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Abstract:

This report considers trading arrangements to improve the cost-effectiveness of UK policy to promote household energy efficiency. We consider trading under the current programme, the Energy Efficiency Commitment ("EEC", or "the Scheme"), as well as under a more formal "white certificate scheme." (The EEC sets energy reduction targets for major electricity and gas suppliers.) Both trading in the EEC and a white certificate scheme involve trading energy savings, i.e., reductions in household energy use. We also consider a shift to a "cap-and-trade" programme that would establish a cap on the overall or average level of a household energy use or CO2 emissions as a means of attaining household energy efficiency improvements. Finally, because one of the motivating factors for the EEC is to reduce greenhouse gases, the report discusses linkages with the European Union cap-and-trade programme for carbon dioxide (the EU Emissions Trading Scheme, or "EU ETS").

The findings of the report are based upon reviews of the experience with the EEC and its trading provisions as well as interviews with scheme stakeholders, including all participating EEC energy suppliers.

The following are conclusions from this study:

Trading is an important element of the EEC.

The major trading activity consists of inter-temporal trading (banking of energy saving credits for use in a subsequent period) and vertical trading (purchasing energy saving credits from non-participants).

In contrast, trading among participants is little used.

Most EEC participants believe that the current trading arrangements are working well, and that there are few barriers to cost-saving trading.

There may be relatively few cost-saving gains from switching to a formal TWC programme, and these gains do not appear to outweigh the potential additional administrative costs.

Switching to a "hybrid" system (i.e., allowing TWC credits to be created within the current trading system) has the potential to encourage additional energy efficiency measures but its impact is likely to be limited.

Developing a cap-and-trade programme for household energy use (or for CO2 emissions from household energy use) would represent a major departure from the current programme. Such a programme may encourage additional low-cost energy-saving measures if it resulted in a large-scale transformation of the energy supply market. Because of the major changes it would entail, it would also be complicated to establish. Further study into the relationship of a cap-and-trade scheme to an "energy services" approach to energy supply is recommended.

Creating a CO2-based cap-and-trade programme would be complicated because of the double-counting of emissions already included in the EU ETS. On the other hand, an energy-based cap could raise concerns about rationing. For either of the two, relative or per-capita "caps" appear to be the most appropriate.

Linking UK energy efficiency schemes to the EU ETS or other international schemes has the potential to offer scheme participants cheaper options for compliance but may compromise current policy objectives, notably the aim to improve of energy efficiency in the UK.

Further detailed recommendations and areas for further study are included in the concluding chapter.

This report contains an executive summary, and is divided into the following sections: