Energy Sector Strategies to

Support Green Growth

Module 03

Policy Instruments for Energy Efficiency

Lesson 2

Information & Market-Based Instruments

World Bank
Institute

Presentation Script

Energy Sector Strategies to Support Green Growth

Module 3: Lesson 2 Information & Market-Based Instruments

Presentation Script

Objectives

The focus of the lessons in this module is energy efficiency. You have
reviewed both the magnitude of accessible cost-savings from energy-
efficiency improvements and regulatory policy instruments, including
building energy codes.

In this lesson, we will cover informational and communication measures and
market-based instruments, the importance and the components of policy
evaluation, and how regulatory, informational, and market-based
instruments may be deployed simultaneously to hasten energy-efficiency
improvements.

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Energy Sector Strategies to Support Green Growth

Module 3: Lesson 2 Information & Market-Based Instruments

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Policy Instruments Overview

In a previous lesson you reviewed these broad categories of policy
instruments that are useful for energy-efficiency improvement, and focused
on regulatory instruments. In this lesson, you will first explore information
and communication measures. Later in the lesson, you will look at market-
based instruments.

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Energy Sector Strategies to Support Green Growth

Module 3: Lesson 2 Information & Market-Based Instruments

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Information & Communication Measures

The principal objectives of information and communication measures are first

to increase consumer awareness of the financial and societal benefits of
energy efficiency; second, to expand the energy-efficient options available to
consumers; third, to make transparent the overall costs of available options
so consumers can easily understand the energy costs associated with their
investment decisions; and fourth, to prepare the workforce to deliver new
energy-efficient options to consumers.

In this section, you will examine the use of labeling, public awareness
campaigns, and training as information and communication measures.

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Module 3: Lesson 2 Information & Market-Based Instruments

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Labeling Schemes

Labeling is an effective instrument for reducing informational barriers to
energy efficiency.

Performance labels, also known as comparative labels, convey to consumers
the relative energy-efficiency of appliances, buildings or vehicles. This
information is typically expressed on some type of sliding scale that gives
consumers basic information on products energy consumption and
operational cost. Performance labels are typically more effective if
mandatory because they apply to all products of a certain class, whereas
voluntary labeling would allow manufacturers to select which products to
label, making them unlikely to draw attention to inefficient products.

Endorsement labels convey that a product is a top-tier energy performer.
Endorsement labeling is typically voluntary because manufacturers have a
strong incentive to apply for a label, which confers competitive advantage.

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Energy Sector Strategies to Support Green Growth

Module 3: Lesson 2 Information & Market-Based Instruments

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Labeling Schemes

There are demand-side and supply-side benefits to labeling schemes.

Labels give consumers an easy metric by which to compare the relative
energy costs of different makes and models of a product theyre looking to
purchase. As consumer attention is drawn again and again to energy-
efficiency labels, energy efficiency becomes a natural criterion for making
purchasing decisions.

In turn, this creates incentives for manufacturers to distinguish themselves
from competitors by developing and marketing energy-efficient models.

Labeling schemes require resources, expertise, and coordination. Commonly,
governments will start out by focusing on refrigerators and air conditioners
to gain experience before moving onto lamps, washing machines, dryers,
dishwashers, water heaters, boilers, computers, rice cookers, tires, and
glazing.

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Hover over the example to review how India developed its first labels.

Performance vs. Endorsement Labels

Here are some examples of performance and endorsement labels.
Endorsement labels typically are designed to look like a seal of approval
which they are and performance labels are designed to convey information.

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Public Awareness Campaigns

Whereas labeling attempts to make useable information readily available to
consumers as they ponder investment decisions, public awareness campaigns
more closely resemble advocacy advocacy aimed at consumers to convince
them to make smarter energy-use decisions, lifestyle changes, or
investments. Awareness campaigns and labeling are very complimentary
because different consumers respond to different types of messaging. Both
instruments target upwards of 20% energy savings, which can be achieved
through small changes in consumer behavior.

Take a moment to review examples of campaign media and tactics used in
South Africa, Cuba, Chile, and China.

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Module 3: Lesson 2 Information & Market-Based Instruments

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Public Awareness Campaigns

These are five stages to effective public awareness campaigns.

