Mobilizing energy efficiency: Energy prices versus non price instruments

Panel: Panel 5: Energy Policy for a Sustainable Environment

Author:
Florentin Krause, Lawrence Berkeley Laboratory

Abstract

To many economists, the economically efficient way of mobilizing energy-efficient technologres is to increase the price of energy through an energy or carbon tax. However, at levels that bring about significant energy efficiency improvements or carbon reductions, such taxes have significant unwanted distributional side-effects on industries and consumers. Though various schemes can be used to minimise them, they diminish the effectiveness of the tax.

To many practitioners in the energy efficiency field, non-price instruments such as mandated standards, utility incentives, and other market transformation programs are the economically most efficient and most effective mobilization strategy. Yet, such policies have to be applied end-use by end-use and involve new regulations and administrative costs.

This paper outlines a solution for this dilemma: the integration of a low energy tax with a trust fund for financing energy efficiency improvements, complemented by efficiency standards, DSM programs, market transformation programs, and feebates. The theoretical and empirical issues surrounding this approach are outlined, and a comparison is made with the more encompassing concept of ecological tax reform.