IEA Examines Whether Carbon Pricing Makes Energy-Efficiency Policies Redundant

New analysis published by the International Energy Agency examines whether energy efficiency policies are redundant once carbon pricing is implemented.

To date, many academics and government officials have argued that putting a price on carbon – most commonly through taxes or emissions trading – is all that is needed to overcome every possible barrier to delivering cost-effective energy efficiency improvements. The latest IEA report, however, contends that while carbon pricing is an essential part of strategies to mitigate CO2 in the earth’s atmosphere, it does not hold all the answers.

The authors of Energy Efficiency Policy and Carbon Pricingidentified several barriers that appear not to be addressed by carbon pricing.

These barriers include:

  • imperfect information. (This occurs when a consumer buys an appliance but there is insufficient or inaccurate information provided on the energy performance of the product).
  • principal-agent problems. (These problems occur when two parties engaged in a contract have different goals and different levels of information. For example, landlords are commonly responsible for buying electrical appliances such as refrigerators for their properties. However, there is limited incentive for a landlord to choose the most energy-efficient model, as it is the tenant – and not the landlord – who will benefit from reduced electricity bills.
  • behavioral failures. (This refers to personal decisions made by consumers that appear not to be economically rational. If someone is buying a car, for instance, although they may be told that a more fuel-efficient option exists, that does not mean they will necessarily choose that option. Other factors, such as aesthetic look, driving performance, status or initial purchase price may determine the choice of car model).

The authors go on to highlight key policies which do address these barriers in both residential appliance electricity use and buildings heating use, including:

  • energy performance standards,
  • energy performance labelling,
  • consumer feedback tools,
  • awareness-raising efforts, and
  • contractual support for the construction of low energy buildings.

These and other policies should, therefore, be implemented in addition to carbon pricing, the authors argue, in order to boost efforts to save energy.

This report will be complemented by an IEA paper Combining Policy Instruments for Least-Cost Climate Mitigation Strategies, which is expected to be published this fall. It provides guidance on how to assess the need for supplementary policies for energy efficiency and renewable energy with existing carbon pricing.