There is an increasing interest in the role so-called market-based instruments (MBIs) can play to deliver energy efficiency across the world. Their rising popularity among policymakers owes, in part, to their characteristics. They tend to be less prescriptive than traditional regulations and grants because they focus on the energy savings versus the means of delivery. Furthermore, policymakers’ objectives can potentially be met more cost-effectively through the direct involvement of profit-maximising companies, either as obligated parties or auction bidders. In the case of obligations, the costs to utilities do not appear on government balance sheets, as utilities pass on their costs to consumers through energy prices.
While these characteristics can also create some challenges for policymakers, the uptake of MBIs has not yet slowed as a result. The freedom given to private sector actors to discover the most cost-effective means of generating energy savings can lead to delivery through a concentration of particular technology types, especially if their costs decline quickly. This puts a premium on good programme design, with regular evidence-based reviews and, in many cases, limits on the amount of energy savings that can be claimed by individual technologies. Another issue related to obligations is that instruments funded through energy prices are potentially more regressive than those funded through general taxation, given that poorer households tend to consume more energy as a proportion of their incomes. A number of programmes have elements targeted at fuel poor households, while other policymakers have employed explicit redistribution policies aimed at lowering the energy bills paid by poorer households.
In a groundbreaking effort, the authors provide a global assessment of the impact of MBIs for energy efficiency in terms of investment, energy savings, and cost-effectiveness. Our analysis of 52 different instruments from across the world shows that MBIs are becoming increasingly important in terms of their number, global coverage, energy savings, and investment triggered.