In practice, policymaking rarely, if ever, conforms to the rational ideal. One of the many reasons for this is that there are often competing rationalities that make it difficult or even impossible to identify what the 'ideal' would be. Different actors with competing objectives have contrasting views. What is good for society at large need not be good for each of the individual actors within that society. Although in theory governments should act on behalf of the wider public interest, in many instances if they wish to adopt new policies they must either confront or compensate those actors that benefit from the status quo.
Even when there are a relatively small number of competing interests, policymaking necessarily involves contestation and compromise and the nature of these compromises depends on the relative power of the winners and losers. When the definite costs of change are imposed on actors who are powerful in the here and now, while the prospective benefits will be secured by actors who might become powerful in the future, there is an in-built bias towards the status quo. In the case of environmental policy there is the extra issue that while many of the costs associated with environmental policy are relatively easy to measure in monetary terms, many of the diffuse and often rather intangible social and environmental benefits are not easily monetised.
A second reason for departures from the ideal is that governments commonly operate under conditions of 'bounded rationality'. When surveying the options that are open to them, they rarely have the time, the resources or the expertise needed to conduct a comprehensive analysis of the numerous ways with which they could achieve their objectives. Instead, they have to muddle through, often taking satisfactory rather than optimal decisions. Furthermore, when deciding how to progress, they very rarely start with a blank sheet of paper. Instead, they normally inherit various habits and traditions, as well as the institutions that emerged to support previous policies. Because decision makers are often risk-averse, they may stick with an approach that has worked (or at least not failed) in the past instead of trying to adopt something that might be better but that also might fail. As a result, many of the more radical opportunities that could only work if policy-makers were able to create new institutions and if they took a risk are commonly overlooked. Instead, policy tends to evolve gradually, often through a series of small and frustratingly slow steps.
A third reason is that while some issues can be addressed within a single sphere of policy, many issues can only be addressed through a complex multi-sectoral and multi-level approach that is inherently difficult to coordinate. The need for a multi-sectoral approach is particularly evident in the environmental field as environmental policymakers are commonly required to respond to the negative after effects of other policies (c.f. agriculture, transport etc.). Joined-up thinking is therefore required; but this would require increased environmental awareness and a change of culture across the different spheres of government.
Fourthly, despite the focus on governments making policy, it is probably more accurate to say that while policies are designed by governments, they are not really made until they are interpreted and applied by implementing agencies. Particularly in the context of the EU where subsidiarity is such an important principle, this means that all of the organisations and individuals that are involved in the transposition, implementation and enforcement processes are able to influence the practical substance of policy. These actors may or may not subscribe to the central objectives of the policy in question, and even if they do they have a considerable amount of discretionary room for manoeuvre. Furthermore, there is an obvious and critically important role for local and national inputs to the policy process. Bottom-up approaches to policy development with all of the diversity that they bring are at least as important as top-down approaches, and as a consequence harmonisation on paper does not necessarily equate to harmonisation in practice.
Finally, many policies have a long shelf life, information on their performance is often scarce and the opportunities for policy learning are commonly limited. Ex-post evaluations of policy performance are quite difficult to conduct, not least because it is difficult to isolate the influence of the policy in question from that of the wide range of other factors that combine to shape behaviour or performance on the ground. As a result, sub-optimal policies often remain in place for some time, especially if they are not so much failing as mildly under-performing. The maxim of if it's not broke, don't fix it is as true for policy-makers with limited time and attention as it is for everyone else.
THE INFLUENCE OF POLICY ON TECHNOLOGICAL CHANGE
To compound these problems, there are real questions about the ability of government to influence technological change processes. Two contrasting viewpoints are significant here. One very economic perspective is that if governments and markets get the costs and benefits right, rational and responsive actors will quickly change their behaviour to suit. The other more institutional perspective suggests that actors are nowhere near as responsive as the economic perspective implies. Instead, they are deeply embedded in existing trajectories, and while there may be moments when they are open to influence, for long periods they are actually quite resistant to change.
