Directing Private Technologies & Behavior

The main types of instrument regarding private actors are based on the prime working mechanisms set in motion, thus defining the instrument. In order of bindingness, they are Information; Financial Incentives; and Standards & Regulations, including prescriptions and prohibitions. The legal status may vary, from a contractual relation with one party; covenants with several parties, rules binding all concerned and operating permits with conditions specified.

For the long term, the goal of also these instruments directing private actors is to help induce the deep innovations and transformations required for 2-degrees. The instruments at Level 4 roughly coincide with (Grubb, Hourcade et al. 2014) Pillar I, p79ff, including the specific pricing instruments from Pillar II.

Informational instruments, to stimulate and clarify markets, leave all decisions to the then better informed private parties. Labels on energy use of electric appliances and Best Available Technology (BAT) specifications are examples for consumers and producers, information, with standards setting possibly following. The information instrument is difficult to fill in for long term development, but may be relevant only for creating shorter term dynamics. The Japanese Top Runner program might be an example where such dynamics are created. The Top Runner in the market receives broad public attention and an exclusive label for a limited period. This leads to a price premium (Nishitani and Itoh 2014), creating an effective incentive for R&D for the firms in the market for electric appliances, see (Hamamoto 2011). The regulatory follow up is to set standards following the top runner, pressing laggards out of the market. The very differentiated top runner structure for cars, in many weight classes showed an adverse effect in statistical analysis according to (Hamamoto 2011). It is not sure for cultural reasons if such programs can effectively be introduced in the EU.

The issue of educating the public towards environmental and climate values is politically laden.

With values belonging to the private domain and from there feeding also public policy, they should be left to the private domain. Public education will however have a value element included next to informational aspects and may be directed at value creation conducive to climate friendly behavior. This active cultural development does not find a right place yet in the instrument typology developed and applied here.

Financial instruments, of any legal status, influence actors in markets, changing trade-offs. Taxes, duties, excises, charges and product surcharges, and even fines, all mean: payment. To view an extreme: the EU Fleet Standards fines on non-compliance are set up as a regulatory instrument, related to the volume of emissions above a standard. They start at around 20€/tonne CO2 and rise to around 380€ per tonne⁷. They might be used as an emission tax, setting the fines at levels corresponding to carbon pricing in other domains. Whether they are a fine, tax, duty or excise does not make a difference in their functioning. Subsidies are there in many forms as well, all meaning: receiving. Subsidies may be direct, or they may be as tax deduction or exception, or as a product price guarantee, and more. Their effectiveness depends on their specific nature, their level and on the nature of the markets involved. Both taxes and subsidies need to be linked to some object or behavior as a condition for their payment, either some physical or technical aspect indirectly relevant, like home insulation and road payment, or directly relevant, like a carbon based fuel tax. Then an upstream administered emission tax would however be simpler. Indirect effects of financial instruments relate to broader market effects than their specific domain of application. Subsidies on non-fossils increase total energy supply, pressing out some fossil use only, while taxes on fossils use, including reduced subsidies, reduce total supply, see (Hood 2011).

Standards & Regulations, including prescriptions and prohibitions, remain as a main instrument also in climate policy. The may refer to a specific climate performance, as in CO2 emission standards for cars per km or for electricity per kWh; to a variable related to emissions, like energy standards in electric appliances; or to specific technologies prescriptions like minimum insulation standards in building, only indirectly related to emissions, in a binary way: yes/no.

7 The fine is expressed per gram CO2 over the fleet standard, in the average car in the fleet per km. The figure per tonne emitted is based on life time driving distance of a car set at 250.000km. A fine of 95€/g then corresponds to a tax of 380€/tonne CO².

They may act directly, as in limiting CO2emissions per kWh electricity produced or per km driven in a car, or indirectly, like in prohibiting new coal fired power stations to be built. A fine may be used for non-adherence to a standard, as now considered by the EPA for Volkswagen. This is different from the emission volume related fine as currently in the EU Fleet Standards and the ETS.

