Policy Instruments to Foster Energy Efficiency - Green Energy and Efficiency: An Economic Perspective - page 95

Moreover, some governments have also approved low interest loans to help

nancing such investments, and particularly ESCOs. 3
As noted these interventions are also exposed to important limitations. First, in
many cases they raise energy prices, which are politically sensitive, partly due to
our experience of the volatility in oil and gas markets. There is a major concern
about energy (or fuel) poverty that limits the scope for increasing prices as a policy
tool, although there is also evidence that the impacts of some increases on income
distribution are exaggerated. In developing countries the case for fuel taxes is
opposed on distributional grounds but as Sterner [ 72 , 73 ] has forcefully shown the
main bene ciaries of lower prices are not the poor but middle and upper income

groups. It is also argued in the literature that the impact of raising energy prices on
energy consumption is small as the price elasticity for different kinds of energy is
very low in the short run and general low in the long run [ 38 ]. The evidence on this,
however, is contested. While most researchers would agree that the short-run
demand is inelastic with respect to price there is some evidence that in the long run
the elasticity is considerable and often well over one [ 72 ]. Moreover the estimates
have a wide range, indicating that response to taxes may well vary by location [ 26 ].
The other

scal incentive of course is to provide some kind of subsidy and there
are many schemes of this kind that have been tried. In general they do result in the
adoption of more energy ef cient appliances and they are politically popular but

they have a number of negative aspects. One is the high scal cost of providing the
subsidy. Second is the scope for misuse of funds when a subsidy is being offered.
Third we have the rebound effect, so the reduction in the price of an appliance
results in consumers buying larger and more energy-using versions. For all these
reasons subsidies often turn out to be a high-cost policy for achieving energy
ef

ciency [ 49 ]. We provide a more detailed comparison between taxes and subsi-
dies in the next section.
A dual approach to scal incentives is to use permits rather than taxes and

subsidies and there a number of cases of such approaches in Europe and the US, the
largest perhaps being the EU emission trading scheme (EU ETS) for GHG emis-
sions created in 2003. By limiting the number of allocated permits the authorities
can reduce emissions and provide incentives to increase energy ef

ciency. Since the
permits are tradable, agents with a low cost of reducing emissions can make bigger
cuts then their allowances demand and sell any surplus to those agents who face
higher costs. In this way the overall cost of meeting a given target reduction is
minimised. The EU ETS is discussed elsewhere and we do not go into depth on it,
except to note that its effectiveness in including energy ef ciency gains is clearly

dependent on how many permits are issued, on how they affect energy prices and
by the interaction between the ETS and other schemes. The EU ETS has been

3 Energy Services Companies (ESCOs) are companies that guarantee the energy savings by
energy performance contracting, that is, customers pay the services with the energy savings
achieved.