Part 4. Where do we go from here?

Energy and economic prosperity

The demand of industrialised and transition economies for energy services is likely to grow, although increasing efficiency in conversion and end uses may result in a levelling off or even a reduction in the demand for primary energy. In developing countries, however, primary energy demand is expected to grow at about 2.5 percent a year as industrialisation and motorisation proceed and living standards improve.

Meeting these projected demands will be essential if developing countries are to achieve economic prosperity. It will require considerable investment - on the order of 2.0-2.5 percent of the GDP of developing countries over the next 20 years. This is close to historical norms and, with good financial and economic policies, should be affordable. In the past, energy investments in developing countries rested heavily - and unnecessarily - on government subsidies, and too little on the financial resources that would be generated by real cost-based pricing, regulatory policies, and efficient management.

In general, there is no reason the energy sector should not be financially self-sufficient in the following sense: appropriate pricing and regulatory policies would raise revenues to cover operating costs and generate returns on investment sufficient to attract large-scale private finance and investment. Indeed, one of the primary aims of market liberalisation and the new forms of regulation introduced in many countries in the 1990s was precisely this: to reduce the need for government subvention and to attract private capital and investment to the energy sector. The other aims were to encourage innovation, cost-effectiveness, and managerial efficiency.

But temporary government subsidies may be needed to help people who are excluded from the market by extreme poverty. Just as poor areas in today's industrialised countries benefited in the past from non-market energy policies, such options should be still available, when justified, in developing countries. Moreover, the poor may need to be shielded from economic hardships caused by trends over which they have no control. In some developing countries, for instance, the oil price increases of the 1970s and early 1980s contributed to large increases in external debt - up to 50 percent in some cases.¹⁶ The effects of that debt - impoverishment of the country and widespread unemployment - were particularly hard on the poor, even though their main source of fuel was and continues to be firewood rather than oil. The debt burden from the 1970s persists in many developing countries.

Although there seem to be no physical limitations on total energy resources, potentially severe problems are likely if appropriate economic, technological, and environmental policies are not developed in a timely manner. Rational energy pricing is part of what is needed, but so is a willingness to prompt markets to find technological solutions to problems before they begin exacting high societal and environmental costs. Finding ways to curb energy-related greenhouse gas emissions and to address other environmental problems, while still expanding energy services, will require enlightened research, development, and demonstration policies. Much therefore will depend on the energy and environmental policies that are introduced, and on their relationship to the forces of globalisation and liberalisation (discussed below).

Thanks to technological advances and better information on impacts, developing countries are in a position to address local and regional environmental problems early in the 21st century, and at an earlier stage of development than industrialised countries did. By addressing these negative externalities of energy generation and use early on, developing countries would find their overall economic well-being and the prospects of their people improved, not diminished. The issue of global climate change, however, may prove more difficult to reconcile with high levels of economic growth.

Overall, however, the analysis in this report suggests that there are no fundamental technological, economic, or resource limits constraining the world from enjoying the benefits of both high levels of energy services and a better environment. This is not to suggest that these benefits are to be expected - only that they are achievable. As the scenarios discussed above demonstrate, sustainable futures depend on ambitious policy measures and support for technological innovation.

In analysing appropriate policies, it is important to keep in mind key features of the political and economic environment in which new energy systems will evolve:

· The broad structure of macroeconomic and development policies - particularly those for education and broad-based growth. Below a certain level of per capita income, subsistence needs other than energy dominate household budgets and priorities. Income growth among groups without access is the most important determinant of whether they will be willing to pay for energy services (and thus provide the demand required for markets to work effectively). This, in turn, depends on policies beyond the control of energy industries.

· The widespread liberalisation of energy markets and the restructuring of the energy sector. These changes are driven by inefficient monopolies, government budget constraints, and expanding technological opportunities - especially in electric power generation. Liberalisation and restructuring can lower costs and generate the finance required for the expansion and extension of supplies (as long as it is profitable to do so). But in restructured energy markets, cross-subsidies will not be available to increase access in areas that are not attractive to investors, unless restructuring is accompanied by policy measures that specifically address such concerns.

