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 / Spring 2009 / Issue 54(originally published by Booz & Company)


Pollution, Prices, and Perception

Across the Atlantic, the German government has implemented a similar plan for a 40 percent re­duction in the country’s GHG emissions by 2020. The plan, which targets sectors such as agriculture and transportation, also calls for boosting Germany’s share of electricity produced from renewable en­ergy to 25 to 30 percent by 2020. (Germany already has the highest share of installed wind energy ca­pacity in the world.) In addition, the government is implementing a package of emissions reduction policies, as well as 14 new laws and regulations designed to encourage businesses to conserve energy. And by providing hundreds of millions of euros in subsidies to encourage home and building owners to install efficient heating systems, the German government hopes to increase the energy efficiency of buildings. Australia’s plans also take a multi-instrument approach.

Given the novelty, complexity, and scale of the challenge, governments will undoubtedly experiment with a variety of approaches. However, over time they will gravitate toward policies that reflect the underlying realities of emissions reduction, national and local politics, and economics. That almost certainly means, in the end, that the regulatory landscape will reflect these three broad principles:

1. Low-cost solutions. The cheapest sources, by far, of GHG emissions reductions are improved energy efficiency and land conservation and reforestation programs; that has been the experience of dozens of companies and governments around the world. In the past, “sexier” and higher-cost op­tions, such as photovoltaic solar or “clean coal” technologies, have often received greater attention and funding. That will change as cost-benefit trade-offs favor such measures as efficiency standards for buildings and electronics. Automation will also help by reducing the behavioral barriers to capturing more energy-efficiency savings. For example, advanced control technologies, com­bined with real-time price data and information exchanges enabled by smart grid systems, will allow devices to “decide” when to reduce load as a function of overall electricity grid conditions (which in turn incorporate carbon prices).

The lowest-cost option for reducing emissions will often vary by geography, and by the stage of local economic development. A 2008 study by the World Wildlife Fund and Booz & Company found that the most significant sources of emissions shift significantly over the lifetime of a city or region. During the early stages of economic development, the greatest reduction is possible from designing new transportation and communications infrastructures to support dense hab­itation and high bandwidth. (Internet connectivity can reduce commuting and other travel and enable much smarter energy use within buildings.) For more established cities with slower growth, the most effective sources of emissions reduction are changes in electricity supply and energy efficiency.

2. Streamlined markets. The design of carbon emissions markets is still evolving. One key trend, for example, is the movement to in­corporate “offsets” such as forests, which play a large role in reducing CO2 but are not always accepted as viable parts of a carbon trading program. Another likely development will be mechanisms to reduce price volatility. For example, some policymakers may apply to climate change some of the design principles that Harvard Professor William Hogan has proposed for taming wholesale electricity markets.

3. A long-term commitment. Until now, policymakers in many countries, including the U.S., have not provided the steady, long-term conditions needed for new technologies to flourish. At the heart of GHG reduction will be corporate choices about which multibillion-dollar, multiple-decade projects to fund. Unfortunately, companies seeking to invest in clean technology have faced an unpredictable, constantly shifting regulatory landscape. Subsidies stop and start. Laws change. Without a matching commitment from their political counterparts, business leaders can’t commit the capital over time that is needed to transform the sector.

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