The Role of Regulation in Reducing Greenhouse Gas Emissions

01 Nov 2007Archived News Energetics in the News

PUBLISHED: Ethical Investor - Jonathan Jutsen, Founder & Executive Director, Energetics Pty Ltd shares his post election regulation wish list.


Australia faces a major challenge to rapidly decarbonise the economy, requiring a reversal of existing energy growth and then achieve at least 60% reduction in emissions by 2050. To support aspirations of developing nations to improve living standards, developed nations such as Australia will need to make even deeper cuts. But our energy consumption continues to grow unabated at around 2% per year. Every year that we continue to delay reducing our emissions, the challenge becomes more daunting.

To achieve these targets Australia faces the challenge of zeroing energy growth within the next few years, and turning this around to achieve a decline of 1+% p.a. thereafter, while maintaining economic growth. Australia will need to significantly reduce its energy use by 2020 to have a reasonable chance of hitting longer term emission reduction targets. I propose that we set a target of achieve a 20% efficiency improvement, beyond ‘business as usual’ trends by 2020. Australia must therefore achieve substantial improvements in energy efficiency to get there.

To rapidly improve energy efficiency will require the application of an entire policy toolkit, not just carbon pricing through a trading regime. The policy tools which ALL need to be effectively employed to achieve the proposed 2020 target include:

  • Regulation;
  • Substantial incentives, (calculated to be in the order of $1.5B/year);
  • Information and training;
  • Carbon/externality pricing;
  • Specific support for cogeneration
  • Energy efficiency technology development demonstration; and
  • Leadership.

The Howard Government has demonstrated a belief that energy efficiency is ‘business as usual’ because businesses are economically rational and will naturally implement all cost effective measures. What we know in practice is that this is not happening, and we understand causative the market barriers. As a pragmatist, I believe that in order to achieve rapid results, government must implement all policies that are known work and are cost effective.

It has been proven that carefully targeted regulation has a critical role to play in achieving rapid and economical market changes. The best regulatory programs couple regulation with information/education programs and incentives.

Figure 1 shows results from efforts in California over the past 30 years to improve energy efficiency as part of their integrated demand side management (DSM) programs. These programs require that utilities defer investment in energy supply infrastructure using energy efficiency and load shifting wherever more cost effective. CA will invest $US750 million in DSM this year, and together with regulations (building and appliance minimum energy efficiency standards) has halved electricity growth rate through efficiency improvements.

Figure 1 – Annual Energy Savings from Efficiency Programs and Standards

Graph 1

The benefits of using targeted regulation can be exemplified by the introduction of energy efficiency standards for refrigerators in the mid-1980’s. Energy efficiency labeling had been introduced a few years earlier, but research showed that energy efficiency ranked at around number ten on the buying selection criteria. The policy team predicted that this would not be enough to drive market change and to eliminate the worst performing refrigerators. Regulation was proposed to introduce minimum efficiency performance standards (MEPS). Conservative economists predicted that consumers would adversely affected by an unfair cost burden by being forced to buy more efficient appliances and it would damage local appliance manufacturers.

The reality was quite different - after some short-term price increases following regulation, refrigerators rapidly dropped in price and are now 40% lower in real cost. This was largely due to the fact that quality manufacturers could reduce the range of product lines they needed to produce, thus providing improved economies of scale. Figure 2 below shows the parallel experience in the US refrigerator market through the application of minimum efficiency performance standards (MEPS).

Figure 2 – United States Refrigerator Use vs. Time

Graph 2

Good regulatory programs use minimum efficiency performance standards (MEPS) to remove the least efficient equipment from the market. Education and financial incentives are used in parallel to encourage consumers to invest in equipment rated above the MEPS to continue moving the market. MEPS are regularly reviewed and made more stringent in line with market conditions. Appliance MEPS are typically set using an economic analysis such that the benefit to cost ratio to consumers is about 2:1. This means that when consumers are forced to buy more efficient equipment, they are assured of gaining a good return on this investment.

It is my opinion that Australia’s existing appliance MEPS should be tightened considerably to reflect both increasing energy prices, and the calculations should take into account a shadow cost of carbon to correctly set pricing for the period when a carbon market comes into play. The standards should be extended to a wider range of domestic, commercial and industrial equipment.

Apart from MEPS, there are other areas where regulation can be applied to good effect. One area where regulation has been implemented at both Commonwealth and State government levels is mandatory reporting requirements for energy and greenhouse/carbon management.

The Energy Efficiency Opportunities Act (EEO) and the recent National Energy and Greenhouse Reporting Act (NGER) are examples of Commonwealth regulation for business. At a State level, Eastern States are implementing various regulatory programs for business, though there is an urgent need for national and uniform regulations to be established between States to avoid a proliferation of duplicative reporting requirements. Again, it is important that regulation be attended by financial incentives to ensure that identified savings through these programs are implemented, not just reported.

These energy efficiency regulations are critical because the economics of energy efficiency is best at the normal economic investment cycle. As buildings, cars and many appliances have long economic lives, regulations ensure that new equipment purchased/constructed is energy efficient. We cannot afford the time to lose these opportunities at the time of investment decisions.

In conclusion, regulation clearly has an important place in the mix of pragmatic policy measures that need to be implemented to achieve rapid decarbonisation of the economy through energy efficiency. These regulations should be implemented in tandem with incentives for business and residential consumers. Regulation can be highly cost effective and should be implemented in a targeted way with an understanding of the specific dynamics of the market to avoid any unexpected impacts.

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