Use of policy instruments

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2.2.2 Policy effectiveness in the manufacturing sector

The policy conducted in the energy-intensive manufacturing sector in the period 2000-2007 increasingly became less compulsory. The policy had few results. The energy saving achieved 0.5 per annum on average was less than the saving that would have occurred without policy the autonomous development of 0.8-1 per annum. In the period 1995-2007, the manufacturing sector as a whole performed slightly better 1.5 per annum on average than the national average 1.1 per annum. The national average, however, was significantly reduced by the transport sector. Between 1995 and 2008 the policy for energy intensive manufacturing companies, which are responsible for 80 of energy consumption in the manufacturing sector, had little effect. There are several reasons for this:  The governments main policy instrument for energy intensive companies was the Benchmarking Agreement. A series of side letters, however, weakened the agreements obligations and it ultimately had no effect: the 139 participating companies saved less energy than the autonomous saving.  The European CO 2 emissions trading system did not work in practice until 2008, chiefly because of the generous allocation of emission allowances.  The most energy intensive companies were exempt from the top rate of energy tax on electricity consumption in 1995-2008 because they participated in the first multiyear energy efficiency agreements and then in the Benchmarking Agreement. 7  The statutory energy saving obligations the government introduced did not apply to energy intensive companies participating in the European CO 2 emissions trading system. 8 At present, the emissions trading system is the most important instrument to encourage energy intensive and many other medium-sized and large companies to save energy and ultimately to reduce CO 2 emissions. The instrument has had some effect since 2008 but at relatively high cost. This is because the price of an emission allowance the working ingredient is still low relative to the cost incurred by the government and the administrative burden on industry see section 2.2.4. 7 This exemption is still available because the companies are now participating in the successor to the Benchmarking Agreement, the Multiyear Agreement on Energy Efficiency for ETS Companies MEE. 8 It is also difficult to get other companies to fulfil these obligations and it is open to question whether they can actually be enforced. We return to this matter in our recommendations see section 2.3.2. 12 The cost benefit ratio of the various instruments in the national energy saving policy in 1995-2008 was mixed.  Tax instruments. The Energy Investment Allowance EIA is the most important tax instrument introduced by the government. It is effective and relatively inexpensive. Energy tax is also effective and relatively inexpensive but it would be even more efficient if the tax brackets were refined. Unlike income tax, the higher the energy tax bracket, the lower the tax rate.  Multiyear agreements with industry organisations. The government has made several multiyear agreements with industry organisations with mixed results. It cannot be determined whether the first energy saving agreements had an independent effect i.e. separately from other instruments such as grants and tax facilities. At the end of the first generation of multiyear agreements, a distinction was made between small energy consumers and large energy intensive companies. A second generation of multiyear agreements was introduced for smaller consumers. These agreements had an effect but at a high cost. Social pressure, a key factor in such agreements, does not seem to have had any demonstrable effect in the current arrangements. The government concluded the Benchmarking Agreement with energy intensive companies. The successor to the Benchmarking Agreement, the Multiyear Agreement on Energy Efficiency for ETS Companies MEE, came into operation in October 2009. 9 It will be several years before it can be investigated whether this instrument has had an effect on energy consumption. In this section we considered the effects of the policy instruments separately from each other. As noted at the beginning of this chapter, however, there is a negative interaction between the European CO 2 emissions trading system and the national energy saving policy. We return to this in section 2.2.4.

2.2.3 Agreement between policy and company behaviour

Policy instruments in the manufacturing sector are targeted chiefly at lowering the direct cost of investing in energy efficiency measures. In practice, however, other reasons also influence energy efficient behaviour. The governments policy measures in the manufacturing sector consist chiefly of instruments to reduce the direct cost of investing in energy 9 ETS: emissions trading system. 13 efficiency or to increase the return on such investments e.g. by taxing energy consumption. Our audit found that financial incentives indeed were important for saving energy. Companies frequently expected energy savings to increase their market share. The presence of sufficient capital is also an important factor to invest in energy savings. But there are also other reasons and factors that are not directly related to the direct investment cost. A company may decide not to take energy saving measures if it thinks they will disrupt its relationship with suppliers and maintenance contractors a computer-controlled energy efficient production line, for example, might be too advanced for the tried and trusted maintenance contractor. Companies are also more willing to invest in energy saving measures at a natural moment for example when a production line is expanded or machinery is replaced. There are also non-cost factors for investing in energy savings and energy efficient products. One is the presence of knowledge, not only about the energy saving potential but also about the companys own energy management. Our audit found that policy instruments that agreed with the reasons and factors given above were a greater incentive to manufacturing companies than policy instruments that did not. Aligning the current policy instruments would therefore increase policy effectiveness. We return to this in the recommendations given in section 5 of part II of this report. Our audit findings regarding the manufacturing sectors reasons for and against taking energy saving measures are considered in chapter 5 of part II of this report.

2.2.4 The European CO

2 emissions trading system Part of the energy saving is negated by the interaction between national energy saving policy and the European CO 2 emissions trading system. Since 2005, the EU has used the trading system to reduce the emission of greenhouse gases see box. In the system, major emitters of CO 2 factories, power stations must have emission allowances. They can buy and sell allowances. Those that successfully reduce their CO 2 emissions can sell their excess allowances to others.