More fundamentally, the institutional perspective suggests that technological change processes are unpredictable and often unmanageable. Instead of being omnipotent, therefore, governments are often confined to a role where they can only react to the technological changes brought about, for example, through globalisation. As a result, in many instances governments can exert only a marginal rather than a defining influence on the pace or the direction of technological change.
Again the reasons for such observations are manifold. However, two or three theoretical observations can help us to understand the reasons why technological processes may be resistant to government influence.
Firstly, the right conditions have to be in place if policy is to trigger an innovative response. As in every market, successful outcomes only8 emerge where the supply of new technologies is matched by demand for those technologies. The supply of innovation is dependent upon the technological opportunities, market structure and the ability of the innovator to appropriate a proportion of the benefits associated with the innovation (see Dosi, 1988). Similarly, the demand for innovation is dependent upon the price and quality of the innovation, the transfer of knowledge and information relating to an innovation and the perceptions of economic risk and uncertainty associated with the application of that innovation (see Kemp and Soete, 1992). In order for supply to meet demand, we need networks that facilitate the transfer of information and understanding between the actors at various stages of the innovation process. Where information flows freely, interactive learning between actors at different stages can facilitate a cumulative and self-reinforcing process of innovation. The consequence of this is that systems that have been innovative in the past are more likely to be innovative in the future. While this can be good for some sectors or regions, it can be very difficult to encourage technological change in contexts that have not been innovative in the past. Overcoming this threshold can require substantial and sustained investment.
Secondly, new innovations depend upon a system or network of relations without which their adoption would be impossible. The introduction of a new innovation into one part of an existing system may require changes to be made to other parts of the system. Considerable resistance and inertia may be apparent in this respect. For example, firms (and indeed sectors, regions and countries) that have successfully mastered the operation of old technologies and techniques commonly face difficulties in acquiring the new skills and knowledge needed to successfully apply new technologies and techniques (OECD, 1992). Consequently, innovations that require only incremental change to existing systems are more likely to be adopted than those that require more radical change. As a result, change becomes path-dependent and significant barriers to radical change emerge even where there is both a supply of raw technologies and a latent demand for them.
Thirdly, there is an inherent paradox that lies at the heart of the technological change process: in their early stages, new technologies will not be adopted because they are costly to produce and risky to use, but the only way in which their costs of production and the risks of their adoption fall is if they are more widely adopted (OECD, 1992). However, where initial reluctance can be overcome, there can be increasing returns to adoption (see Kemp, 1993; Soete and Arundel, 1995). On the supply-side, the diffusion of a new technology is normally associated with improvements in its quality as experience with its production accumulates and reductions in its cost as economies of scale are exploited. On the demand side, as the innovation is adopted, users learn to apply it more efficiently and effectively and establish or adapt an appropriate system to surround the innovation. Over time therefore, the cost of the innovation drops and the quality increases. Furthermore, the information and knowledge gathered by actual users can be transferred to potential users so that the risks of adoption decrease. An increased community of users can also facilitate joint problem solving, cumulative learning and the establishment of a supporting infrastructure. In combination, these factors mean that first-movers need to be encouraged to adopt new technologies as second and third movers will then benefit from lower costs, reduced risk and higher quality.
Thus, we can see that if new technologies are to be adopted, the right conditions have to be in place on the ground and the incentives have to be strong enough to overcome initial inertia. These factors become more and more significant where the technologies to be adopted are radically different from their predecessors. However, as has been established, as policy makers may not be in a position to put the best policy framework in place to enable this to happen, significant barriers to change may remain.
THE IDEAL POLICY FRAMEWORK
In view of all this, if someone were to design the optimal policy framework to promote the development and diffusion of renewable energy technologies, what would it look like? Within the EU there are clearly different perspectives, and policy must be developed and enacted at levels ranging from the EU to the local. However, in theory at least, most would agree that an optimal policy framework would include some common components:
1) Where they needed to intervene, policy makers could do so safe in the knowledge that the competitive implications of their interventions would be minimal as their major competitors would adopt similar goals.
2) There would be ready access to investment resources at both the macro- and the micro-levels that would allow any short-term costs to be more than offset by medium-term benefits. The overall level of the benefits would also be enough to compensate any losers whilst still leaving society as a whole better off.