· Globalisation and the transformations of the information age. Related to the liberalisation of markets is globalisation - the world-wide expansion of major companies and their acquisition of, or partnership with, local companies. Procurement of materials and services from distant and foreign sources has become common. New technologies are also diffusing at rates faster than ever before, spurred by world-wide access to the Internet and other information technologies. This expansion can expedite the awareness of sustainable energy options and the deployment of new technologies.

Energy policies for sustainable development

The scenarios exercise showed that, although energy can contribute to sustainable development, its performance in this respect will depend on a range of factors. These include attitudes and behaviour, information and technologies, the availability of finance and supporting institutions, and - in particular - policies and policy frameworks that encourage change in the desired direction. The current path of energy development, and the rate of change, are not compatible with key elements of sustainable development. The divergence of alternative futures that becomes apparent in the scenarios after about 20 years reflects the long-term nature of energy systems. It also indicates that if governments, corporations, and international institutions do not introduce appropriate policies and measures now, critical windows of opportunity are likely to close. It will then become even more difficult to change course.

The most critical issues that sustainable energy strategies and the policies derived from them need to address are how to widen access to reliable and affordable modern energy supplies, and how to ease the negative health and environmental impacts of energy use.

Given proper frameworks, pricing signals, and regulatory regimes, markets can efficiently deliver on the economic objectives of sustainable development. But markets alone cannot be expected to meet the needs of the most vulnerable groups and to protect the environment. Where markets fail to protect these and other important public benefits, targeted government policies and consistent regulatory approaches will be needed. The problem is that government interventions are usually less efficient than market approaches. Government intervention may have unintended consequences at odds with its original aims. For that reason, there is a need to try different approaches and learn from the experiences of other countries.

Policies and policy frameworks in support of sustainable development should focus on widening access, encouraging energy efficiency, accelerating new renewable energy diffusion, and expanding the use of advanced clean fossil fuel technologies, while keeping open the nuclear option. These policy areas, as well as related decisions on private-public transportation and city planning, have the greatest relevance to the environmental and safety problems associated with conventional fuels.

The broad strategies for encouraging sustainable energy systems are straightforward. But achieving them will require wide acknowledgement of the challenges we face and stronger commitment to specific policies. The strategies are largely aimed at harnessing market efficiencies to the goal of sustainable development and using additional measures to speed up innovation, overcome obstacles and market imperfections, and protect important public benefits. Among the basic strategies, six stand out.

Making markets work better

Driven by the forces of competition, markets do a better job than administered systems in allocating resources. But the marketplace fails to adequately account for the social and environmental costs of energy provision and use. Policies that reduce market distortions - that level the playing field - would give sustainable energy (renewable sources, energy efficiency measures, new technologies with near-zero emissions) a considerably better market position relative to current uses and practices.

Market distortions can be reduced by phasing out permanent subsidies to conventional energy (estimated at $250-300 billion a year in the mid-1990s) and by including social and environmental costs in prices. Several countries have experimented with energy and environment taxes as a way to address the latter. In many cases incentives will be needed to induce or accelerate changes. One such option is a targeted, time-limited (through a 'sunset clause') subsidy Where energy markets cannot function effectively because of absolute poverty, additional resources, including official development assistance, are required.

Another aspect of making markets work better is finding ways to overcome obstacles to energy end-use efficiency measures. Even in the absence of subsidies, market barriers - such as lack of technological knowledge, different interests of investors and users, and high transaction costs of individual investors - keep energy efficiency measures from reaching their cost-effective potential. Options to overcome these barriers include voluntary or mandatory standards (effectively applied) for appliances, vehicles, and buildings, labelling schemes to better inform consumers, procurement policies to achieve higher standards and economies of scale, technical training in new energy efficiency technologies and their maintenance, and credit mechanisms to help consumers meet higher first costs.

