Energy Efficiency and Carbon Pricing - Dr Lisa Ryan, IEA - EPA June 2010

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  • Energy efficiency has shown it can deliverWithout energy efficiency, energy use would have been 58% higher in 2005Interesting quote about effectivenessBut, there is a worrying trend. Energy efficiency improvement rate has reduced recently.
  • This graph shows the potential for global CO2 emissions reductions in the energy sector under the 450 Scenario.It shows that potential savings resulting from energy efficiency total 7.1 Gt by 2030. This project assumes that all of the IEA’s 25 Energy Efficiency Policy recommendations are implemented worldwide by 2030 [and other EE policy assumptions?]
  • However, analysis conducted by the IEA in the publication“Implementing Energy Efficiency: Are IEA member countries on track?” , which was released in October 2009, shows that IEA countries are not on track to fully implement the 25 recommendations. In fact, even the best countries are not capturing more than 60% of the energy saving benefits of the recommendations. IEA analysis for the G8 summit in L’Aquila produced similar results. Now, if we assume global implementation of the recommendations currently reflects the level of IEA countries (it is probably going to be less, but let’s assume IEA-level of implementation globally because we don’t have data on the rest of the world), then globally we are on track to miss one fifth (2.5 Gt) of the total potential savings (7.2 Gt) from energy efficiency measures by 2030. BACKGROUND INFORMATION ON THE ASSUMPTIONS BEHIND THIS GRAPH – FOR INFORMATION ONLYBased on data collected in Implementing Energy Efficiency Policies, IEA member countries are not on track to implement all of the IEA’s 25 EE Policy Recommendations. The analysis showed that a number of recommendations have either not been implemented or are only planned to be implemented.Given that the best implementation levels are found in the IEA, it is reasonable to consider the average implementation level of IEA countries as a best-case scenario for the rest of the world. Therefore, in the following, data for IEA members is used as a proxy for countries worldwide.If countries do not step up their implementation level, the ultimate end-use potential will end up to be lower than what is expected in the 450 Scenario.To estimate that missed potential, we compute an average of the percentage of the 25 recommendations that are either not implemented or only planned to be implemented for each country and sector. These percentages are then averaged across countries and sector, using their 2008 TPES and the relative CO2 abatement potential of each sector.We finally obtain that 36% of the end-use potential for CO2 abatement by 2030 could be missed if IEA member countries do not step up their implementation level of the IEA 25 Recommendations.]
  • From Mind the Gap, two examples:The IEA’s 2007 publication Mind the Gap provides examples of how the principal-agent problem can impact energy usage. Set-top boxes in the US consume significant energy because they are constantly drawing power, and while technological and power management solutions to reduce their consumption are readily available they have not been adopted due to split incentives. The person paying for the device’s electricity consumption – the person using it to watch television – does not choose the box. The television service provider leasing the set-top box has no incentive to provide one with efficiency features, and thus manufacturers have no incentive to produce energy-efficient devices since service providers do not demand them. In contrast, while food and beverage vending machines in Japan could suffer from the same problem of split incentives between three actors, contractual requirements have eliminated the problem. The owner of the space where the vending machine is placed is compensated for electricity costs by the beverage manufacturer and the vending machine operator. In addition, due to their significant energy consumption, vending machine efficiency began to be regulated, with a 34% reduction in electricity use from the prevailing level in 2000 required between 2002 and 2005.Swedish study: Nässen, Sprei and Holmberg, 2008; note 99% of tenants in multi-dwelling buildings in Sweden do not pay directly for energy, as it is a fixed part of the rent.
  • 1) Nässen, Sprei and Holmberg, 2008. When examining stagnation in building energy efficiency levels, Swedish researchers found that the correlation between energy prices and specific energy use for heating seen in existing buildings was weak in new buildings. An important cause of this was that information about the life cycle cost of different investments in new buildings affecting energy use was often not available to building sector actors. Builders and clients (landlord, housing federation)– sometimes the same person – have no incentive to reduce life cycle cost (LCC) of buildings (besides negative feedback); focus is on minimising investment costs and budgets for construction and operation are often separated. LCC calculations “quite uncommon” or “negligable”. Building standard is the most common basis for decisions on ee investments, even if can be cost-efficient to go further (using LCC as a basis for example). Lack of knowledge on EE among clients, architects, lack of learning process to create knowledge and competence. 2) Newell, Jaffe and Stavins, 1998. Note that in their study autonomous energy-efficiency improvement is significant, explaining up to 62% of the total change in energy efficiency. However, they acknowledge that this means they cannot exactly explain where such changes came from, and that some portion of them could be exogenous if driven by forces such as government-funded R&D. Also note that Mark Ellis (2007) does not find any clear correlation between electricity prices and appliance performance data for Australia, Japan, the UK, the US and Europe. Some products did show a correlation (US refrigerators and air conditioners, Australian clothes washers), but other products within the same country did not. Since it is difficult to see why certain products would be linked to electricity prices while others are not, generic conclusions on the link between energy price and product performance may be inappropriate. 3) Atkinson, Jackson and Mullings-Smith (2009). The study starts by saying that in theory there is no need to change the current market to encourage efficient design, since even with constant energy prices over 60 years (dream on!) and an average commercial interest rate (8% over 15 years) there is an economic incentive to address the energy efficiency and thermal performance of an existing residential building. In applying an annual increase of 5% and 8% a year on grid electricity and natural gas, the decision framework constructed shows the “typical” design (compliance with 1995 building regulation) as the least favourable economic choice. Typical design and build contracts do not adopt an increasing energy price as a fundamental appraisal assumption, taking a short-term, low-risk view to investment.
