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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 efficiency in developing countries.

Energy efficiency provides a triple win in providing environmental improvements, economic profits and social dividends.

First in environmental terms, improvements in industrial energy efficiency could play a major role in reducing climate change emissions. The literature stresses that developing countries will suffer most from climate change impacts. 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 fuels 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 access 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 evaluation methods mean that in some cases companies decide against profitable energy efficiency investments) and hidden costs (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 audits 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 schemes 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 intensity 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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