Energy Sector Strategies to

Support Green Growth

Module 01

Green Growth and Energy: an Introduction

Lesson 2

Overview of Policy Instruments

World Bank
Institute

Presentation Script

Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

Presentation Script

About this Presentation

In the previous lesson, we discussed the rationale and importance of

government action for developing a green growth strategy.

This lesson illustrates the specifics of government action and provides an
overview of the range of policy instruments available to promote green
growth. We will conclude with some approaches for monitoring progress
towards green growth objectives in the energy sector. We will also provide
some links to references and resources for more information.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Introduction

At their simplest, policy instruments can be defined as means by which

objectives are pursued. This broad interpretation allows us to think of a
wide range of potential instruments.

There is no universal policy prescription for supporting green growth in the
energy sector. Nations are typically unique. Various nations are at different
stages of development, have different energy sector compositions and
varying institutional capabilities, and have different abilities to undertake
large-scale investments. Therefore, the most suitable policy instruments in
one country may not be appropriate for another country. However, there are
some common goals or objectives of an appropriate policy framework.

Generally, the objectives of energy sector policies are to:
foster growth while improving environmental and social conditions;
promote resource and energy efficiency;
transition to low carbon technologies and develop renewable energy
source; and
improve energy access, security and reliability.
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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Introduction

Instead of thinking of a single policy to achieve all of these policy objectives,

it is more useful to think of a policy portfolio approach or a policy tool kit.

The portfolio approach would include a number of policy instruments,
functioning in a complementary manner, and interacting in a manner that
enhance the overall impact. Policy packages that combine the best attributes
of multiple policies in this manner may be the best way to advance green
growth solutions in the inherently uncertain future.

An analogy is to think about economic policy. Economic policy can never be
simplified to one single law or policy; rather, it is the combination of a
number of policies targeting different aspects of the overall economy. Energy
or Green Growth policy is similar.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

Presentation Script

Scanning for Policy Options

There are many different policy options for greening the energy sector
available to governments. Five broad categories of policy options to support
green growth in the energy sector include Research & Development Support,
Regulations and Standards, Price Instruments, Quantity Instruments, and
International Cooperation. Click on each of these policy options to learn
more. Select Next when you have viewed each option and are ready to
continue.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Scanning for Policy Options - Research Development and Support

Energy innovation is a fundamental component of greening the energy
sector. The cornerstone of innovation is Research & Development, or R&D.
Innovation is a complex process that is enabled by several factors: research,
applied science and engineering, the activities of entrepreneurs, an educated
and skilled workforce, and access to financing for investment.

Research and development can be enhanced with public sector support.
Public sector support for renewable energy R&D surged to $5 billion in 2010,
from $2 billion in 2009; surpassing private sector investments according to
UNEP data in 2011.

Specific policy options available to governments include increased funding to
basic research in science, engineering, and education, and support for the
commercial development of new technologies.

In addition, governments can promote the development of an innovation

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

Presentation Script

culture through research institutions and innovation clusters.

Finally, job training can help provide the necessary human capital into the
R&D production process.

Roll your cursor over the case study icon to learn more about Renewable
Energy R&D in China. After you are finished, advance to the next screen to
continue.

Scanning for Policy Options - Regulations and Standards

Regulation and standards policy options can include performance standards,

technology standards and voluntary standards.

Performance standards policies include fuel efficiency standards for vehicles,
biofuel standards for vehicles, electricity efficiency standards for appliances
and electronics and power generation standards. Similarly, the government

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

Presentation Script

can set minimum energy efficiency standards in buildings by adjusting

building codes to increase environmental performance. All these policies aim
to reduce emission intensities.

Take a moment to learn more about these policy instruments by rolling your
cursor over each of the examples shown on the screen. After you are
finished, advance to the next screen to continue.
Scanning for Policy Options - Regulations and Standards

The second set of regulatory policy standards are technology standards.
These standards guide investments in new technologies. They can do this in
several ways, such as setting minimum performance standards, setting
standards for quality grades, or mandating the use of specific technologies.
Best available technology standards prescribe that the best state of the art
technology should be deployed. Although literally understood to mean that
costs should not impact the technology decisions, in practical applications,

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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costs are often taken into account. The best available techniques not
entailing excessive cost, or BATNEEC, was introduced in the European Union
to recognize that costs are an important consideration in setting technology
standards. These types of technology standards are widely deployed in the
developed countries, but are less common in developing countries.

Take a moment to explore an example illustrating technology standards. Roll
your cursor over the prompt on screen to learn more. After you are finished,
advance to the next screen to continue.
Scanning for Policy Options - Regulations and Standards

A third set of regulatory policy options are voluntary standards. Government

recognized or government issued standards and labelling can provide
important information signals to consumers and businesses regarding the
environmental benefits of products. Such standards are market driven in that
they leave technology choice in the market, but they seek to address

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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information gaps that often exist at the point of purchase. Programs such as
Quality Seals and the US Energy Star label are examples. In addition,
sometimes the private sector has developed voluntary standards that seek to
provide similar information. ISO process standards for companies, LEED
building certifications, and voluntary carbon standards are example of
programs that identify compliance with best practices in the industry.

