Regulation, economic instruments and sustainable energy

24 May 2012

In 2008 the International Energy Agency ('IEA') called for an 'energy revolution', involving radical action by governments at national and local levels, and through participation in co-ordinated international mechanisms. As the IEA (2008, 37) put it:

"The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable– environmentally, economically and socially. But that can – and must – be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply."

Fundamental to achieving such an energy revolution is the role of governments, and the policy instruments that they use to achieve their objectives. For it is governments that “hold the key to changing the mix of energy investment” and it is the policy and regulatory frameworks that they establish, nationally and internationally, that “will determine whether investment and consumption decisions are steered towards low- carbon options” (IEA 2009, 41).

This paper explores the roles of a range of policy instruments that might be introduced by governments to facilitate a transition to a low carbon economy, with a focus on the energy sector (as distinct from transportation or deforestation). It is driven by the questions: what works, when and why?

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