The Limits of Energy Efficiency Markets in Climate-Change Law

This Article examines whether market-based policies, deployed in many areas of environmental law, should be harnessed to promote energy efficiency. Several countries in Europe and Asia have experimented with this new approach to energy efficiency, establishing markets that involve mandatory energy savings targets for firms and inter-firm trading of certificates that represent quantified energy savings. Many analysts contend that these new markets can unlock overlooked opportunities for energy efficiency improvements and could be a critical policy tool for addressing climate change.
After describing the rationale for these new markets and their operation in other countries, this Article concludes that the growing international support for energy efficiency markets is misplaced. I argue that market enthusiasts are overlooking problems of institutional design that complicate and weaken this new application of market principles in environmental law, and I demonstrate that energy efficiency markets face several hurdles that are likely to limit their role in climate change mitigation. The hurdles include accurately verifying energy savings, setting environmentally meaningful savings targets, and preventing what I call energy savings “leakage,” in which firms participating in the markets outsource energy intensive parts of their operations to non-regulated firms. These limits of energy efficiency markets call into question long-held assumptions about the superiority of market-based approaches in environmental law.

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