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Case Study on Fiscal
Policy and Energy Efficiency
Lessons Learned
Prepared
by
M.K. Jaccard & Associates
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Please note that this version of the case study is slightly
modified from the version previously available. The modification
relates to a paragraph in Section 3.5 of Appendix B dealing
with aluminium electrolysis technologies.
June
4, 2004
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While the greater diffusion
of technologies already in the market targets decarbonization
of the energy system immediately, it is also important to
consider continued innovation and commercialization of energy-efficient
technologies in the long term.
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Energy efficiency is not
necessarily the most cost-effective option to reduce carbon
emissions in the industry sector. Other means include: fuel
switching; reducing fugitive emissions; reducing process emissions;
and capture and storage of CO2. In the modelling
results, while a significant share of reductions in emissions
occurred through increased energy efficiency, considerable
reductions also occurred through other means. Focusing on
energy efficiency alone risks orienting efforts to achieve
decarbonization in industry towards an option that is not
the most cost-effective.
- Promoting greater energy efficiency is
not a new policy objective; it has been actively pursued in
many countries over the past 30 years. Considerable experience
can be gained from understanding the successes and failures
of these efforts. Of significant note is research that shows
an ‘energy-efficiency gap’ between the levels
of investment in energy efficiency needed for cost-effectiveness
and the lower levels of investment that are actually being
made. This gap is a chief focus of this case study, which
attempts to estimate alternative carbon emissions scenarios,
as well as to evaluate the related economic costs and potential
for EFR policy to influence the adoption of energy-efficient
technologies. This is an emerging analytical area that has
only recently been incorporated into technology simulation
modelling.
- Technical gains in energy efficiency
do not translate directly into reduced carbon emissions. The
potential for industrial energy efficiency actions to contribute
to the decarbonization of the energy system is a complex matter,
based on the following factors:
- The degree to which technical
potential can be further developed
– Our energy system
is far from being at its maximum technical potential for
second-law efficiency, but how and when will new technologies
and systems be developed?
- The degree to which this potential
is adopted – Mature energy-efficient technologies
that appear to be cost-effective are available, but have
not penetrated the market. To what degree will energy-efficient
technologies, systems and practices be adopted?
- The degree to which this adoption
translates into reduced aggregate energy use –
The lower cost of energy services from investments in
energy efficiency elicits a rebound effect of increased
demand for energy services and thus creates greater energy
consumption.
- The carbon intensity of conserved
energy – Reductions in carbon emissions depend
on the carbon intensity of energy; for instance, the impact
of improved energy-efficient end-use will be considerably
different depending on whether that electricity was generated
by hydroelectric power or thermal generation.
- The modelling work in the case study
sought to analyse complex relationships involved in the carbon
intensity of conserved energy. Forecasting trends based on
models is inevitably an uncertain endeavour, since models
cannot possibly incorporate all information and relationships
of potential importance, or accurately project all factors
2.
Still, the modelling results can suggest the potential of
current and emerging technologies to harness energy efficiency;
the role of energy efficiency in industry among other options
to decarbonize; and the relative potential for decarbonization
among industry sub-sectors.
- Modelling the long-term potential for
fiscal policies that will increase adoption of energy efficiency
suggests the need for a dynamic analysis that is capable of
considering how technological innovation and perhaps even
consumers’ and establishments’ preferences may
be influenced by these policies. That kind of analysis was
beyond the capability of this case study, but is emerging
as a new direction for research.
- The results of the alternative scenarios
reflect certain assumptions about carbon prices — different
prices for carbon would have revealed different potentials
for reductions. While the potential for decarbonization would
appear to be greater, the model tended to show diminishing
returns in decarbonization (lower additional reductions in
emissions for each additional $ / tonne of carbon).
- The long-term potential for energy efficiency
to contribute to a decarbonized energy system is also constrained
by what it will cost to produce a clean energy supply. The
price of energy represents an upper limit on the potential
of energy efficiency to contribute to reductions in carbon
emissions.
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