Effectiveness energy covenants: International evidence

Matthijs De Jong, Erasmus University Rotterdam

Several OECD countries use covenants as an important part of their policy to stimulate energy efficiency, carbon reduction and the use of renewable energy. Not much evidence, however, is present about the effectiveness of covenants. Some studies based on micro data find significant effects, others conclude that the effectiveness of covenants is questionable. This study uses yearly (1978-2006) data from 24 OECD countries at the national and sectoral level to analyze the relation between the use of covenants and energy efficiency, carbon dioxide emissions and the use of renewable energy. The database is partly based on public data and partly on a detailed inventory by the authors of the use of covenants in all OECD countries. As also taxes, subsidies and rules are included in the analysis, the study provides also evidence of the relative effectiveness of covenants.

It shows that there is very little statistical evidence for the effectiveness of covenants. Many sensitivity analyses, testing all potential relevant assumptions, show that this conclusion is robust. When the covenants are separated in different classes with respect to the design, it shows that even covenants that are most strict are not effective. If, for example, clear goals are set and explicit sanctions are included if goals are not met the effectiveness is still very low.

We find much evidence that taxes are effective and moderate evidence for the effectiveness of subsidies and rules.

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