How much market do market-based instruments create? An analysis for the case of “white” certificates

Panel: Panel 5. Market-based instruments

Authors:
Ole Langniss, Lund University
Dr. Barbara Praetorius, DIW Berlin

Abstract

Discussions about “green” certificates for renewable energy forms are under way for some time now. In contrast, tradable “white” certificates have only lately been celebrated as a market-based tool to foster energy efficiency. Theoretically, there is little doubt about this. In practice, however, some fundamental problems and doubts about the usefulness of certificates arise: How “competitive” are markets for certificates in reality? Is a “white” certificate scheme only a new name for an old hat rooted in control and command regulation?

With this suspicion, a number of questions and aspects arise:

Market mechanism: Which criteria guarantee that an – artificial – market for certificates really becomes competitive? Will trading be characterized by spot markets or by rather anti-competitive long-term over-the-counter contracts? Which minimum market size is needed, and which are the conditions regarding the tradability of the certificate that have to be met?
Target group: Who should be obliged to purchase certificates? Are electricity suppliers the right target group, or should fuel and heat suppliers be addressed, or the consumer himself?
Additionality and measurability: Which efficiency technologies should be eligible for certificates? What exactly is an efficient technology? A narrow definition might ease measuring problems but at the same time reduce innovation incentives.

We use the theoretical framework of Transaction Cost Economics to discuss these issues. A brief review of the design of tradable certificate schemes in Italy and the UK is given. Lessons can also be learned from renewable portfolio standards recently implemented in a number of countries.