Linking Green Stimulus, Energy Efficiency and Technological Innovation

Linking green stimulus, energy efficiency and technological innovation:

The need for complementary policies

Edward B Barbier

Department of Economics & Finance

University of Wyoming

February 8, 2011

Final Draft

Paper prepared for the European Commission DG 1 (External Relations) Project, "Transatlantic Opportunities for Meeting Global Challenges in Energy Efficiency and Low Carbon Technologies". Presented at the Transatlantic Energy Efficiency Workshop, UC Berkeley School of Law, Berkeley, CA, February 11-12, 2011.

Summary

The following paper contains five contributions:

·  An overview and summary of global green stimulus, especially low carbon and energy efficiency (LC/EE) measures, enacted during the 2008-9 recession.

·  An analysis of the effectiveness of such stimulus measures on their own in achieving long-term goals for improved energy efficiency, including implementing necessary energy R&D.

·  A review of the key barriers to extending the cost-effective energy efficiency elements of current green stimulus packages into a long-term strategy.

·  A discussion of the additional complementary pricing policies and programs, such as carbon pricing, emissions policies, further regulations, subsidy removal, etc., which are required to achieve long-term energy efficiency and R&D goals.

·  An assessment of the additional challenges facing and assistance required for emerging market economies, with a focus mainly on development assistance, post-Kyoto reform of the Clean Development Mechanism (CDM), and the need for an emerging global carbon market.

In analyzing the link between green stimulus, energy efficiency and technological innovation, this paper advances and explores an important hypothesis: as the stimulus packages enacted during 2008-9 are wound down, the energy efficiency elements – which typically have the highest net benefits – should be continued. This paper finds that this hypothesis is plausible, provided that energy efficiency policies are appropriately designed and executed, and more importantly, that they are supported by a range of complementary pricing policies. These include economy-wide pricing and regulatory policies, such as carbon pricing, emissions policies and additional regulatory incentives; removal of fossil fuel subsidies; prescriptive and targeted incentive programs; behavioral nudging; and combined or improved design of energy efficiency programs. Developing economies may also need additional support, especially in the form of technological and capital assistance, reform of the CDM and the development of a global carbon market.

Overview of green stimulus during the 2008-9 recession

A unique feature of the global policy response to the 2008-9 recession was that, as part of their efforts to boost aggregate demand and growth, some governments adopted expansionary policies that also incorporated a sizable "green fiscal" component. Such measures were wide ranging, including support for renewable energy, carbon capture and sequestration, energy efficiency, public transport and rail, and improving electrical grid transmission, as well as other public investments and incentives aimed at environmental protection (Barbier 2010a,b; Robins et al. 2009 and 2010). Several studies have shown that such "green stimulus" policies could foster a more sustainable, low-carbon economic development in the medium term while creating growth and employment in "clean energy" sectors (Barbier 2010a,b; Houser et al. 2009; Pew Charitable Trusts 2009; Pollin et al. 2008; Renner et al. 2008).

Green stimulus measures can be separated into three broad categories of support:

·  Energy efficiency - Support for energy conservation in buildings; fuel efficient vehicles; public transport and rail; and improving electrical grid transmission.

·  Low carbon power - Support for renewable energy (geothermal, hydro, wind and solar), nuclear power, and carbon capture and sequestration.

·  Water, waste and pollution control – Support for water, waste and pollution management and control, including water conservation, treatment and supply.

It is common to refer to two of these areas, low carbon power (LC) and energy efficiency (EE), as comprising collectively the clean energy sector of an economy (Barbier 2010a,b; Pew Charitable Trusts 2009).

Green stimulus in the above three areas is measured in terms of the additional fiscal commitments made by national governments during the 2008-9 recession in the form of spending plans or tax breaks. Additional investments resulting from regulatory mandates, such as renewable energy obligations, vehicle fuel use standards, or energy efficiency requirements, are usually not included.

Table 1 summarizes the global green stimulus enacted by governments from September 2008 through December 2009. Annex 1 provides a further breakdown of the major green stimulus packages enacted during the recession, by region and country.

Of the $3.3 trillion allocated worldwide to fiscal stimulus over 2008-9, $522 billion was devoted to green expenditures or tax breaks. Almost the entire global green stimulus was by the G20, which comprise the world's twenty largest and richest countries.[1] Globally, green spending amounted to just under 16% of total fiscal stimulus and 0.7% of world GDP.