Advance to the next screen to return to the policy options menu and select
another policy option to learn more.
Scanning for Policy Options - Price Instruments

The next set of policy options aim to influence the decisions of businesses
and individuals through price instruments. For example, by correctly
incorporating environmental costs into prices, businesses and individuals will
internalize these costs when they are making their investment and
purchasing decisions. The net result should be a more efficient allocation of
resources.
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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

Presentation Script

It is useful to distinguish between multi-sector policies and sector specific

policies. Multi-sector policies aim to correct market failures across multiple
sectors while sector specific policies target certain sectors, in our case the
energy sector.

Advance to the next screen to learn more about multi-sector price
instruments.
Scanning for Policy Options - Price Instruments

Two of the most pertinent multi-sector policies are fossil fuel subsidy reforms
and carbon charges.

In the previous lesson, we reviewed the harmful economic, environmental,
and social implications of fossil fuel subsidies. By reducing the subsidies,
consumption decisions of individuals and businesses would be influenced by
the resulting increased prices of fossil fuels. Eliminating these inefficiency
subsidies remains as one of the most important tools in greening the energy

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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sector.

Carbon charges or fees set a price to the emission of carbon and provide
several advantages. First, they act as an incentive for producers to use low
carbon technologies and to switch towards less emitting fuels. Second, they
act as an incentive for consumers to reduce their energy use. And third,
carbon charges raise revenue and allow the government to reduce income or
other taxes through tax shifting. However, there are also political challenges
to implementing carbon charges and there use in the real world has been
limited, especially in the developing world.

To learn more, review this short case study on carbon charges from the
Canadian province of British Columbia. When you are finished, advance to
the next screen to continue.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Scanning for Policy Options - Price Instruments

There are many energy sector specific policies that influence decisions via
pricing mechanisms. These policies can aim to increase the supply of clean
energy, increase the demand for clean energy or mitigate risks of green
energy projects.

Policies that increase the supply of clean energy often function by lowering
the cost of investing in, and operating clean energy projects. These policies
include tax credits, loan guarantees that help lower the costs of capital, and
other sector specific subsidies.

Policies that increase the demand for clean energy include feed-in tariffs and
green procurement contracts. Feed-in tariffs schemes require electric utilities
to purchase electricity from clean energy projects at a set rate for a specified
period of time. Feed-in tariffs can provide the price certainty over a longer
term that can make clean energy projects viable. Similarly, greening

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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government procurement contracts can quickly provide the demand for

green energy by integrating the application of environmental performance
considerations in government energy procurement processes. This approach,
a form of public-private partnership, can be used to reduce investment risks
and to lower overall unit costs on new technologies.

Policy instruments that mitigate the risks of clean energy investments include
public-private partnerships where the projects risks are shared by private and
public stakeholders and liability caps where the government sets an upper
limit on the amount a private party is legally responsible for. Liability caps
are often used for projects that have risks of disasters that are very low, but if
the worst case situation happens, the impacts are very large. Liability caps
are often associated with nuclear energy projects.

If you wish to see an example of single sector market based mechanisms that
increase supply or increase demand roll your cursor over the case study
prompts on screen. When you are finished, advance to the next screen to
continue.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Scanning for Policy Options - Quantity Instruments

The next set of policy instruments are quantity instruments. Similar to price
instruments, it is valuable to separate multi-sector policies from sector
policies that target the energy sector.

An example of a multi-sector policy is a carbon emission trading system, or as
it is also known cap and trade. A certain amount of emission credits for the
right to emit carbon are given or auctioned away and businesses are allowed
to trade these credits. Although different from a carbon charges reviewed
earlier, both of these types of policy instruments can achieve similar
objectives of reducing emissions at least cost to the economy.

An example of a sector-specific quantity instrument is renewable energy
credits or RECs. RECs are set up by electricity operators who set a fixed quota
of electricity which has to be generated from renewable energy. Companies
have the option of meeting their obligations through trading. These policies
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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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have been used to jumpstart demand for clean energy in several jurisdictions.
One variation on REC trading is the renewable portfolio standard (RPS) or
Renewable Obligation, which sets a minimum percent of a utilitys portfolio
that must come from renewable energy. Unlike a full REC trading system, RPS
systems may or may not allow for trading to achieve compliance. In addition,
certain RPS systems may also specify minimum levels, called set-asides for
specific technologies like solar PV. Countries with RPS or REC trading should
take care to ensure that they do not conflict, or are not redundant with,
other policies such as emissions trading systems.

To learn more, review the two case studies shown on screen. After you are
finished, advance to the next screen to continue.
Scanning for Policy Options - International Cooperation

The fourth category of policy options available to governments is
international cooperation. As the energy sector is globalized both in terms of

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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its structure, and its impacts, governments from around the world need to
work together to promote green growth in the sector.

