We’ve highlighted a couple of explanations of how cap and trade works. Essentially, cap and trade establishes a limit on carbon emissions and ramps them down over time by reducing the number of emissions permits that are available to polluters. Because the permits would represent a scare commodity (the right to emit carbon) they would result in a price on emissions, and therefore an incentive to reduce emissions. Would it be possible to apply a similar principle to energy efficiency; and would this help accelerate weatherization and retrofitting of buildings?

Permit trading has been tried with other pollution problems like acid rain. In my ongoing scan of the literature about realizing the promise of energy efficiencies, I couldn’t help but be drawn to an article by Tom Tietenberg called “Reflections—Energy Efficiency Policy: Pipe Dream or Pipeline to the Future?” I have asked myself the same question. The article is a good high-level and thoughtful review of many of the issues I have already written about like the need for financial incentives and better information to spur demand for energy retrofits. Tietenberg takes a look at an idea for creating an energy efficiency market called Transferable White Certificates (TWC). 

  • Tietenberg knows permit trading, having studied it for years as it has been applied in dozens of different ways, from fish to forestry. He suggests it might also work for efficiencies by mandating efficiencies (much like a cap) and then enabling successful parties to sell their energy savings to parties who failed to comply (basically, trade).

    Here’s how it might work. National, state, or local government would set a quantifiable goal for energy efficiency in a sector each year requiring that multiunit housing use 10 billion gigawatt hours less than the year before. Businesses or households would be able to trade in certificates—perhaps in kilowatt hour denominations—for cash from other businesses or households who didn’t save energy, or used more than they did in a previous year. Those who didn’t save energy would have an interest in acquiring the certificates because of the hefty fines they would face for not holding permits sufficient to cover their energy consumption.

    It is just too early to tell whether this kind of scheme would work. A  preliminary analysis of this kind of program in Europe is mixed. The experts say that programs like this can work, but a “proper balance between high efficiency-effectiveness and low administrative burden must be found.”  This balancing act is the same one that frustrates the implementation of energy efficiency programs already (see my post on prevailing wage issues)

    I like the idea of TWC because commodifying future energy savings would create liquidity—cash—where there currently isn’t any. The sale of units of energy savings by businesses that want to save or generate energy could help offset the upfront capital costs of energy efficiency and infrastructure. For example, an owner of a large multiunit building might be motivated make energy-saving improvements to her buildings because she could sell certificates to other landlords that weren’t saving energy.

    On the other hand, it is hard to see exactly why such a scheme would be better than the low-interest loans and other financing mechanisms that we already have. And it would certainly be more complicated. We have seen again and again that financial incentives alone don’t always spur investment in energy efficiency. A TWC program could end up generating mandates to reduce energy use but little interest in the certificates.

    There are already a couple of goodreviews of the TWC idea. After thinking about the concept and reading some of the literature, I have three thoughts.

    • Large scale efficiencies that lead to jobs won’t be easy. There probably isn’t a silver bullet, and while TWC schemes are interesting it is an idea that needs much more development before it can even be tested here.
    • Keep an eye on countries and states that are trying the idea and learn from what happens. 
    • If programs elsewhere have some success it might be worth implementing a pilot in the region to determine whether it is feasible here.