Towards a Green Energy Economy? Steering an Effective Transition

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14 December 2016

What is a ‘Green Energy Economy’ (GEE)? Opinions differ, but it can be defined as the scientific and policy subject area that focuses on how the expansion of resource-efficient and low-carbon energy technology systems, markets and services can bring together economic, environmental, social and security aspects. A key focus of a GEE is on policies and strategies that are designed to foster the rapid transition towards sustainable energy-economy systems. The 2008–2009 global financial crisis led to the implementation of numerous ‘green growth’ economic stimulus packages (mostly fiscal incentives) that targeted low-carbon energy technologies. These initiatives were quickly presented as the key elements in the transition to green growth, in which low-carbon energy technologies would play a pivotal role.

Setting aside multiple conceptual variations, there are growing research efforts attempting to analyse the performance, implications and complexities of GEE policies and strategies. What have we learned so far? What is still needed for an effective and rapid transition towards a GEE? This article summarises the main knowledge gaps and suggests some policy recommendations that can help to bridge the current policy–science divide and drive an effective GEE transition.

More ambitious policy instruments

Research clearly indicates that a rapid transition to a GEE depends on ambitious and well-coordinated policies that target low-carbon energy technologies. Despite the plethora of policies and low-carbon energy technologies that are available, research has shown that progress so far has either been insufficient or ineffective, or both. Climate change mitigation is an important element in the GEE debate, notably the socio-economic, ecological, technological and institutional implications of the 2°C mitigation target. Are the international community and governments serious about the Paris Climate Agreement? If so, ambitious policy instruments must be implemented to achieve the full decarbonisation of our energy-economy systems in the short term. Strong leaders must drive forward ambitious targets and goals. Action plans associated with ‘Intended Nationally Determined Contributions’ (INDCs) offer an immediate opportunity for policymakers.

Integrate behavioural change and consumption-based incentives

Gas Pump

We are beginning to understand the effectiveness of policies that explicitly focus on consumption and behavioural change (e.g. norm-based motivation, public commitment, goal-setting). These policies encourage changes in energy consumption decisions based on behavioural science. However, at present, most policies addressing a GEE are production-based (e.g. EU emission trading scheme), pricing-oriented (e.g. subsidies, taxes) and aim to address mostly market failures (e.g. negative externalities, lack of information). As a whole, they have had little impact on consumption choices. A multitude of behavioural failures (e.g. biases, heuristics, illusions, misconceptions) intervene to prevent consumers from making effective energy choices. The IPCC has taken note, and its latest Assessment Report calls for more research on the application of behavioural economics to energy and climate mitigation policies. Overall, the current situation tells us that there is an opportunity to enrich current GEE policy portfolios with innovative behaviour-oriented elements; it also highlights that policymakers need to be ready to experiment and work more closely with behavioural scientists.

Complement top-down policymaking with bottom-up approaches and capacity building

GEE policy is often seen (and implemented) as a top-down approach. However, this overlooks the rich contribution of synergies at the regional and local level. Local authorities are often responsible for coordinating, implementing, enforcing and sometimes monitoring national policies. Similarly, utility-driven and private initiatives are found at the local level. At the same time, knowledge about non-technical barriers to the uptake of low-carbon energy technologies tends to be fragmented across actors and disciplines. In addition, local actors often lack the resources to mobilise and develop capacity. Some have argued that there are different levels of GEE institutional development, seen in terms of capacity building, governance structures, technology transfer, finance and regional cooperation. A key priority is to reduce complexities, uncertainties and inefficiencies between different levels of GEE governance. Local actors can provide critical input for the development of effective national and international policies.

Align the financial system with GEE challenges

More effort is needed to align the financial system with long-term GEE challenges, notably climate change, access to energy, and poverty. For instance, economic pathways that are compatible with the GEE policy discourse indicate that global investments in low-carbon energy systems need to be of the order of US$1.7-2.2 trillion per year. This can be compared to: (i) current levels of approximately US$1.3 trillion; (ii) nearly US$500 billion in direct fossil fuel subsidies in 2014; and (iii) the US$100 billion a year that has been allocated to climate finance for developing countries under the Paris Climate Agreement. While some countries have abundant financial resources, their investment levels remain incompatible with GEE goals. It is clear that we need to not only find new financial resources and innovative schemes, but also re-direct existing resources – and reduce transaction costs for bankable GEE projects. Further attention needs to be given to the broader implications of asset stranding and financial stress tests for new energy infrastructure involving positive net emissions. Finally, regulatory oversight mechanisms need to be strengthened to ensure stable financial markets that can support the GEE transition.

Increase the social inclusiveness of GEE policies

Seventeen Sustainable Development Goals (SDGs) were adopted by more than 150 world leaders in 2015. Of these, ten have explicit links with the GEE discourse, including the eradication of  poverty, the well-being of populations, gender equality, clean water, affordable and clean energy, reduced inequalities, climate action and peace among others. Achieving a GEE that is compatible with climate, social and economic goals is an enormous challenge for society, and goes beyond the technological domain. While poverty, the lack of basic energy services (e.g. heating, lighting) and food may seem very abstract, truly inclusive and effective GEE policies need to target the poorest and most vulnerable. Policies that drive the transition, and ultimately the transformation towards a GEE are fundamental to fight hunger, unemployment and carbon inequality, particularly in the least-developed countries. Green energy is critical to human development and is a fundamental element of sustainable development. This is why we must measure, assess, communicate and improve the social performance of GEE policies.

Mainstream rigorous policy assessments

Solar panels

It is not enough to design and implement policy. Its evaluation needs to be brought into the mainstream. Any GEE has multiple objectives that are addressed through numerous instruments, and in many domains. More attention needs to be paid to evaluating the effects (outcomes and impacts) of low-carbon energy technology, and the positive and negative interactions between (overlapping) policy portfolios. In turn, we need to disentangle the effects of policy instruments that target low-carbon energy technologies from the effects of other (green economy stimulus) policy programmes or developments. Furthermore, given that it is unlikely that the electricity sector will be fully decarbonised in the near future, it is imperative to assess the uncertainties and trade-offs associated with the global deployment of negative-emission technologies. We know that this is not easy. Comprehensive policy assessments are both resource-intensive and complex, but research shows that it is achievable—and offers ongoing learning opportunities for both policymakers and stakeholders.

Note: this post is based on the key findings presented in the special issue “Towards a Green Energy Economy? Assessing policy choices, strategies and transitional pathways” published in Applied Energy.

Energy, Finance

The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.

Associate Professor and Director of Doctoral Studies, International Institute for Industrial Environmental Economics (IIIEE), Lund University
Director, International Institute for Industrial Environmental Economics, Lund University