3) There would be a broad and stable consensus amongst different actors and at different levels (EU, member state, regional, local) both on the ultimate objectives for policy and on the ways in which these would be achieved. Unambiguous goals would be clearly communicated to give consistent and predictable longterm signals to the market place.
4) There would be an integrated or joined-up approach that spanned the boundaries between different areas of policy. Policies in areas as diverse as energy, environment, agriculture, transport, tax and competition would all be pulling in the same direction.
5) Different policy instruments would be applied which would both encourage and enable change. These instruments, which would include mandatory targets, economic instruments, information-based approaches, capacity building measures and support for basic R&D, would be applied in concert within a complementary policy mix.
6) There would be perfect implementation so that the range of policies and instruments adopted were applied as intended at the national, regional and local levels.
7) There would be enough flexibility in the system to allow implementing agencies to take into account the variable conditions encountered by different technologies and by diverse actors operating in contexts that change over time and space.
8) Markets would serve to reinforce government policies. External costs and benefits would be internalised so that social and environmental impacts were accurately reflected in economic transactions and there would be perfect information to inform voter and consumer behaviour.
9) Actors on the ground would understand, support and have the capacity to respond to the wide range of signals from government, from the market and from society at large.
10) Infrastructure would also be flexible enough to accommodate the needs of new renewable energy technologies.
Even a basic understanding of the political realities of life in the EU, as well as of the administrative contexts within which policies are made and implemented and of the economic contexts within which target actors must respond, suggests that such a 'rational ideal' is unlikely to be grounded in reality. Of course this is not to say that policy makers should not seek to identify the ideal and then work towards it, merely to point out that in practice there are lots of barriers to be overcome before this can happen. In an acknowledgement of these barriers, more and more commentators are emphasising the significance of 'multi-level governance' in the EU, where action depends on not on the top-down imposition of policy but on diverse actors at different levels actively 'buying- in' to the objectives of policy.
EU POLICIES ON RENEWABLES
Now that we have set up an ideal and explored the reasons why it may not be realised in practice, we are in a position to examine the extent to which EU policies are likely to promote the further development and diffusion of renewable energy technologies. While many other policies also play an important role, two key policy documents will be assessed here: first, the EU White Paper for a Community Strategy and Action Plan on Renewable Energy Sources which was published in 1997, second, the EU directive on the Promotion of Electricity Produced from Renewable Sources which was adopted in 2001. By examining these policy documents, the paper will be able to review the factors shaping the evolution of EU policies on renewables over the last five years or so. By examining the European Environment Agency's report on 'Renewable Energies: Success Stories' (2001) the paper can also speculate about the future of EU support for renewables.
In 1996, the European Commission first mooted its intention to double the contribution that renewables made to energy generation to 12% by 2010. As the 'business as normal' scenario was predicted to lead to renewables growing from 6% to 7.7% of the market, the Commission surveyed best practice in the member states and predicted that if these national examples of good policy were applied across the EU, renewables would attain a market share of 12.5% by 2010. Policy learning and the diffusion of good practice were therefore built into the policy process from the start.
The European Commission's initial soundings led to mixed reactions. The European Parliament, a range of environmental groups and the renewables lobby called for higher targets and more support. However, there was opposition from some member states, as well as from some trade associations and conventional energy generators, who claimed that the targets were over-ambitious and would be expensive to meet. Nonetheless, in 1997 the European Commission proceeded to publish its White Paper on Renewables that maintained the 12% target and set out a range of measures that would need to be adopted if the target was to be met. Recognising that there was a need for a 'concerted and coordinated effort by the various players over time', the measures proposed included:
- Measures designed to ensure that renewable energy sources had fair access to electricity markets;
- A range of fiscal and financial measures designed to establish incentives and enhance access to investment resources;
- Measures to raise the priority awarded to renewables in other EU policies - including environment, economic development, research and development, regional policy, agriculture and competition;
- Measures to build networks and to promote cooperation between the member states;
- Targeted financial support for renewables through the ALTENER II scheme;
- Specific programmes designed to lead to the adoption of one million PV systems, 10,000MW of large wind farms, 10,000 MWth of new biomass installations and the integration of renewables into 100 communities;
- Mechanisms designed to monitor implementation by the member states and to monitor progress towards the objectives of the strategy.