  • Energy Efficiency and Carbon Pricing - Dr Lisa Ryan, IEA - EPA June 2010

    1. 1. Energy Efficiency and Carbon Pricing Lisa RyanInternational Energy AgencyEnergy Efficiency Unit, Paris, France.30th June 2010EPA Climate Change Conference 2010<br />
    2. 2. Overview<br />Introduction <br />Carbon mitigation and energy efficiency strategies<br />Addressing energy efficiency gaps<br />Case studies<br />Summing Up<br />
    3. 3. IEA members<br />International Energy Agency Members<br />Austria<br />Belgium<br />Australia (1979)<br />Czech Republic(2001)<br />Canada<br />Denmark <br />Germany<br />Finland (1992)<br />France (1992)<br />Ireland<br />Hungary (1997)<br />Greece (1977)<br />Italy (1978)<br />Japan<br />Korea (2002)<br />Luxembourg<br />The Netherlands<br />New Zealand (1977)<br />Norway participates in the Agency under a special Agreement<br />Poland (2008)<br />Portugal (1981)<br />Slovak Republic (2007)<br />Spain<br />Sweden<br />United Kingdom<br />Switzerland<br />Turkey (1981)<br />United States <br />
    4. 4. Energy efficiency- the new wave<br />Countries interested in energy efficiency again for different reasons:<br />Energy security<br />Economic development<br />Greenhouse gas mitigation<br />How are carbon prices impacting EE?<br />
    5. 5.
    6. 6. Historical trends<br /> Long-Term Energy Savings from Improvements in Energy Efficiency, All Sectors, IEA11<br />180<br />160<br />Hypothetical energy use <br />without energy efficiency <br />improvements<br />140<br />58%<br />120<br />Savings<br />100<br />EJ<br />80<br />Actual energy use<br />60<br />40<br />20<br />0<br />1973<br />2005<br />1990<br />2000<br />1980<br />Actual energy use<br />Energy savings due to energy efficiency improvements<br />Energy efficiency improvements<br />
    7. 7. 42<br />Gt<br />Reference Scenario<br />40<br />38<br />36<br />34<br />32<br />30<br />28<br />450 Scenario<br />26<br />2010<br />2015<br />2020<br />2025<br />2030<br />450 ScenarioWhat role for energy efficiency?<br />7.2 Gt<br />End-use potential<br />End-useefficiency<br />Power plants<br />Renewables<br />Biofuels<br />Nuclear<br />CCS<br />Full implementation of the IEA 25 energy efficiency recommendations is essential to achieve the 450 scenario.<br />
    8. 8. Carbon market and energy efficiency<br />Under perfect market conditions, carbon pricing (tax or cap-and-trade) will deliver a least-cost outcome. Why, then, complement it with other measures that also abate CO2 emissions?<br />Interactions between various policy instruments to reduce energy-related CO2 emissions<br /><ul><li>Carbon pricing (mostly cap-and-trade)
    9. 9. End-use energy efficiency policy
    10. 10. Support to renewable energy supply</li></li></ul><li>42<br />Gt<br />Reference Scenario<br />40<br />38<br />36<br />34<br />32<br />30<br />28<br />450 Scenario<br />26<br />2010<br />2015<br />2020<br />2025<br />2030<br />Energy efficiency in the 450 Scenario: we can’t miss a vital opportunity<br />42<br />Gt<br />Reference Scenario<br />Reference Scenario<br />40<br />4.6 Gt<br />38<br />End-useefficiency<br />End-use potential<br />7.2 Gt<br />End-useefficiency<br />36<br />Power plants<br />34<br />Renewables<br />Power plants<br />Biofuels<br />32<br />Nuclear<br />Renewables<br />CCS<br />Biofuels<br />30<br />Nuclear<br />Missed potential<br />19%<br />28<br />CCS<br />450 Scenario<br />26<br />2010<br />2015<br />2020<br />2025<br />2030<br />Current levels of implementation are insufficient, leading to 2.5 Gt of missed potential by 2030. 450 scenario will not be achieved.<br />
    11. 11. A cost perspective: a rational use of the carbon market<br />€/tCO2e<br />Targeted tech. support<br />Expenditures on the carbon market<br />Market approaches in Copenhagen Accord<br />International price of CO2<br />Abatement GtCO2e/year<br />Low / no-cost measures requiring separate policy measures <br />
    12. 12. End-use savings and cap-and-tradeAssuming all potentials can be tapped<br />Price of CO2<br />€/tCO2e<br />P*<br />Q*<br />MtCO2<br />Emission reduction goal<br />Energy efficiency <br />potential<br />Under ideal market conditions, all options including end-use energy efficiency would be exploited, through the price signal<br />
    13. 13. End-use savings and cap-and-tradeAssuming end-use savings are not exploited<br />Price of CO2<br />€/tCO2e<br />P<br />P*<br />Q*<br />MtCO2<br />Emission reduction goal<br />Energy efficiency <br />potential<br />No access to end-use energy savings implies relying on higher cost measures in the system  higher price of CO2 and higher cost to society<br />
    14. 14. Carbon mitigation policy measures<br />Fiscal measures – carbon taxes and low carbon tax incentives<br />Market-based instruments – cap and trade<br />Regulation – CO2 regulation for cars<br />Carbon finance – project and sectoral<br />Voluntary approaches<br />Education and training<br />