First, every country is unique, so a campaign should be nested in the context
of policy and market realities especially the nature of energy-efficiency
barriers the campaign seeks to overcome.

Second, a campaign should be planned to align with and complement energy-
efficiency policies and programs.

Third, implementation should be coordinated with stakeholders with
particular emphasis on the launch.

Fourth, a campaigns progress should be monitored to detect problems and
facilitate solutions.

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Lastly, data collection for campaign evaluation is critical to understanding the

effective and ineffective components of a campaign.

Training

Training is the final information measure to cover. The provision of training

and educational materials is essential to capacity building.

In order to achieve an energy-efficiency transformation, the private sector
must become capable of delivering energy-efficient methods and
technologies. This transition is made easier by training in-house managers to
become proficient in energy-saving options and practices, and by training
salesmen and purchasing officials to understand energy-efficient products.

The workforce must also become capable of implementing efficient practices
and technologies. Energy efficiency policy will create jobs so long as those
jobs can be filled by trained engineers, designers, construction workers, and

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energy auditors. Governments can partner with research and professional

organizations to organize seminars, workshops, materials, and certification
schemes to enhance workforce capacity.

Lastly, public officials require training to become capable of making and
enforcing energy efficiency policy. This is especially true of policy makers,
inspectors and enforcement officials, and municipal energy managers.

Hover over the Example from Austrailia to learn about the consequences of
inadequate training.
Policy Instruments Overview

Having covered information and communication measures, we now turn to
market-based instruments, including price instruments and quantity
instruments.

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Market-based Instruments

Market-based instruments alter the incentive structure of the market for

energy or energy-efficient technologies.

Price instruments either lower the price of investing in energy efficiency,
through economic or fiscal incentives, or raise the price of inefficiency by
internalizing the cost of externalities through taxes.

Quantity instruments also achieve the effect of raising the price on
inefficiency, but do so by regulating the minimum supply of energy savings or
the minimum supply of energy-efficiency investment, or, alternatively, by
regulating the maximum supply of the carbon externality.

In this lesson, we will not address carbon taxes or carbon markets, but focus
on the other three types of market-based instruments.

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Price Instruments: Economic Incentives

Price instruments can be split into economic and fiscal incentives.

Economic incentives help initially expensive but cost-effective investment
options compete against initially cheap but inefficient investment options.
Economic incentives include government subsidies for energy audits,
government-subsidized loans for energy-efficiency investments, or direct
government subsidies to allay the costs of specific energy-efficiency
investments. Investment subsidies are common in the buildings sector, which
we covered in lesson 1. Investment subsidies are also popular to lower the
price of energy-efficient products or equipment; for example, compact
fluorescent lamps, efficient motors, efficient boilers, solar water heaters, etc.
Subsidies can be structured as a fixed amount per purchase or investment, as
a percentage of investment, or as proportional to energy savings.

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Energy Sector Strategies to Support Green Growth

Module 3: Lesson 2 Information & Market-Based Instruments

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Price Instruments: Fiscal Incentives

Fiscal incentives reduce the tax burden on consumers that make energy-
efficiency investments. Fiscal incentives can take the form of tax credits or
tax deductions, or reductions in VAT or import duties for energy-efficient
technology. Governments can also encourage industry to invest in efficiency
upgrades by accelerating the depreciation schedule. Fiscal incentives are
more economically efficient than investment subsidies because they apply to
the whole economy and are simple and cheap to monitor and administer.

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Fiscal Incentives vs. Subsidies

Economists tend to rank fiscal incentives as superior to subsidies.

The upside of subsidies is better market penetration of subsidized
technologies. Subsidies helped to mature the market for solar water heating
in Israel and Greece.

One downside to subsidies is potentially wasting resources on free riders in
other words, people who would have otherwise made the investment
without a subsidy. There are risks to mitigating against free riders with
rigorous application procedures, because participation by the target
demographic will also decrease. Another downside is the perverse incentive
for manufacturers and installation contractors to hike their prices in response
to a subsidy program.

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In contrast, fiscal incentives apply to the whole economy and are simpler and
cheaper to administer. Instead of policy-makers, fiscal incentives let the
market pick technological winners.