Support for energy efficiency was a prominent component of most green stimulus packages (see Table 1 and Annex 1), amounting to $335 billion over 2008-9, or nearly two thirds of all green spending globally. Although the amounts vary from country to country, just under two thirds of the green stimulus globally went to energy efficiency. This allocation appears to reflect a general consensus that support for energy efficiency measures were a relatively effective and fast way of creating jobs while curbing energy use during the recession (Barbier 2010a,b; Houser et al. 2009; Pew Charitable Trusts 2009; Pollin et al. 2008; Renner et al. 2008). $87.1 billion of energy efficiency spending globally was for energy conservation in buildings, $21.4 billion for developing fuel-efficient vehicles, $135.2 for rail and public transport, and $97.1 billion for improvements in electrical grid transmission (see Annex 1). However, the amount spent on these different energy efficiency investments varied considerably from country to country. For example, almost all of China's support for energy efficiency was for grid and rail improvements. In contrast, the European Union and the United States spent more on building conservation than any other energy efficiency category.

Assessment of green stimulus and energy efficiency measures

At the 2008 Group of Eight (G8) summit in Hokkaido, Japan, leaders committed to implementing the 25 energy efficiency recommendations of the International Energy Agency (IEA 2008).[2] The recommendations were aimed at seven priority areas: cross-sectoral activity, buildings, appliances, lighting, transport, industry and power utilities. The IEA estimated that full implementation globally of the proposed actions could save annually around 9.2 exajoules (EJ) of final energy consumption, or 8.2 gigatonnes (Gt) of carbon-dioxide (CO2) equivalent greenhouse gas (GHG) emissions, by 2030. This amounts to around one fifth of projected energy-related emissions in 2030, or about twice the European Union's current yearly emissions.

The 2008-9 recession provided further rationale for government-led efforts to boost energy efficiency investments. As argued by the IEA (2009a, p. 2), "improvements in energy efficiency can deliver some of the largest and cheapest CO2 reductions. Importantly in a time of financial crisis, they can also often be implemented quickly and bring more benefits for employment than any other category of energy technology."

As noted previously, the fact that energy efficiency measures featured prominently in many fiscal stimulus packages adopted during the 2008-9 recession suggests support for this view expressed by the IEA. However, as we have also seen, not all countries adopted green stimulus measures, and even those that did, varied in how much was spent on energy efficiency.

The purpose of the following section is to assess in more detail, first, the extent to which green stimulus and energy efficiency measures were adopted as part of global economic recovery efforts, and second, whether energy efficiency measures do have an advantage over other green stimulus measures in terms of speed of disbursement, employment creation, and large and cheap greenhouse gas reductions. In addition, the section concludes by examining whether energy efficiency spending and tax breaks alone are sufficient to achieve long-term savings in energy consumption and CO2 emissions.

Green stimulus

As Figure 1 indicates, the United States and China accounted for over two thirds of the global expenditure on green fiscal stimulus during 2008-9. The world's largest economy, the European Union, contributed substantially less to the global total. Total green spending by all of Europe totaled only $57 billion; in contrast, the Asia Pacific region spent $342 billion (see Annex 1). The governments of key European economies, such France, Germany, and the United Kingdom, spent much less on clean energy and other environmental investments than the major Asia-Pacific economies, Japan and South Korea. Several G20 governments did not commit any, or very little, funds to green stimulus, including the large emerging market economies of Brazil, India and Russia (see Table 1).

As shown in Figure 2, green stimulus measures and investments amounted globally to around 16% of all fiscal stimulus spending during the recession. However, only a handful of economies devoted a substantial amount of their total fiscal spending to green investments. The most notable is South Korea, which allocated nearly 80% of its total expenditure to green investments. China apportioned around a third of its total fiscal spending to green measures. Around 60% of the European Union's fiscal stimulus was for green investments, but as indicated in Figure 1, the overall size of this investment was relatively small. In comparison, whereas the United States total expenditure on green stimulus was large, it comprised only 12% of total fiscal spending. Overall, most G20 governments were cautious as to how much of their stimulus spending was allocated to low-carbon and other environmental investments during the 2008-9 recession.

Perhaps most revealing, however, was the share of green stimulus measures in gross domestic product (GDP), as illustrated in Figure 3. Very few governments spent 1% or more of GDP on green investments during the recession. With the exception of Sweden, all these countries were from the Asia Pacific region. Large-scale green stimulus programs, such as the 5% of GDP planned by South Korea and the 3% of China, were the exception rather than the norm. The United States spent 0.9% of GDP on green stimulus, more than the global average, but the European Union spent only 0.2% of GDP (see Table 1).