For all instruments the legal status may vary from international agreement or legally specified rules to contractual relations between groups as in covenants, or with single parties, or as permit or license granted to a single firm. National agreements may be used to engage parties more voluntarily, important for dynamics and functioning most effective ‘in the shadow of the law’:

regulators then must have broad discretion to enforce stringent compliance, as by building in financial instruments or strict standards to fall back on, see (Vogel 1986, Meidinger 1987) on such regulatory culture based differences between countries.

In principle the choice of technology specific measures may be based on their implicit costs of emission reduction, which may be linked to static efficiency. The costs and amount of emission reduction are based on modelling mechanisms and assumptions. Current instruments may lead to large differences in implicit costs, between countries and technologies, ranging from near zero to above 1000 Euro per tonne of CO2 reduced, see (Rey, Markandya et al. 2013), Chapter 5.

Though static efficiency is important for overall costs of climate policy it is not decisive in specific cases. The high costs of photovoltaics have been justified by the substantial price decreases induced by learning curves as created by their subsidized introduction. It is the expected long term cost of emission reduction which may guide the choice of technologies to be brought into the market. Dynamic efficiency cannot easily be linked to technology and behavior specific instrumentation however, depending more on direct innovation and incentives created. In a most extreme way of reasoning, subsidies filling the gap between current costs and current market prices for renewables may reduce incentives for innovation. Actual developments in fast decreasing costs of photovoltaics and wind power have shown the opposite however. Technology choices now cannot be based on substantiated predictions however. In some instances the potential may be established. The Sterling engine has the highest efficiency of all combustion motors in principle. In spite of substantial investments that potential has not been realized in the last two centuries. Still, if such an option would come up in the low emission domain, it may well be worth the try. A choice may be due between further public RD&D for possible later introduction, and forced or induced market introduction now. In the consideration the avoidance of lock-ins possibly created relative to long term more interesting options play a role. Current forced improvements in fuel efficiency of combustion engines through Fleet Standards certainly are useful in the short to medium term but may be judged also involving this long term perspective. The inherent uncertainty of longer term technology development shifts instrumentation to generic dynamic incentives, as intended with the ETS. A link between ETS and development of emission reducing technologies has not been established however, see (Rey, Markandya et al. 2013) Section 5.2, also due to low and varying price of its emission permit price and the still short period of its functioning. They indicate the positive role of more technology-specific instruments, slightly different for different technologies, see their survey of literature there.

A special challenge is in the instrumentation for CCS technologies, not for enhanced fossil recovery but for pure final storage. CCS requires capital outlays and substantial amounts of

energy. With generic emission taxes, a refund upon is due CCS, wherever it takes place in the tax jurisdiction. With tradable emission permits, there is a direct emission reduction with lower permit requirements if the CO2 producing firm takes care of CCS itself. With independent CCS operators they would receive tradable emission permits for what they store. Price stabilized permit prices would easier induce the long term investments required for CCS. The permits granted are to be subtracted from the cap volume brought on the permit market. Without emission pricing, technology specific instruments are due quite unavoidably.

Standards and regulations are most technology binding, like emission standards for power stations and maximum speed for person cars. They have been, and still are, the workhorse of environmental policy, and climate policy. They are mostly seen as stifling technological progress, and hence not fit for long term climate policy. They also require a substantial and reliable public and private administrative system not always present, as for fleet standards. Performance specification allows for more technology dynamics than technology specification. However, even the most restrictive regulations might induce innovation, see the Porter Hypothesis (Porter and Van der Linde 1995). This can result from a prime-mover mechanism or by forcing change in firms, just any to get them moving, see the literature review by (Ambec, Cohen et al. 2013). The speed of emission reduction through these mechanisms may be limited however. Setting dynamic standards has been the main thrust towards technology specific dynamic emission reduction, which however requires a strong political and administrative involvement, continuously.