    15. 15. Questions<br />Most countries have climate change strategies – many including cross-sectoral policy measures with carbon taxes, emissions trading schemes etc<br />Can carbon pricing address barriers to energy efficiency or are complementary policies needed?<br />What package of policy measures needed – complementary to CO2 pricing?<br />
    16. 16. Energy efficiency barriers<br />
    17. 17. Case studies<br />Principal agent problem – principals and agents engaged in a contract have different goals and levels of information<br />Imperfect information – insufficient or incorrect information to enable optimal investment<br />
    18. 18. Carbon/energy pricing may not best exploit energy-efficient opportunities<br />The person experiencing increased prices may not be the one making decisions on energy use (principal-agent problem)<br /><ul><li>Mind the Gap (IEA, 2007): <30% energy savings potential untapped
    19. 19. 2005 Residential Energy Consumption Survey (2005) in the US: renters significantly less likely to have energy-efficient refrigerators, clothes washers and dishwashers than homeowners; controlling for income, demographics, energy prices, weather and other controls
    20. 20. Builders, consumers etc may not understand the benefits of EE and know which is the best product (imperfect information):
    21. 21. Newell, Jaffe and Stavins, 1998: energy price changes (along with MEPS and AI) impacted on energy efficiency of US room air conditioners and gas heaters but responsiveness increased after energy-efficiency labelling requirements for these appliances took effect. </li></li></ul><li>Where efficiency levels may be sensitive to price, market barriers can still prevent their uptake<br /><ul><li>Nassen, Sprei and Holmberg, 2008 :
    22. 22. Residential price elasticity low across building types, due to split incentives and imperfect information;
    23. 23. Short-run price elasticity significantly lower in multi-dwelling buildings (more tenants) than in one- and two-dwelling buildings (more home-owners)
    24. 24. 99% of tenants in multidwellings do not pay individual energy bills – PA issue
    25. 25. Heating expenses on average between 3 and 4 percent of total household expenditures - energy efficiency improvements have a small impact on the overall household budget
    26. 26. New buildings EE levels stagnated – builders no incentive for low LLC and information barrier
    27. 27. Energy and carbon prices not able to address all these issues</li></li></ul><li>In the UK building sector, an increase in energy prices would make investment in low-carbon, energy-efficient refurbishment options much more economically sensible than business-as-usual; yet typical design and build contracts do not consider thisFigure compares net present cost over 60 years for different market scenarios and building types<br />TYP: Building regulations 1995 (Part L)<br />INS: Improved insulation; efficient boiler, hot water storage, lighting and heating controls<br />CHP: Gas-fired micro-CHP system<br />SOL: Solar energy plus meeting 2002 Building Regulations<br />MIX: Microgeneration using solar and wind plus efficiency measures<br />Increased capital support<br />Business as usual<br />Enhanced market mechanisms<br />Carbon tax<br />Source: Atkinson, J G.B., T. Jackson and E. Mullings-Smith (2009), “Market influence on the low carbon energy refurbishment of existing multi-residential buildings”, Energy Policy 37, pp. 2583 - 2593. <br />
    28. 28. Landlord-tenant problem<br />Source: Davis, L. W. (2010) “Evaluating the Slow Adoption of Energy Efficient Investments: are Renters Less Likely to have Energy Efficient Appliances?” NBER Working Paper No. 16114.<br />
    29. 29. Survey of residential price elasticity of energy demand<br />McKinsey 2007 study on energy productivity:<br /><ul><li> Residential price elasticity is low in the short and long run due to various market imperfections
    30. 30. Concluded that standards may be more appropriate for this sector in addition to carbon pricing.</li></ul>* median of ~125 estimates of price elasticity<br />Source: McKinsey Global Institute (2007), Curbing Global Energy Demand Growth: The Energy Productivity Opportunity, McKinsey Global Institute, San Francisco. <br />
    31. 31. Overcoming energy efficiency barriers<br />
    32. 32. Policy packages needed<br />Carbon price for least cost carbon mitigation<br />
    33. 33. Summing up: Energy efficiency and climate policies <br />Energy efficiency improvements needed to achieve low cost carbon mitigation<br />Barriers to energy efficiency are well-known<br />Carbon prices are a given – what else do we need to overcome EE barriers?<br />Complementary policies for energy efficiency market failure needed:<br /><ul><li>MEPS, EE financing, Information, Economic instruments</li></ul>More analysis!<br />

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