Again the White Paper received a mixed response, and the debate rumbled on for nearly three years before the European Commission translated the broad statements of intent that were included in the White Paper into a draft directive which, if adopted, would introduce legally binding obligations. In the period between the publication of the draft directive in May 2000 and its adoption in October 2001, some of the proposals were watered down in a number of ways whilst a number of others were retained despite some opposition.
Firstly, the binding targets that were originally proposed by the Commission became merely 'indicative' targets that the member states were obliged to work towards but that they were not legally obliged to meet. While the Commission is obliged to review progress and to consider the need for mandatory targets after three years, opposition to such mandatory targets amongst the member states is likely to remain and unless the position changes they are unlikely to be adopted.
Similarly, although the directive initially sought to harmonise the ways in which the various member states supported the development of renewables, these proposals were rejected following opposition from some countries. Instead, a diversity of national schemes will continue to be applied across the EU for a further five years, although once more the Commission has the right to review these schemes and to propose an EU wide scheme if necessary. However, as with the question of whether targets should be made mandatory, there is no guarantee that any future proposals for harmonised support for renewables will actually be approved.
Despite some significant opposition, the directive also established a basis for financial support to be given to renewables. Although the Energy and Environment Directorates of the European Commission clearly saw the need for financial support to be provided to renewables, the Competition Directorate of the European Commission argued for such financial aid to be phased out as quickly as possible as it distorted markets. Countering this view, a consortium of environmental groups argued that:
In the European Union at present the electricity market is significantly distorted to the detriment of renewable energy generators: access to grids is restricted, excessive transmissions costs are applied to renewables; there is still no internalisation of environmental and social costs; embedded generators do not receive remuneration for the savings they create. These factors and the use of nearly 15 billion ECU in direct subsidies to the conventional generation sector all contribute a market distortion that continues to hold back the harnessing of renewable energy in the European Union (Greenpeace et al, 1999).
Thus, provisions within the directive for financial support for renewables are retained, although as the ALTENER II scheme offered on €22 million over a 5 year period, the level of support is likely be comparatively modest.
Otherwise, the directive also introduced an obligation for member states to establish mechanisms that would guarantee the origin of energy generated through renewables. In the future, certificates might then be issued which could be used as the basis for the trading of green electricity as countries buy or sell certificates depending on whether they fall short of or exceed their targets for renewables or their climate- change obligations. This would incentivise renewables generation and lead to greater investment and more efficient outcomes across the EU. However, there has been some reluctance to see the EU pioneering this form of marketable permit as it is seen by some to be untried and untested.
For the member states, the directive includes a requirement that they prepare a report on how they plan to reduce regulatory and other barriers to renewables and on how they might streamline planning procedures to allow for quicker approval of site-applications relating renewables. Finally, the directive introduces an obligation for the operators of transmission and distribution networks to give priority access to electricity from renewable sources, although `these provisions are couched in such general terms that their impact may be limited' (ENDS, 2000).
While the Renewables Directive is not as strong as was originally proposed, or as ambitious as the European Parliament, the renewables lobby or the environmentalists had hoped, it remains a significant piece of policy. However, it does not exist in isolation. As the European Environment Agency points out (EEA, 2001), member states can do a lot to create the conditions needed to allow actors on the ground to respond effectively to the directive. As stated above, within the Renewables Directive there is an obligation for the Commission to review these national mechanisms and to consider the need for an EU-wide support scheme. The EEA's review of national 'success stories' may therefore offer some insight into the EU policies of the future. In seeking to identify those factors which would allow the successful introduction of renewable energy technologies, the EEA (2001, p8) states `no single factor was identified as being of over-whelming significance. It is the cumulative benefits of a series of supportive measures that determine the extent to which a renewable technology is successfully exploited'. However, seven essential factors were identified which help to create an environment within which renewable energy exploitation can succeed, namely:
- Political support, i.e. through long-established policies in support of renewables.