International Cooperation approaches can include climate finance to provide
access to capital funding for clean energy projects and investments in energy
efficiency in the developing world. South-south knowledge exchange and
data sharing can enable the sharing of information, experiences, and best
practices. Furthermore, partnership networks can be cultivated to help
facilitate the flow of information across borders. The signing of international
treaties regarding greening the energy sector can potentially be a useful way
for governments to align interests, set targets, and collectively take action.
For example, the signing of trade agreements may encourage the flow of
clean technologies between countries.

Lets examine the south-south knowledge exchange and data sharing options
further. Advance to the next screen to learn more.

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Energy Sector Strategies to Support Green Growth

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Scanning for Policy Options - International Cooperation

The energy sectors in developing countries often have important similarities

in terms of financing, technology, institutional arrangements, and power
sector priorities. As part of its wider South-South Knowledge Exchange
program, the World Bank launched the South-South Experience Exchange
Facility (or South-South Facility) in 2008.

The Facility strives to empower local authorities and practitioners to own and
undertake development initiatives via financing initiatives that:
Facilitate the exchange of development experience and knowledge between
country practitioners,
Document and disseminate lessons learned, and
Integrate South-South knowledge exchanges into broader World Bank
financed projects.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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To date, 73 knowledge exchanges have been funded by the South-South

Facility. For example, in 2011, India shared its experience with renewable
energy credits with government delegates from Kenya, the Philippines and
Thailand.

Examples such as these south-south information transfers are important to
illustrate the mutual benefits of policies that support international
cooperation. Click on the link to learn more about this example.

Scanning for Policy Options - International Cooperation

We are now going to talk about data sharing, which is another way to
collaborate internationally.

We need to throw open the doors, recognizing that others can find and
create their own solutions. The Open Data initiative is one effort to achieve
this aim.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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The World Bank launched the Open Data initiative in 2010 with the release of
the most comprehensive database on developing economies, which included
more than 7,000 indicators. Believing that open data can increase
transparency and accountability, improve efficiency and effectiveness and
create economic opportunity, this initiative aims to embrace a new
development paradigm toward Open development.

The main objective is to provide public access to previously restricted sources
of data and knowledge, thereby promoting local solutions to development
and energy challenges.
Monitoring Progress Towards Green Growth

Transitioning to a greener energy sector can be made more effective with
targeted monitoring of effectiveness and the ability to adapt policy to
respond to this information. This requires well-designed indicators to help
governments monitor trends, assess policies, and revise objectives.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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The key steps for monitoring begin with developing a framework for
monitoring progress towards green growth that outlines the interactions of
the economy, environment, and policy.

Identifying energy-related indicators is the next step of the process. In
selecting the type and number of indicators to cover, there is a trade-off
between ensuring all the different dimensions and interactions of green
growth in the energy sector are adequately covered and the necessity for
simplicity.

Once the indicators have been identified, data should be collected.

The next step is to analyze the results and then report the results to the
public and stakeholders. Ensuring the process is transparent is a critical
component to earn public and stakeholder support.

Finally, using the results of the process, refinements can be made to the
framework and the identified indicators as needed.

We will explore these steps in more detail in a subsequent lesson.

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Energy Sector Strategies to Support Green Growth

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Monitoring Progress Towards Green Growth

When monitoring progress, it is often useful to group potential indicators into
broad categories. The OECD has developed a useful framework that outlines
the interactions of four groups of indicators: the environmental and resource
productivity of production and consumption; the natural asset base; the
environmental dimension of quality of life; the policy responses and
economic opportunities. All of these categories are relevant for the energy
sector.

Review each of the indicator groups to see some examples of potential
energy-related indicators.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Monitoring Progress Towards Green Growth

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Energy Sector Strategies to Support Green Growth

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Monitoring Progress Towards Green Growth

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Monitoring Progress Towards Green Growth

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Monitoring Progress Towards Green Growth

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Energy Sector Strategies to Support Green Growth

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Monitoring Progress Toward Green Growth

Indicators are means to monitoring progress towards green growth. This
information is used to assess whether the policy instruments are achieving
the identified policy objectives.

For example, if the policy objective is to increase renewable energy in the
electricity grid, we can use an indicator such as the share of electricity from
renewable energy to track and assesses the progress and effectiveness of the
key policy instruments. Other key indicators of a policy could be employment
impacts and costs.

Click on the link to see the share of electricity from renewable energy sources
within different countries in 2009, and the different targets countries have
set.

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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Monitoring Progress Towards Green Growth

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Energy Sector Strategies to Support Green Growth

Module 1: Lesson 2 Overview of Policy Instruments

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References and Further Reading

Now that you have completed this lesson, we invite you to review the
following references. Visit these links for more information on Energy Sector
Strategies Policy Instruments.

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