‘Sustainable energy: subsidy or obligation?’

What could possibly be easier than an obligation for sustainable energy; this is what many political parties thought in 2010.  The government imposes a share of sustainable energy as a binding standard for energy companies and the market then determines the price for sustainable energy. Simply a matter of supply and demand in a self-regulatory market.

Recently, the Dutch Ministry of Economic Affairs, Agriculture and Innovation, with support from ECN, sketched the preliminary outlines of such an obligation-based policy by request of the Dutch Lower Chamber. Guess what they discovered? To start with, the newly elected Lower Chamber will need to express itself about a multitude of technical aspects of such an obligation, for example the height of the obligation or whether or not green gas should be included. This complicates the matter, because it is difficult to see right now what will be the effects of these choices on the efficiency and effectiveness of the policy.

A subsidy that needs to be reassessed every year may seem challenging. However, creating a new market for sustainable energy is an even bigger challenge. A market that treats new entrants and parties with vested interests the same way calls for clear regulation. Should market failure take place, this would hit back hard on the political arena. In that case, it won’t be long before a new regulator arrives.

But which system is ‘easier’? A systems of subsidies in which politicians are in control and able to adjust the course swiftly? Or a system of obligations in which politicians merely hand over a TomTom navigation system to the user. Should the TomTom fail, this would require the vehicle to return to the garage immediately for large-scale maintenance work.

An obligatory share of sustainable energy could turn out to be more cost-effective for the consumer than a subsidy. In any case, it will be rooted in a complex system that the politicians will need to monitor closely. There seem to be legitimate arguments in favour of an obligation. Simplicity in policy is not one of them.

Sander Lensink is policy researcher at ECN

Take a look at an ECN study on the cost-effectiveness of a system of obligations.