Energy sobriety: can an energy quota market provide solutions?


War in Ukraine, geopolitical tensions, shut down nuclear reactors… Many elements are converging to generate strong uncertainties about the winter that is being felt. Will we have enough energy to satisfy all requests? A word is on everyone's lips: "sobriety".

At the beginning of October, the French government presented a energy sobriety plan which aims to reduce domestic consumption by 10% by 2024 in order to avoid cuts. The communication campaign "I lower, I turn off, I shift" was launched immediately.

Of course, there will be no “temperature police”, insists the government, to check that everyone, households and businesses, plays the game. However, if there must be a cut, who should be penalized first? The issue of information is essential on these questions: how to know who is providing the efforts?

Faced with these challenges, Roland Lescure, Minister Delegate for Industry, proposed on August 29 the establishment of a quota market over-the-counter energy. This instrument is well known to economists since the contributions of professors Thomas Crocker and John Dales in the 1960s to fight pollution. The idea has, it seems, since been discarded, but the discussion does not seem without interest. Our research work in environmental economics make it possible to question its relevance in terms of social justice and efficiency.

Social justice or efficiency?

At first glance, the demand for companies to reduce energy consumption by 10% may seem legitimate. One can imagine that the cuts to come will concern in priority the companies not respecting the objective, which would amount to punishing the bad pupils. However, this reasoning seems a little too hasty. In particular, it does not take into account heterogeneity between companies.

Many are in fact those who have already, in the past, reduced their energy consumption and even obtained environmental performance beyond the measures indicated by the State. The 10% reduction target will thus be more easily achieved by companies that have not made any energy sobriety efforts until now, and more difficult for those that are already the most virtuous. In summary, this policy, which consists of considering different companies in a uniform way, can be considered unfair, and quite costly to respect.

Similarly, many energy suppliers have already announced the introduction of “sobriety bonus”, rewarding reductions in energy consumption this winter or the postponement of consumption from peak periods to off-peak periods. The French government is also thinking about financing such bonuses, thus financing the incentive to reduce energy collectively via the State budget. If these means can prove effective in avoiding cuts, they will certainly reward the agents who, until now, were the most energy-consuming.

One way to consider social justice would be to take into account the past behavior of agents to differentiate goals. It would be a question of setting a reduced objective or exonerating those who have already made efforts. However, this solution may come up against the imperative of economic efficiency, which means that more effort is required from those who find it easier to achieve energy savings.

Whatever the chosen objective – efficiency or social justice – the regulator will come up against an information problem. How to distinguish virtuous companies from others? How to identify companies that can achieve low-cost efforts?

Social justice and efficiency: an energy quota market

It is to solve this problem that the proposal of Minister Roland Lescure could have participated. The idea of ​​transferable energy quotas would effectively take into account the heterogeneity of companies, avoiding the thorny issue of collecting information.

Let's explain the mechanism. The State sets the energy saving target at 10%, which amounts to indicating a maximum quantity of energy to be consumed collectively. It then splits this cap into energy quotas. Each company has the legal obligation to hold a quota to justify an equivalent energy consumption.

These quotas are transferable. Some companies may find it more advantageous to reduce their energy consumption more than requested and sell their allowances to companies experiencing difficulty in reaching the reduction target. Energy savings would be obtained at the lowest possible collective cost, reaching the famous efficiency criterion. This regulatory instrument therefore offers companies greater flexibility while respecting the stated objective of the State.

Some form of social justice could be achieved by working on the distribution of quotas. Our communication on this subject lead to this proposal: in order to reward the most virtuous companies, the quotas could be distributed inversely proportional to past energy expenditure.

Organized market versus over-the-counter market

There remains the question of the price of the quotas, a decisive variable for the effectiveness of the mechanism because it is on this that the decisions of the companies will be based. Two types of markets are possible. In an organized market, allowances are distributed by the State and a stock exchange makes it possible to organize transactions while showing a continuous price. This is different in an over-the-counter market.

If we follow the Minister's suggestion, each company should reduce its energy consumption by 10% and a company that cannot achieve this objective would have the possibility of buying quotas from a company that has reduced its consumption more than the 10 % requested. The difficulty of meeting potential trading partners actually limits the number of transactions. Not all mutually beneficial exchanges can be made.

Since the companies will have to agree on a price, it is unlikely that this market will produce the “right price” for the allowance, especially if some companies have more influence than others when negotiating. According to our recherches studying the dominant position on the pollution quota markets, the collective cost of complying with the energy saving constraint is higher than on an organized market.

Moreover, in this system, the initial allocation of allowances is “implicit” and would correspond to a 10% reduction in energy consumption. It can therefore no longer be used to achieve an objective of social justice.

This is why most environmental markets of the cap and trade type are organized markets. As an example, we can cite the American program Acid Rain, or the European carbon market. Over-the-counter trading experiments took place in the 70s in the United States as part of the fight against atmospheric pollution, with a mixed success. The bureaucratic heaviness and the uncertainty about the terms of the transactions have considerably weakened the interest of this type of market.

And in the future?

What to remember? Recourse to an organized quota market can indeed prove to be interesting in dealing with the energy crisis by achieving energy savings where they are least costly. Some form of social justice can also be achieved through the initial endowment. However, the problem of the concordance of the political agenda with the urgency to resolve this energy crisis arises. It is unlikely that an organized quota market will be operational in the coming weeks.

Although an over-the-counter market is less efficient than an organized market, it could nevertheless provide companies with flexibility in relation to uniform regulations, and make it possible to avoid power cuts in the short term. Social justice would, however, be a dimension left aside.

Whatever policy is adopted – uniform objective, quota market organized or not, sobriety bonus – the consequences of these various short-term measures on future behavior must be kept in mind. The anticipation of forthcoming regulations could curb the virtuous behavior of agents today, for fear of being penalized in the future for past efforts.

Sonia Schwartz, University Professor of Economics, Clermont Auvergne University (UCA)

This article is republished from The Conversation under Creative Commons license. Read theoriginal article.

Image credit: Shutterstock/ Orso bianco

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