- Legislative support, i.e. in the form of feed-in systems that combine favourable tariffs for energy from new renewables with an obligation on utilities to purchase renewable energy at these tariffs. Such support can also come in the form of guaranteed prices for renewable energy generators that win a competitive tendering process. Legal mechanisms can also be used to enhance grid-access.
- Fiscal support, i.e. through measures designed to penalise fossil-fuel based energy sources or give tax exemptions to renewable sources.
- Financial support, i.e. in the form of favourable loans to actors developing new renewables technologies.
- Administrative support, i.e. in the form of planning guidance or altered planning or building regulations.
- Technological development, i.e. with financial support given to particular technologies and at different stages of the innovation process.
- Information, education and training, i.e. to raise awareness amongst the general public and particularly amongst the communities where renewables might be adopted.
Thus, the EU has adopted a Renewables Directive that is backed up by a range of national support mechanisms. Although the directive is not as strong as was originally proposed or as ambitious as some groups had hoped, it is leading to the development and diffusion of new renewables technologies in some contexts. Furthermore, although further changes may not take place for some years, it seems likely that EU policy will continue to develop, for example if the various support schemes that have been successful at the national level are adopted in a harmonised framework applicable across the EU.
CONCLUSIONS: HOW CLOSELY DOES EU POLICY REFLECT THE IDEAL?
Having considered the nature of EU policy on renewables, and examined the reasons why their design may be sub-optimal and their influence rather limited, we are now in a position to return to the ideal policy model to see how it compares with the real world.
1) Where they needed to intervene, policy makers could do so secure in the knowledge that the competitive implications of their interventions would be minimal as their major competitors would adopt similar goals.
Clearly this is not yet the case. As with the Kyoto Protocol, the lack of parallel commitments from other countries raises the prospect that in the short-term at least the EU will be put at a competitive disadvantage if it raises taxes on conventional energy sources. Consequently, renewables are put at a relative disadvantage.
2) There would be ready access to investment resources that would allow action to be taken, as any short-term costs associated with transition could be more than offset by the mediumterm benefits. The level of the social benefits would be enough to compensate any losers whilst still leaving society as a whole better off.
Despite some support for renewables, the amount of money made available through the EU is really very modest. However, the indicative targets introduced by the EU suggest that the renewables market will grow significantly in future years. Even in the absence of significant incentives or subsidies from the EU, this is likely to build support at the national level and to encourage private sector investment.
3) There would be a broad and stable consensus both on the ultimate objectives for policy and on the ways in which these would be achieved. Unambiguous goals would be clearly communicated to give consistent and predictable longterm signals to the market place.
Clearly this has not been realised. Despite some loose alliances between the Energy and Environment Directorates of the European Commission, the European Parliament, some environmental groups and the renewables lobby, these actors have not been powerful enough to prevent policy targets being watered down. Actors on the ground therefore receive mixed messages from different sectors of government and from the market.
4) There would be an integrated or joined-up approach that spanned the boundaries between different areas of policy. Policies in areas as diverse as energy, environment, agriculture, transport, tax and competition would all be pulling in the same direction.
As above, there has been only a limited amount of 'buy-in' from some other sectors, most notably in fiscal policy and competition, where policies that contradict the goals for renewables remain in place.
5) Different policy instruments would be applied which would both encourage and enable change. These instruments, which would include mandatory targets, economic instruments, information-based approaches, capacity building measures and support for basic R&D, would be applied in concert within a complementary policy mix.
A range of policy instruments have been applied which should complement each other to some extent. However, the links between the different instruments could be better developed so that the framework as a whole was more cohesive.
6) There would be perfect implementation so that the range of policies and instruments adopted were applied as intended at the EU, national, regional and local levels.
As the targets set out by the EU Renewables Directive are only indicative, its success depends very much on the commitment of the member states. While the indicative targets will be taken seriously in some settings, some states remain less than fully committed to the national targets whilst others have resisted the adoption of a harmonised approach, seemingly preferring to go their own way. Again this means that the framework could be more coherent/consistent.
