When prices don’t steer – mimicking ambitious carbon pricing with energy performance standards

Pricing carbon is often considered to be the cornerstone of any climate policy and, at least in economic theory, it is the only policy intervention required to reach an optimal level of mitigation. In practice, various market and behavioural failures, as well as political barriers, necessitate a policy mix that also encompasses policies to induce energy efficiency and stimulate the up-take of renewable energy sources. Minimum energy performance standards (MEPS) are one group of instruments to drive energy efficiency. However, MEPS are viewed very differently by different actors; some see them as complementary to carbon pricing, while others view them as market distortion. Recent studies indicate that MEPS for appliances and vehicles are currently the best performing climate policy instruments. There is a need for more research about how MEPS and carbon pricing policies interact and how they can best be combined for an effective climate policy mix. In this paper, we examine the advantages and potential of using MEPS to drive more ambitious climate policy. We first model the market price of appliances in a UK market and how life cycle costs (LCC) shift when the social cost of carbon (SCC) is factored in. We then examine how the inclusion of the SCC affects the point at which least life cycle costs (LLCC) for an appliance class are reached. We consider carbon prices ranging from the current carbon market price to high-end estimates of SCC, and then estimate the corresponding MEPS in each scenario. Finally, we discuss the implications for mixed policy design when climate change externalities are addressed primarily through MEPS, as well as the merits of such a policy approach.