Table 1.

Policy challenges for a transition to sustainable energy

Challenges		Effective policies and strategies
(a) Triple externality problem	(a1) Negative, environmental externality, which means that prices do not reflect social (private + external) costs, thus providing incorrect incentives for consumption, production, investment, and innovation.	Private decisions (by firms, households, investors, and innovators) need to account for external costs throughout the life cycle of products and services (e.g., carbon pricing) Environmentally harmful subsidies need to be removed.
	(a2) Innovation/knowledge externality (positive) causing the investor in innovation activity to not always be able to reap a fair share of the innovation benefits. An uncertain and long-term return on investment in innovation is characteristic of many environmentally relevant innovations.	Protect innovators so they can reap the benefits of their investments (e.g., patent law). Subsidize promising but still expensive technologies. Basic research with low return on investment by the state (universities and state research institutes).
	(a3) Lock-in, which means a positive externality for the dominant technology and a negative externality for new, niche technologies.	Discourage innovation in the dirty technology, subsidize set-up costs and infrastructure of cleaner alternatives, restrict advertising of dirty locked-in product, and use status seeking to sell cleaner alternative (e.g., electric car).
(b) Escape routes: indirect, undesirable, and avoidable effects of well-intended policies and strategies	(b1) Carbon leakage due to relocation of polluters to countries with lax environmental regulation and associated changes in trade patterns.	International climate agreement.
	(b2) Energy or CO2 rebound: indirect effects of energy conservation that create new energy use.	A hard ceiling to total CO2 emissions. Carbon pricing. Combination means tradable permits are an effective policy.
	(b3) Environmental rebound: shifting of environmental problems.	Systems analysis of sustainability policies and renewable energy strategies to identify unwanted indirect effects.
	(b4) Green paradox: oil market response to climate/innovation policies.	Externality pricing of fossil fuels (supply policy).
(c) Lack of economic rationale of a sustainable energy transition	(c1) Transition to lower EROEI technologies is environmentally motivated but lacks economic logic. Therefore, it cannot be compared with historical energy transitions.	Improve EROEI of technologies by research and development incentives and public investments. Subsidize niche technology. Feed-in-tariffs for renewable electricity.
	(c2) Environmental innovations are generally factor-saving, not output-quality improving. This means that although innovative technology is more expensive it does not provide relevant new features for users. Diffusion is hampered then.	Try to combine function/quality and factor-saving innovations. Make consumers and producers more conscious about environmental impacts (voluntary action, altruism). Subsidize niche technology.
(d) The financial-economic crisis creates new barriers to energy transition.	(d1) Reduced pubic support of, and investment funds for, renewable energy and energy conservation.	Integrate macroeconomic policies with environmental and innovation policies. Show that energy transition can go along with economic recovery. Prepare society and politics for a lower rate of economic growth.