Complementing energy sector restructuring with regulations that encourage sustainable energy

The ongoing, world-wide restructuring of the energy industry - largely driven by the increasing globalisation of the economy - will lead to more economically efficient energy markets. This restructuring presents a window of opportunity for ensuring that the energy-related public benefits needed for sustainable development are adequately addressed in emerging policies for energy market reform. The process could be enhanced if governments set goals that define the performance characteristics of qualifying sustainable energy technologies (for example, by specifying air pollution emission limits or minimum standards on plants, machinery, and vehicles).

These goals for suppliers can be complemented by mechanisms that favour sustainable energy technologies in energy market choices. Other regulatory approaches supportive of sustainable energy include mandating that a certain percentage of energy comes from renewable sources, requiring that energy grids be open to independent power producers, and ensuring that rural populations are served. Such regulations are based on the recognition that energy market restructuring in itself may not help achieve sustainable development.

Mobilising additional investments in sustainable energy

Energy markets in many countries are rapidly becoming more competitive. For that reason, successful sustainable energy policies, whether involving financing, incentives, taxes, or regulations, must engage the private sector and catalyse private investment on a large scale. But for political or institutional reasons, many of the transition and developing economies that most need investment have problems attracting private enterprise and gaining access to financial markets, Reliable commercial legislation and jurisdiction, as well as incentives, may be needed to encourage private companies to invest in sustainable energy - or to defray the risks associated with such investments.

Official developement assistance may also need to play a greater role in the least developed countries, especially in those where the conditions that attract private sector investment are lacking. Political stability, application of the rule of law, avoidance of arbitrary intervention, and the existence of institutions that facilitate savings and investment are generally important for promoting investment. Supportive financial and credit arrangements (including microcredit arrangements like those now in existence) will be needed to introduce commercial energy to people excluded from markets, especially in rural areas.

Encouraging technological innovation

Currently applied technologies are not adequate and profitable enough to deliver the energy services that will be needed in the 21st century and simultaneously protect human health and environmental stability. Adequate support for a portfolio of promising advanced and new technologies is one way to help ensure that options will be available as the need for them becomes more acute. Energy innovations face barriers all along the energy innovation chain (from research and development, to demonstration projects, to cost buy-down, to widespread diffusion). Some of these barriers reflect market imperfections, some inadequacies in the public sector, and some different views about needs, corporate priorities, relevant time horizons, and reasonable costs.

The public support needed to overcome such barriers will vary from one technology to the next, depending on its maturity and market potential. Obstacles to technology diffusion, for example, may need to be given higher priority than barriers to innovation. Direct government support is more likely to be needed for radically new technologies than for incremental advances, where the private sector usually functions relatively effectively Options to support technological innovation, while still using competition to keep down costs, include tax incentives, collaborative research and development ventures, government or cooperative procurement policies, 'green' labelling schemes, and market transformation initiatives.

Supporting technological leadership and capacity building in developing countries

Because most of the projected growth in energy demand will occur in the developing world, innovation and leadership in energy technologies could be highly profitable for developing countries in economic, environmental, and human terms. Developing economies need to farther develop their resources - human, natural, and technological - so they can create energy systems appropriate to their own circumstances. But they also need assistance with technology transfer, financing, and capacity building.

The declining share of official development assistance relative to required investment capital suggests that much of this investment will need to be led by the private sector or private-public partnerships. International industrial collaboration offers one means by which the private sector could gain markets while fostering the private research institutes, and regional institutes that provide training in technological management offer additional possibilities for furthering technology sharing and capacity building.

Encouraging greater cooperation at the international level

The ongoing process of globalisation means that ideas, finances, and energy flow from one country to another. Productive ways of moving forward might include combining national efforts, for example, in the procurement of renewable energy technologies. Other options include international harmonisation of environmental taxes and emissions trading (particularly among industrialised countries), as well as energy efficiency standards for mass-produced products and imports of used machinery and vehicles. The need for concerted action on energy is clear from Agenda 21, which emerged from the 1992 Earth Summit.

The challenge of sustainable energy includes crucial enabling roles for governments, international organisations, multilateral financial institutions, and civil society, including nongovernmental organisations and individual consumers. Partnerships will be required, based on more integrated, cooperative approaches and drawing on a range of practical experience. A common denominator across all sectors and regions is setting the right framework conditions and making public institutions work effectively and efficiently with the rest of society and other economic actors to reach beneficial, shared objectives.

