Agreement between policy instruments and reasons

66 calculation of a potential investments payback period. Companies that use financial schemes acquire energy –efficient technologies more often. The idea that companies do not use financial schemes because the administrative burden is too heavy was not confirmed by our survey. Most companies expect more paperwork but it does not stop them using a financial scheme. There were strong indications, however, that a decision to invest in energy saving is often taken regardless of the schemes and grants if a company has a strong culture of energy savings. Environmental Management Act Companies do not see the Environmental Management Act as an incentive to take energy saving measures. It requires companies take all energy saving measures that pay themselves back within five years provided their financial situation permits. Our audit found that many companies used a shorter payback time: 41 invest in energy saving only if the payback time is less than four years, for 33 the criterion is three y ears or less. Since the prescribed behaviour differs so much from the spontaneous behaviour, a great deal of enforcement is needed to ensure companies comply with the statutory obligation. The potential consequences of non-compliance with statutory obligations risk of sanctions or fines did not prompt the companies we surveyed to invest in energy efficiency. CO 2 emissions trading system As noted above, the CO 2 emissions trading system was named in our survey as the least effective instrument. It does not directly agree with the reasons and conditions that influence energy saving decisions. Reasons such as a stronger market position and industry leadership, however, can reinforce its effect. The instrument is not concerned primarily with energy savings but at reducing CO 2 emissions. Within the trading system, a company is free to opt for other CO 2 reducing measures or to buy emission allowances. With the current low price of emission allowances, there is little incentive to save energy. The instruments that agree most with the energy saving reasons multiyear agreements and tax schemes are appreciated more and have more effect than other instruments. It is therefore likely that poor agreement between policy instruments and the target groups reasons contributes to the underachievement of the targets. 67

5.5 Costs and benefits of policy instruments

5.5.1 Cost effectiveness

The final section of this chapter considers the costs and benefits of the instruments. For the benefits the instruments contribution to energy saving, the survey results have been combined in so far as possible with an economic analysis. 37 The survey reveals the extent to which participants in an instrument take more energy saving measures than non-participants. After correction for potential self-selection for example because the most enthusiastic companies participate, this is indicative of an instruments effect. The economic analysis reveals the saving attributable to each instrument and the cost of each instrument per gigajoule of energy saving. The cost benefit ratio should not be regarded as fixed. The cost per unit of energy saved is higher if a measure is refined to encourage more savings. A small grant, for example, encourages entrepreneurs to take inexpensive measures. Higher grants will be needed to achieve more savings. The ratio between the cost and the energy saving will therefore be less favourable. The true reasons for an investment cannot be stated with certainty. A number of assumptions therefore have to be made to estimate the cost per gigajoule. The main assumption is that entrepreneurs act rationally, that they understand the savings opportunities and select those that best match their economic situation. The assumptions used in the economic analysis are considered in appendix 2. The study of cost effectiveness was confined to the direct costs borne by the government and manufacturing companies and the direct saving attributable to the policy instruments. Cost effectiveness can be calculated from several angles. In this report we calculated it on the basis of national cost: both the cost to government and the cost to companies. Companies must usually first invest in measures before they can save energy. They must, for example, acquire low-energy lighting or energy efficient production techniques. 38 In this chapter, each policy measure is analysed in four steps:  Does the instrument work? Using the survey results, we determine whether the instrument has contributed to the target. Where 37 The analysis was carried out by CE Delft on behalf of the Netherlands Court of Audit. 38 The cost to the government and end users cannot be simply aggregated. A grant, for example, is a cost to the government but an income item to the energy user. 68 meaningful, we consider differences by company size or other important characteristics.  How much energy has the instrument saved? We determine the total saving attributable to each instrument based on the price elasticity of energy. Price elasticity provides an indication of how strongly companies respond to an increase in energy prices by making more efficient use of energy. In the very short term, the response is virtually nil: companies do not change their energy consumption overnight if fuel becomes more or less expensive. The response is stronger in the longer term if the change in price is permanent. 39  What are the costs? The costs consist of overhead costs borne by the government, administrative costs borne by companies and the investment costs to implement the energy saving measures. Owing to lack of data on the precise investments and related cost per company, we have assumed that entrepreneurs will in general incur additional costs up to the point at which an additional investment costs as much per unit of energy saved as the additional energy saved. We also assume that, on the whole, the average additional investment cost will lie halfway between zero and this maximum, i.e. half of the marginal price incentive provided by the policy instrument per unit of energy. 40  What is the costsaving ratio cost effectiveness?

5.5.2 Context: total saving in 2008 relative to 1995

In the manufacturing sector as a whole including energy generation energy consumption in 2008 was about 260 PJ below the level that would have been consumed if no measures had been taken. After deduction of the autonomous effect and a number of other changes that are not attributable to government policy, the saving induced by government policy in 1995 –2008 is between 56 and 88 PJ. This is equal to an energy saving of 5-8 over the entire period from 1995 to the end of 2008, an average of 0.4 to 0.7 per annum Davidson et al., 2011, based on data provided by ECN specifically for this audit. 41 39 Using figures from the Netherlands Bureau for Economic Policy Analysis, we applied a price elasticity rising over 20 years from zero to between –0.1 and –0.2, i.e. between -0.005 and –0.01 for each year that a measure is in force. For a summary of the literature on the price elasticity of energy consumption in the Netherlands and an account of the above choice, see the separate report to be issued by CE Delft shortly after the publication of this report Davidson et al., 2011. 40 This assumption is also made by the OECD and the International Panel on Climate Change of the United Nations Burniaux et al., 2009, p. 193; Burniaux et al., 2008, p. 116; OECD, 2000, p. 28. 41 In principle, the same margin of uncertainty applies to this calculation as to the national policy. The effects of the EIA, energy tax and CO 2 emissions trading, however, were calculated independently of the estimates of the autonomous growth and the national saving. The uncertainty 69

5.5.3 Auditability

To determine whether the various energy saving instruments worked, we have to know whether energy savings were greater at companies that used a particular instrument than at companies that did not use that instrument. Our survey was a snapshot. Differences it found between companies that used a particular instrument and companies that did not cannot be put down simply to the use of that instrument. The differences might be due to companies or industries that were already saving energy, or were intending to, using the policy instruments positive self- selection. We therefore studied whether there were differences between users and non-users within the group of companies with a positive corporate culture towards energy saving and within the group with a negative corporate culture.

5.5.4 Costs and benefits of tax schemes and grants

Do tax schemes and grants work? Companies that used a tax scheme or grant acquired energy efficient technology for their production processes more often than companies that did not. At small companies, the use of such schemes also had a positive impact on attitude and perceived feasibility. This is entirely in line with the governments intentions for these instruments although the relationship for medium-sized companies is not significant. Corporate culture, however, seems to make a big difference. Table 4. Acquisition of energy efficient technology: differences between users and non-users of financial schemes, broken down by corporate culture Total Saving culture Non-saving culture User Non-user User Non-user User Non-user Small acquired 70 45 77 67 63 37 Medium-sized acquired 77 70 83 82 71 51 Large acquired 89 76 88 83 90 67 Source: Netherlands Court of Audit survey Bold: Significant, less than 5 probability that the relationship is chance Within the group of companies with a positive corporate culture towards energy saving, there is no significant difference. Companies that received regarding the overall saving in the manufacturing sector has consequences for the remainder category, particularly the multiyear agreements. We accordingly consider the benefits of these measures to be unknown and not as the difference between the uncertain total saving and the sum of the savings induced by other instruments.