies. This is reflected, for example, in the ranking of instruments for environmental
protection in OECD (2001): (Governments should) “provide permanent incentives to innovate and diffuse
technologies that support sustainable development objectives, by expanding the use of market- based
approaches in environmental policy. When market-based instruments are not appropriate, use
performance standards in preference to measures that prescribe and support specific technologies.”
Performance standards can be of different types. The European Union traditionally tends to base required
performance standards on either the “best available technologies” (BAT) or “the best available
technologies not entailing excessive costs” (BATNEEC). While such performance standards again could
be efficient means for disseminating best available technologies, they provide little incentive for further
technological improvements. As Jaffe et al. (2002) outline, under such approaches “a business that adopts
a new method of pollution abatement may be ‘rewarded’ by being held to a higher standard of
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performance and thereby not benefit financially from its investment, except to the extent that its
competitors have even more difficulty reaching the new standard.”
In other Member countries, notably the U.S., governments or local authorities sometimes set more
ambitious targets than can be met through existing technologies, with the aim of “forcing” technology
developments (an approach that has been suggested for dealing with climate change). However, while this
approach has proven effective in some cases, in others it has not, for example the “zero emission vehicle”
percentage set in California. The standard proved too demanding for the auto manufacturers to meet – and
the dates have been rolled back several times. However, the California standard has clearly promoted the
use of hybrids, and the global auto manufacturing effort to reduce emissions has been in large part driven
by California laws.
The difficulty in setting over-ambitious standards is that regulators do not know the exact amount of
improvement that is feasible; standards thus run the risk of being either unambitious or of being ultimately
unachievable. To make things worse, companies often anticipate that political authorities will waive the
target if technological improvements are insufficient, particularly if the consequences of a full enforcement
would be very costly and/or politically difficult.
The dynamics of incentives for innovation is unclear in such a case. Companies subject (even indirectly)
to regulation might prefer not to develop new technologies – and instead wait for authorities to waive the
regulatory target. While regulations provide a strong incentive for innovators, in many industries (for
example, the automobile industry), the level of technical and financial resources needed to develop
radically new technologies and more generally the entry barriers are too high for outsiders.
In sum, there are areas – such as the case of appliances in the household and small business sectors – where
standards might be efficient and cost-effective, and areas –such as industry and power sectors – where they
risk being less or not efficient at all, and less or much less cost-effective.
reference :
https://www.oecd.org/env/cc/2956490.pdf
