Towards a green economy Box 4: Feed-in tariffs
Feed-in tariffs can be a powerful market-based instrument to reduce greenhouse gas emissions, enhance energy supply
security, and enhance
economic competitiveness. A feed-in tariff is regulated by the government and makes it mandatory for energy companies responsible for operating the national grid to purchase electricity from renewable energy sources at a pre-determined price that is sufficiently attractive to stimulate new investment in the sector (UNEP 2010e).
Feed-in tariffs are the most common policy used by governments to promote renewable power generation. Of the 83 countries that currently have renewable energy policies, at least 50 countries – both developed and developing – and 25 states/ provinces have feed-in tariffs. Over half of these
tariffs have been adopted since 2005 (REN21 2010).
Analysis of the use of feed-in tariffs in the European Union suggests that the tariffs achieve greater renewable energy penetration than other market based instruments, and do so at lower costs for consumers (European Commission 2008). In Kenya, it is expected that a recently revised feed-in tariff policy will stimulate around 1300 MW of electricity generation
capacity, contributing significantly
to energy security in the country. Moreover, the Kenyan feed-in tariff is expected to stimulate the building of renewable energy infrastructure as well as lead to the implementation of projects to increase the capacity of sugar companies for biomass-based cogeneration, thereby contributing to employment and development in rural areas (UNEP 2010e).
and disposal of waste is usually not reflected in the price of a product or waste disposal service. Aside from the problem of basic fairness, this is a problem because in order for markets to efficiently allocate resources, prices need to accurately reflect the full social costs of economic activity.
Box 5: Peak pricing
Peak pricing is a pricing technique commonly used by electricity distributors, whereby electricity usage charges are higher during periods of peak demand. This gives electricity consumers an incentive to reduce consumption, at least during peak periods. Peak pricing has been used by developed and developing countries. For instance, in 1987, peak pricing was introduced in some areas of China to address the country’s electricity supply shortages, and led to a variation in the cost of hydropower between dry and rainy seasons (Zhao 2001).
Congestion pricing is a similar technique, used to manage traffic congestion. One of the earliest examples of congestion pricing is Singapore’s road- charging scheme, which subjects road users to a congestion fee each time they enter a cordoned area. Road charges vary depending on traffic conditions at the pricing points (Land Transport Authority of Singapore 2011). The scheme has
proven successful in managing the congestion of Singapore’s roads (Keong 2002). Congestion pricing is a useful mechanism for making users aware of the negative externalities of road transport, such as air and noise pollution, environmental degradation and delays, as these costs are internalised so that consumers are obliged to pay for their contribution to traffic congestion. The economic rationale is that congestion charges encourage users to consider cheaper alternatives, such as travelling during off- peak times, or switching to public transport.
Peak pricing and congestion pricing can
encourage electricity and road users to reduce their consumption. Furthermore, peak pricing may facilitate increases in the proportion of electricity supplied by renewable sources, by enabling electricity distributors to manage periods when renewable energy supply is low, such as during periods of low wind or sunlight.
This section looks at how market incentives might be altered by improving price signals through the use of environmentally-related taxes and other market- based instruments (see Boxes 4 and 5). In so doing, the enabling condition of a more level playing field would be established between green activities and their