ENERGY FOR A SUSTAINABLE WORLD - World Resources Institute

combination of user preferences, incomes, the
resourcefulness and technical know-how of
those who produce and sell energy-using technologies
and related services, and other factors.
Further, user preferences as well as the technological
and institutional opportunities for satisfying
consumer needs are varied and ever
changing. In short, patterns of energy use depend
on decisions by large numbers of consumers,
each continually confronted with
scores of energy-related decisions. This pattern
of decision-making is far more complex than
that for the production of energy, which
Patterns of energy use depend on
decisions by large numbers of consumers,
each continually confronted with scores of
energy-related decisions. In contrast, the
production of energy generally involves
only a few energy forms and a relatively
small number of producers.
generally involves only a few energy forms and
a relatively small number of producers. Nonetheless,
policy-makers must try promising new
approaches, assess how well different approaches
work in different situations, and
make continual adjustments in light of
experience.
The Role of Markets in End-Use
Energy Strategies
Market Shortcomings. Despite the economic
attractiveness of end-use energy strategies, the
market cannot be relied on to promote them
because of (1) existing policies that further the
expansion of energy supply (market biases), (2)
the reluctance of many consumers to make
cost-justified energy-saving investments (market
friction), and (3) the inherent inability of markets
to meet the challenges of poverty, the external
social costs of energy production and
use, and the welfare of future generations
(market failings).
New public sector interventions are needed
partly because past interventions have biased
the market in favor of energy supply expansion.
Historically, either energy producers have
been subsidized or prices have been held down
to benefit consumers.
Government support for energy producers
has come in various, sometimes ingenious,
forms: tax breaks—including depletion allowances,
intangible cost write-offs, accelerated
depreciation, and investment tax credits—as
well as a variety of other subsidies, hidden and
overt. For example, almost every industrialized
country has subsidized the development and
commercialization of nuclear power, certain
aspects of nuclear plant operations, and even
the export of nuclear technology.
One problem with energy supply subsidies is
that they keep energy prices below the true
long-run marginal costs of energy supplies and
thus encourage economically inefficient consumption.
A more serious problem is that such
subsidies make energy supply investments
especially attractive to investors, making capital
for other investments scarcer. Subsidies to
energy producers may not even increase
energy production. Indeed, unless they are
directed to research activities having no prospect
of direct commercial payoff, energy supply
subsidies tend to decrease net energy yields
because increased energy production will be
more than offset by increases in the energy
opportunity costs of the non-energy inputs
induced by the subsidy. 52
Governments have also set energy prices
below market-clearing levels for certain classes
of consumers—to promote particular patterns of
economic growth or, as in the 1970s, to
cushion the impacts of market price increases
on certain consumer groups or on the economy
generally. The prices of kerosene or liquid
petroleum gas in many developing countries