7) There would be enough flexibility in the system to allow implementing agencies to take into account the variable conditions encountered by different technologies and by diverse actors operating in contexts that change over time and space.
The Renewables Directive does give some scope for flexibility as to how the different targets are to be met at the national level. It also builds in an obligation for a review of progress that creates an opportunity for further policy development at the EU level and policy learning at the national level in the near future.
8) Market mechanisms would serve to reinforce government policies. External costs and benefits would be internalised so that social and environmental impacts were accurately reflected in economic transactions and there would be perfect information to inform voter and consumer behaviour.
The external costs and benefits of the different forms of energy generation have yet to be internalised. This puts renewables at a clear competitive disadvantage. Furthermore, liberalisation has meant that the overall market for energy has become much more competitive. Nonetheless, market-pull backed up by government support will probably be sufficient to lead to the commercialisation of some renewable technologies. As they are more widely adopted, their quality will improve and their costs will drop. However, market-pull will be insufficient to stimulate investments in blue-sky research for other technologies. Government support to overcome some of the most important barriers to innovation therefore remains necessary.
9) Actors on the ground would understand, support and have the capacity to respond to the wide range of signals from government, from the market and from society at large.
Capacities are developing in many settings - however it is clear that those regions/sectors that are most likely to be innovative in the future are those that have been innovative in the past. In those contexts where there is no history of innovation relating to renewables, significant and sustained investments will be necessary not only in the technologies themselves but also in the networks that underpin the innovation process.
10) Infrastructure would also be flexible enough to accommodate the needs of new renewable energy technologies.
Despite calls for greater access to the grid, the infrastructure continues to reflect the fact that it was designed to meet the needs of large-scale conventional generators rather than smaller scale renewables. Grid access therefore remains a major barrier to the development of renewable energies.
As a consequence, it is clear that the ideal policies have yet to be put in place to promote the wider development and diffusion of renewable energy sources in the EU. The negotiation and compromise needed to secure support for the Renewables Directive from other departments of the EU and from various member states meant that the policies departed from the original ideal in quite a number of ways.
Furthermore, diverse national approaches and competing interests in the member states mean that the policies may not be implemented whole-heartedly or in the intended way. And finally, conditions on the ground may restrict the ability of actors to respond to the policies in the ways that are hoped.
Nonetheless, the Renewables Directive represents a significant achievement, and with scope for learning, EU policy design can develop further over time. Ultimate success depends upon the member states' capacity and commitment, both to deliver these policies and to create the conditions that will allow actors to respond to them in efficient and effective ways.
REFERENCES
Dosi, G. (1988) The nature of the innovative process, In: Technical Change and Economic Theory, pp. 221-237, G. Dosi, C. Freeman, R. Nelson, G. Silverberg, L. Soete, (Eds). Pinter Publishers, London
European Commission (1997) Energy for the Future: Renewable Sources of Energy - White Paper for a Community Strategy and Action Plan, COM(97) 599, 26.11.1997.
European Commission (2001) "Directive 2001/77/EC on the Promotion of Electricity Produced from Renewable Energy Sources in the Internal Electricity Market", Official Journal of the European Communities, L283/33, 27.10.2001.
European Environment Agency (2001) Renewable Energies: success stories, Environmental Issue Report 27, EEA, Copenhagen.
Kemp, R. (1993) An economic analysis of cleaner technology: theory and evidence, In: Environmental Strategies for Industry: International Perspectives on Research Needs and Policy Implications, pp. 79-116, K. Fischer and J. Schot, (Eds). Island Press, Washington.
Kemp, R. and Soete, L. (1992) "The Greening of Technological Progress" Futures, June pp. 437-457
OECD - Organisation for Economic Cooperation and Development (1992) Technology and the Economy: The Key Relationship. OECD, Paris.
Soete, L. and Arundel, A. (1995) European innovation policy for environmentally sustainable development: application of a
systems model of technical change, Journal of Public Policy, 2, 2, pp.285-385.
This is one of almost 50
chapters and articles in the 336-page large format book, Before the Wells
Run Dry. Copies of the book are available for £9.95 from Green Books. Continue to Part C of Section Four: The risks of oil supply disruption for the transport sector
