A new study investigating the two primary means of environmental policy intervention — “steering” and “promotion” — has found that steering is both more efficient and less expensive than its cousin.
The study was carried out as part of Switzerland’s National Research Programme “Managing Energy Consumption” by the Swiss National Science Foundation. The study is based on the premise that there are two basic environmental policy strategies geared towards helping the country meet its Energy Strategy 2050 and its CO2 legislation: Specifically, there is “steering” — steering energy consumption using policies such as taxing energy and CO2 — and “promotion” — promoting energy targets through market mechanisms such as taxes and subventions, or implementing mandatory requirements such as efficiency standards for electrical appliances or emissions limits on cars.
The authors of the report sum it up like this:
The “Steering” approach represents a comprehensive market-based regulation which is based on CO2 and electricity taxes. The “Promotion” approach represents a narrowly focused regulation which limits where-flexibility either by the enhanced use of command-and-control (CaC) instruments (emissions standards for new passenger cars and efficiency standards for electrical appliances) or the scaling down of market-based regulation to specific subsidy programs (open competitive bidding and buildings programs).
“The question of how policy measures to reduce energy consumption and CO2 emissions can best be selected and designed must look not only at the overall costs, but also at how the benefits and burdens are distributed among different socio-economic groups,” said Sebastian Rausch, who is Professor of Energy Economics at the Center for Economic Research at ETH Zurich, and who carried out the study.
The conclusions made by the study are fascinating, and completely unsurprising.
While households might suggest that “promotion” works better, the study found that “in overall economic terms, steering is substantially more efficient and up to five times less expensive than promotion.” Specifically, the report concludes that steering policies cuts the economic adjustment cost by a factor of more than five when compared to the more “rigid” promotion policies — and all of this is based on Switzerland’s targets of reducing CO2 emissions by 40% by 2030 compared to 1990 levels, and lowering electricity consumption by 3% by 2030 compared to 2005 levels. In other words, the overall cost of Switzerland decarbonizing its energy sector, reducing its CO2 emissions and electricity consumption, is less expensive for the whole through the use of steering measures than it is using promotion measures.
“Promotion measures lead to only small energy price increases,” Rausch explains. “But the lower costs that this suggests are illusory. Promotion interventions only reduce energy consumption where the promotion is directed, and some things that are already happening anyway are also being promoted.”
“Steering, on the other hand, has an impact everywhere and on every single energy-relevant decision taken by households and companies. As steering takes effect across the board, it therefore results in considerably lower overall costs than targeted promotion. The higher total costs of the promotion strategy are hidden. Ultimately, though, households and companies have to foot the bill for these extra costs.”
However, the report also finds that there are “winners” and “losers” in both strategies based on how steering and promotion affect individual households based on their socioeconomic situation.
The report found that the winners and losers of steering policies are based to a large extent on the mechanism which is used to redistribute the income from steering, as well as the energy expenditure and income of the households in question. Specifically, on average, “per capita redistribution of tax revenues protects lower-income households from rising energy costs, house owners are left worse off than tenants, and households in rural areas lose out compared with households in towns and conurbations.”
“The findings help to increase the social acceptance of this type of market intervention,” Rausch concludes. “The aim of the study is not, however, to evaluate specific policy measures but to highlight the fundamental differences between an energy and climate policy based on promotion and one based on steering.”
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