Stakeholders And Market Transformation: An Integrated Analysis Of Costs And Benefits

Panel: Panel 2: Incentives and instruments to achive greater

Authors:
Mark Hinnells, Environmental Change Unit, University of Oxford
James E. McMahon, Lawrence Berkeley National Laboratory, California

Abstract

The paper takes a radical and integrated view of market transformation strategy. It concludes market based instruments cost more to consumers than efficiency standards.

Market transformation is often an ill defined and misapplied phrase, but should include any or all actions which produce an irreversible and substantial increase in the energy efficiency of products sold. Policy options which may help to transform markets include research and development, technology procurement, labels, rebates and mandatory efficiency standards.

Based on innovation theory, this paper proposes that all market transformation actions may be used for any given technology, but at different stages in the development of the technology and the market (i.e., exploration, consolidation, minor innovation, or decline). An approach is proposed for selecting instruments at any one moment in time for a given end-use.

The paper then challenges the traditional notion that an engineering analysis can easily identify the additional costs associated with future efficiency improvements and the resulting consumer price, and examines two other approaches: analysis of the current market, and time series analysis of price and efficiency. An example is given where actual prices for energy efficient products appear lower than engineering estimates.

Many factors affect any theoretical additional cost. Innovative products carry higher development, tooling and marketing costs. On the other hand, economies of scale from increased production volume would reduce the cost of efficiency improvements. Thus the actual cost of future efficiency is not fixed, but is policy dependent.
Improvements in efficiency made through market based instruments (energy labelling and rebates) allow greater profit margins for manufacturers at greater cost to consumers, compared to savings made through efficiency standards which may cost more to manufacturers but with lower costs to consumers. The net cost and benefits to different stakeholders of improving energy efficiency thus depends on the mix of policy, and this should be explicit in any market transformation strategy.

Market transformation should be a much more integrated process, based on a wider and deeper analysis of costs and benefits, and not a collection of uncoordinated instruments implemented by different actors with different motivations.