Quantity Instrument: Energy Savings Obligations

Energy savings obligations require energy companies to conduct energy-
efficiency improvements with their customers.

There are a few key areas of variation in the design of this policy instrument.
First, the nature of energy companies obligation can either be expressed in
terms of required annual energy savings or required annual investment in
energy efficiency. Further, the obligation can be applied to either energy
suppliers or distributors. For obligations expressed as total required energy
savings, two crucial determinations are, first, which energy-efficiency

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investments are eligible, and second, how much energy savings will accrue
toward obligations from eligible investments.

Hover over the Example from Brazil to learn more.

Benefit of Energy Savings Obligations for Developing Countries

Energy savings obligations commonly rely on so-called deemed energy
savings values. Once an investment is made eligible -- for example, compact
fluorescent lamp installation the regulator will also publish a deemed
energy savings value, based on testing data, which tells energy companies
exactly how much energy savings will accrue toward their obligation from
each CFL they install. This practice makes monitoring and compliance fairly
simple because it requires counting how many investments were made
instead of calculating their energy-savings impact. The relatively low cost of

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Energy Sector Strategies to Support Green Growth

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monitoring and compliance is one reason why energy savings obligations may
be a promising instrument for developing countries.

Another reason that ESOs are promising is because efficiency investments are
coordinated by well-resourced energy companies with consumer networks,
instead of by government.

Policy Evaluation and Improvement

Evaluating the performance of policy instruments once implemented is
critical. The US EPA defines policy evaluation as the process of determining
and documenting the results, benefits, and lessons learned from an energy-
efficiency program.

Evaluation reveals which instruments are successful and which instruments
need corrective action. Evaluation is crucial because results are not readily
apparent. In effect, success is measured by the amount of energy that was

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not used. Evaluation should answer specific questions relating to a programs

performance in achieving desired outcomes, market transformation, process
or administrative efficiency, and cost-effectiveness.

Hover over each area to see a list of sample questions.

Key Components of EE Policy Evaluation

Effective evaluation requires six key components.

First is a logical framework linking the program to a desired outcome.

Second is a specified analytic base, like a data metric, for measuring results
with respect to the desired outcome.

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Third, evaluation requires a baseline against which to measure success. It is

critical to gather baseline data before policy implementation so the policy
impact can be measured.

Fourth, an evaluation strategy must be capable of delivering answers to
relevant evaluation questions.

Fifth, evaluation results should be consistently expressed in the terms most
relevant to stakeholders and policy makers.

And sixth, an evaluation should deliver an assessment of the programs costs
and benefits.

Complementary Policies

To consider which policy instruments might complement one another, its

useful to revert to our slide from Lesson 1 on the role of government.

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Module 3: Lesson 2 Information & Market-Based Instruments

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Different policy instruments address different market failures, behavioral
barriers, and government failures. Governments have a role in overcoming
each failure, and there are multiple policy instruments that might be used.
Market-based instruments can be used to correct prices. Labeling allays
informational market failures. So too do designated-consumer regulations,
which also nudge behavior. Awareness campaigns are designed to nudge
behavior. Government failures require policy evaluation to overcome. In sum,
a package of policy instruments should attempt to address each of the major
sources of the energy-efficiency failure.

Hover over the Example from Thailand to learn more.

Summary of Key Messages

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Module 3: Lesson 2 Information & Market-Based Instruments

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The first lesson in this module covered regulatory instruments. This lesson
looked at information and communication measures and market-based
instruments.

One key takeaway from this lesson is that in order for government policies to
overcome the diverse market barriers to realizing energy efficiency, a policy
package is required that includes regulatory instruments, information and
communication measures, and market-based instruments. Information
measures help consumers make smarter decisions and build capacity for
energy efficiency. Market-based instruments incentivize energy-efficiency
improvement or allow flexibility in meeting required efficiency improvement.

A last but important takeaway: policy evaluation and improvement is critical
and must be planned before policy implementation.
Key References

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Module 3: Lesson 2 Information & Market-Based Instruments

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Select these links to learn more about information and market-based

instruments.

Full List of References

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