Energy efficiency

Figure 4 indicates the total energy efficiency spending by country in response to the 2008-9 recession. China spent by far the most on these measures ($182 billion), well over half the global total ($328 billion). The US also spent a considerable amount on energy efficiency ($58 billion), whereas the European Union allocated less than $10 billion to such measures. The major Asia Pacific economies, Japan and South Korea, spent more on energy efficiency than the major European economies, Germany, France, the United Kingdom and Sweden.

Figure 5 confirms that energy efficiency measures had a prominent role in the total fiscal stimulus packages of some countries. China, the European Union and South Korea spent at least 20% each on energy efficiency. Other European countries, such as Norway, France, the United Kingdom and Germany also devoted around 13 to 17% of their total fiscal stimulus to energy efficiency. In contrast, despite its large expenditure on green stimulus, the United States allocated only 6% of its total fiscal spending to energy efficiency measures (Table 1).

The perceived effectiveness of energy efficiency measures as a cost-effective and quick means to creating jobs while reducing energy use and GHG emissions is reflected in Figure 6. Many countries that adopted green stimulus packages during the 2008-9 recession tended to focus almost exclusively on energy efficiency measures. Although 42% of the European Union's green stimulus was devoted to energy efficiency, individual European countries allocated much more. For example, the entire green stimulus packages of Austria, Belgium, Germany, Italy and Sweden consisted of investments aimed at improving energy efficiency. The United Kingdom allocated 84% of its green stimulus to energy efficiency, France 83% and Norway 56%. Although energy efficiency investments amounted to 84% of China's green stimulus, they were only half of green spending in the United States.

Figure 7 shows the ten economies with the largest green stimulus depicted in Figure 1, and compares this spending to their energy efficiency investments. Even among these ten economies, those with smaller green stimulus packages tended to focus mainly on energy efficiency measures. The only exception was Saudi Arabia, which spent its green stimulus entirely on water supply and management. In contrast, the five economies with the larges green stimulus packages, such as China, the United States, Japan and European Union, also included sizable investments in low carbon power investments and waste, water and pollution control.

Global performance of energy efficiency stimulus

An analysis by HSBC Global Research estimates the disbursement of energy efficiency and other components of global green stimulus packages (Robins et al. 2010). The comparison is indicated in Figure 8. Green stimulus spending is likely to continue through 2012, but with the bulk of the spending occurring in 2010. Energy efficiency investment follows this trend. Around $56 billion of spending on energy efficiency occurred in 2009, which nearly tripled to $165 billion throughout 2010 before expecting to tail off to $92 billion in 2011. By 2012, only $11 billion will remain for spending on energy efficiency from the 2008-9 global green stimulus packages.

However, the speed of disbursement of energy efficiency measures appears to be only slightly faster than other green stimulus. As indicated in Figure 6, around 64% of all global green stimulus packages were devoted to energy efficiency. But energy efficiency comprised just 68% of green funding in 2009, and its final share is likely to be 67% in 2010, 63% in 2011 and 41% in 2012 (see Figure 8). Thus, the rate of disbursement of energy efficiency spending has been fairly constant, and in the early years, consistent with its share of overall stimulus packages enacted over 2008-9. Thus, estimated green stimulus spending over 2009-2012 does not appear to be frontloaded with energy efficiency measures.

Individual countries have also varied considerably in how quickly they have spent their green stimulus (Robins et al. 2009 and 2010). China accelerated its green spending in the first half of 2009, and then slowed down in the second half. It spent an estimated $67 billion of its green stimulus over 2009. In contrast, Australia, Canada, France and the United States started slowly but ended 2009 with a faster rate of disbursement. South Korea spent $2.3 billion of its green stimulus steadily throughout 2009. The European Union has been one of the slowest economies to deliver on its green stimulus spending. Administrative delays and political considerations appear to have been the major reason for the slow disbursement of funds, especially in the European Union, Germany and the United Kingdom. However, poorly developed programs have also been a factor. For example, in Australia, the Home Insulation Program helped to insulate over 915,000 homes in 2009, but had to be suspended in early 2010, along with the solar hot water rebate program, because of safety concerns (Robins et al. 2010).