Clearly, energy can serve as a powerful tool for sustainable development. Redirecting its power to work towards that overarching goal, however, will require major changes of policy within an enabling overall framework. Poverty, inequity, inefficiency, unreliable service, immediate environmental priorities, a lack of information and basic skills, and an absence of needed institutions and resources - require changes to be made. Unless these changes occur within the next few decades, many of the opportunities now available will be lost, the possibilities for future generations diminished, and the goal of sustainable development unrealised.

References

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Nakicenovic, N., A. Gr and A. McDonald, eds. 1998. Global Energy Perspectives. Cambridge: Cambridge University Press.

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Notes

1. In this report the term industrialised countries refers primarily to high-income countries that belong to the Organisation for Economic Cooperation and Development (OECD). Developing countries generally refers to lower income countries that are members of the G-77 and China. Although many transition economies also have a high degree of industrialisation, they are often considered and discussed separately because of their specific development requirements.

2. In this report the terms traditional energy and non-commercial energy are used to denote locally collected and unprocessed biomass-based fuels, such as crop residues, wood, and animal dung. Although traditional energy sources can be used renewably, in this report the term new renewables refers to modern biofuels, wind, solar, small-scale hydropower, marine, and geothermal energy.

3. The Brundtland Report, as the World Commission on Environment and Development report is commonly known, set forth a global agenda for change.

4. Energy's links to sustainable development were most recently acknowledged by the UN General Assembly Special Session on Small Island Developing States in 1999. The major conferences that noted the importance of energy issues were the UN Conference on Population and the UN Conference on Small Island Developing States in 1994, the Copenhagen Social Summit and the Beijing Fourth World Conference on Women in 1995, and the World Food Summit and HABITAT II in 1996. The energy issues emerging from these conferences are summarised in chapters 1 and 2 of UNDP (1997).

5. Agenda 21 is the plan of action for sustainable development adopted at the Rio Earth Summit.

6. Means for achieving these objectives are discussed in more detail in WEC (2000).

7. Unless otherwise noted, all prices are in U.S. dollars.

8. This target was reaffirmed in 1992 (in chapter 33 of Agenda 21).

9. In this report the term conventional energy is used to refer to fossil fuel, nuclear energy, and large-scale hydropower.

10. In this report the word insult is used to describe a physical stressor produced by the energy system, such as air pollution. The word impact is used to describe the resulting outcome, such as respiratory disease or forest degradation.

11. The Energy Charter Treaty, together with a protocol on energy efficiency and related environmental aspects, entered into force in 1998. It has been signed by about 50 countries, including the members of the European Union and the Commonwealth of Independent States, Australia, and Japan.

12. Analysis of efficiency potentials in end-use sectors in the next 20 years appears in chapter 6 of this report and is based on detailed techno-economic studies and examples of best practices.

13. Conventionally, energy efficiency has been defined on the basis of the first law of thermodynamics. The second law of thermodynamics recognises that different forms of energy have different potentials to carry out specific tasks. For example, a gas boiler for space heating may operate at close to 100 percent efficiency (in terms based on the first law of thermodynamics). This seems to suggest that limited additional efficiency improvements are possible. But by extracting heat from the ground or other sources, a gas-driven heat pump could generate considerably more low-temperature heat with the same energy input. The second example illustrates the potential for energy efficiency improvements according to the second law of thermodynamics.

14. An adequate payments system means using meters and payment collection to ensure that all energy services have a price that is paid by all users on a regular basis.

15. Both figures include the 2 billion currently without access to commercial energy. UN population projections were revised downwards in 1998, after the scenarios described here were developed. Although the population assumption used for the scenarios described here (11.7 billion by 2100) is slightly higher than the UN medium scenario (10.4 billion), the two are not inconsistent.

16. The policies of industrialised countries and inflationary pressures from petro-dollars could also have contributed to debt levels.