Chapter 22 - Trading in Energy Efficiency – A Market-Based Solution to Market Failure, or Just Yet Another Market Failure?

Abstract

In this chapter we describe the underlying theory, rationale, and mixed performance to date of policy measures that establish a trading market in “energy savings.” Such approaches, under names that include White Certificates, Energy Efficiency Portfolio Standards, Energy Savings, and Energy Efficiency Certificate Trading, are receiving growing policy attention around the world including in Europe, the United States, and Australia. They are often portrayed as a market-based solution to a “market failure.” This chapter highlights the many challenges – technical, economic, and social – of such “designer” markets that attempt to commodify energy savings, with key problems they face including measurement and additionality. However, there are broader challenges in the complex interaction between technologies and behaviors inherent in energy use and in the financialization of such complex, interacting, uncertain outcomes, making potential imputed “savings” even more problematic. It is concluded that considerable care is required with such approaches to energy efficiency policy lest governments’ merely add yet another market failure to those already existing for energy efficiency. More importantly, policymakers will need to move beyond framing energy efficiency within conventional economic terms of market failure, and address the broader challenge of engaging energy users on their unsustainable behaviors including, notably, the constant fuelling of the desire for further energy services.