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Benefits and Costs of the Energy Targets for the Post-2015 Development Agenda

This perspective paper reviews the targets and their priorities and proposes a seventh, policy-based target. Morris believes that the challenge paper convincingly explains how access to modern energy resources is critical for economic development and improving the welfare of poor households. Few doubt the merits of expanding modern energy access in principle, but there remain questions as to where the benefits are highest and what policies may best be used.

The targets proposed pose several challenges to cost-benefit analysis. In particular, they are mainly target levels of desirable outcomes, without specific policies to bring them about. There is also an issue of rising marginal costs as the easier sectors are served first and, finally, aggregate welfare increases may mask important underlying distributional outcomes, which calls for careful design of policies.

Although the benefits of access to electricity are great, the challenges of delivering this to all make it difficult to deliver. The more modest target of expanding access to modern cooking is likely to provide strong net benefits, particularly now newer, better-built stoves are coming to market.

The objective of doubling the rate of decline in energy use per unit of GDP (SDG 2) does not make much sense in itself, as the energy intensity of an economy tends to shrink with economic growth as the service sector expands. That means that a more energy efficient economy can be both a cause and an effect of development.. Targeting a particular sector would make more sense, but only if there is also a specific cost-effective policy proposal. As for the “energy efficiency gap”, it is difficult to substantiate claims of a significant and pervasive gap. What are apparent benefits to society many actually negatively impact consumers, who have to pay the full cost.

Target 3 is to double the share of renewable energy. If the primary purpose is to reduce emissions of carbon dioxide and pollutants, this should be compared with other strategies. Peer-reviewed literature provides strong evidence that policies to promote renewables are less cost effective than policies to price carbon.

The benefits of reducing ‘pre-tax consumption-distorting’ subsidies on fossil fuels depend on how they were implemented and what would happen to the resources that would have been spent on the subsidies. The net result of the spending shift could be more progressivity, particularly if fossil fuel subsidies are replaced with income support and other programs targeted to the poor.

While it is clear that energy research should be devoted to developing technologies that are cheap, reliable and scalable, to ease the transition from fossil fuels, much R&D takes place in the private sector, so companies need incentives to expand this activity. However, there may be other research areas which are even more under-funded, so Morris suggests a modest increase in public funding plus appropriate carbon price signals to the private sector. Her suggestion for a more policy-oriented target is to phase out implicit fossil fuel subsidies by imposing energy taxes that reflect external costs. One study that benchmarks the potential benefit cost ratio of climate policy appears in the technical documentation of the recent proposed rule from the U.S. Environmental Protection Agency (EPA) to reduce CO2 emissions from existing power plants. EPA figures suggest a benefit-cost ratio of up to 8.4 for global climate and health impacts. Since the EPA proposal is likely to be less cost-effective than a well-designed carbon tax, such a policy could actually achieve BCRs in excess of most if not all of the other sustainable development goals.

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