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NEWS: Industrial energy efficiency – scoring a hat trick

In the first in a two part series of blogs focussing on energy policy and climate change, Nicola Cantore, Research Fellow at ODI, introduces a new report from UNIDO which will be launched at ODI on Tuesday 27th March. 

Next week, Jos Bruggink, will reflect on his recent report on energy aid in times of climate change. 

The United Nations Industrial Development Organization (UNIDO) will launch its Industrial Development Report 2011 (IDR), Industrial energy efficiency for sustainable wealth creation: capturing environmental, economic and social dividends at ODI in London on 27 March.

The Report calls for investing in energy-efficient technologies which can deliver a hat trick of economic, environmental and social dividends that will help to achieve sustainable growth in developing countries. It provides a comprehensive analysis and description of the impacts of energy efficiencyUsing less energy/electricity to perform the same function. Programs designed to use electricity more efficiently - doing the same with less. in developing countries.

Energy efficiencyUsing less energy/electricity to perform the same function. Programs designed to use electricity more efficiently - doing the same with less. provides a triple win in providing environmental improvements, economic profits and social dividends.

First in environmental terms, improvements in industrial energy efficiencyReducing the amount of energy used for a given service or level of activity in order to produce the same level of end-use service. Energy efficiency improvements are predominantly achieved through using technologically more advanced equipment. For example, using compact fluorescent light globes ... could play a major role in reducing climate change emissionsEmissions of greenhouse gases, greenhouse gas precursors, and aerosols associated with human activities, including the burning of fossil fuels, deforestation, land-use changes, livestock, fertilisation, etc. (IPCC). The literature stresses that developing countries will suffer most from climate change impactsConsequences of climate and climate change on natural and human systems. (IIED)A specific change in a system caused by its exposure to climate change. Impacts may be harmful (threat) or beneficial (opportunity). (UKCIP). The World Bank Development Report 2010 on climate change suggests that energy efficiency is an important element of global efforts to reach the 2 degrees temperature increase identified by scientists and Copenhagen agreement as the limit that world should not exceed in order to avoid catastrophic consequences. The potential for improvement is enormous as industry represents 25% of world emissions. Energy efficiency also provides other environmental benefits, for example, contributing substantially to mitigating resource depletion among resource-intensive industries. The processing of materials and water in manufacturing requires substantial energy. Efficiency in resource use thus stimulates energy efficiency.

Second, investments in energy efficiency projects are in many cases financially viable and profitable. A study conducted by ODI for the Industrial Development Report 2011, using a large sample of firms from 29 developing countries finds that, after controlling for firms’ characteristics such as age and size, there is a significant positive relationship between energy efficiency and profitability in 13 out of 29 developing countries and for 9 out of 15 sectors. In terms of productivity ODI finds a strong positive relationship between energy efficiency and productivity in 23 out of 24 developing countries, suggesting that energy efficiency is accompanied by innovation and efficient management of other inputs. The most profitable projects are those requiring small investments, involving process reorganization and housekeeping measures and using existing infrastructure. Micro – small and medium size manufacturing firms tend to be less energy efficient than large companies and show the highest untapped potential for energy efficiency improvements.

Third, the social dividend of energy efficiency has several dimensions. Emissions from burning fossil fuelsEnergy from fossil sources, such as natural gas and oil. This type of energy contributes to climate change and because of its finite nature it is not a permanent resource. for industry, transportation and power generation cause urban air pollution leading to health damage. Greater energy efficiency reduces the atmospheric emissions of damaging substances such as sulphur dioxide, nitrogen oxides, smoke and airborne suspended particulate matter. Energy efficiency also improves productivity and job creation. In terms of employment gains, cost–effective energy efficiency improvements increase productivity which could lead to an expansion in employment. Industrial energy efficiency could also be useful to control the increase of energy use and savings could be reinvested for modern energy infrastructure and better energy accessEnergy access represents a crucial yet often overlooked dimension to the issue of poverty. Relatively small amounts of energy can satisfy the basic needs of rural populations and have a dramatic impact on quality of life. Despite this, approximately 3 billion people , half the worlds population, ... for the poor.

There are obstacles for the private sector in the adoption of energy efficiency technologies such as market failures (e.g. lack of capital, information shortage), bounded rationality (e.g. imprecise evaluationProgram evaluation is the rigorous, scientifically-based collection of information about program/intervention activities, characteristics, and outcomes that determine the merit or worth of the program/intervention. Evaluation studies provide credible information for use in improving ... methods mean that in some cases companies decide against profitable energy efficiency investments) and hidden costsCost: The consumption of resources such as labour time, capital, materials, fuels, etc. as the consequence of an action. In economics, all resources are valued at their opportunity cost, which is the value of the most valuable alternative use of the resources. Costs are defi ned in a variety of ... (e.g. transaction costs or costs to acquire information to implement investments).

For this reason the IDR identifies a set of policies options to boost energy efficiency and to fully capture the triple wins dividend. The categories identified by the IDR 2011 may be broadly summarized as:

1)    Establishing the policy framework for industrial energy efficiency by setting national and sectoral targets;

2)    Creating a regulatory framework for improved energy efficiency of industry by requiring internal auditsInternal auditing is conducted by a unit reporting to management. (Glossary Monitoring and Evaluation Terms; MERG Monitoring & Evaluation Reference Group and UNAIDS) in private companies, which may involve meeting minimum efficiency performance standards or energy management systems standards;

3)    Supporting private sector voluntary initiatives;

4)    Developing training and education campaigns;

5)    Promoting new technology and innovation by encouraging public and private R&D investments, by boosting adoption and diffusion of energy efficient technology, and by promoting demonstration projects and international cooperation.

6)    Using carbon pricing policy instruments such as taxes to internalize negative externalities from the use of  polluting forms of energy, emissions trading schemesThe creation of a market designed to facilitate the buying and selling of the rights to emit greenhouse gases. to drive up the cost of carbon, and subsidies to incentivize energy efficiency investments;

7)    Launching financial instruments such as loans and concessions to ensure access to capital and to guarantee the financing of projects requiring “patient financing” as project gains may not be immediate and may materialise over years.

International collective action can play a major role. The IDR recommends an international target to reduce industrial energy intensityEnergy intensity is usually measured as GDP per unit of energy use, and thus describes how much energy an economy needs to produce economic value. For easier comparison of different countries usually the purchasing power parity GDP per kilogram of oil equivalent of energy use is used. by 3.4 percent annually until 2030. Because reaching a binding international agreement on such a target will be difficult, countries could make it part of their national development plans.

The target is ambitious, but the policy instruments mentioned above can make it a possibility.

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Image: Courtesy of The World Bank

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