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Mohammadi, N.; Mostofi, H.; Dienel, H. Policy Chain of Energy Transition. Encyclopedia. Available online: https://encyclopedia.pub/entry/49699 (accessed on 16 November 2024).
Mohammadi N, Mostofi H, Dienel H. Policy Chain of Energy Transition. Encyclopedia. Available at: https://encyclopedia.pub/entry/49699. Accessed November 16, 2024.
Mohammadi, Naimeh, Hamid Mostofi, Hans-Liudger Dienel. "Policy Chain of Energy Transition" Encyclopedia, https://encyclopedia.pub/entry/49699 (accessed November 16, 2024).
Mohammadi, N., Mostofi, H., & Dienel, H. (2023, September 27). Policy Chain of Energy Transition. In Encyclopedia. https://encyclopedia.pub/entry/49699
Mohammadi, Naimeh, et al. "Policy Chain of Energy Transition." Encyclopedia. Web. 27 September, 2023.
Policy Chain of Energy Transition
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This entry is adapted from the peer-reviewed paper 10.3390/su151712693

A conceptual framework consisting of a policy chain in energy transition from economic and innovation perspectives has five links, corresponding to policies supporting decarbonization, transformation, renewable energy deployment, energy saving, and CO2 emissions. 

energy transition energy policy

1. Introduction

Mitigating climate change in accordance with the Paris Agreement protocols necessitates an energy transition in the electricity, transportation, heating, and cooling sectors. This energy transition must substantially reduce the intensity of CO2 emissions by at least 85% between 2015 and 2050. According to the data, an average annual decrease in CO2 emissions of 2.6% is required to reach this goal [1].
These changes necessitate the implementation of national and governmental policies that are consistent with the market participants who invest in low-carbon carbon sectors [2][3].
In this regard, a comprehensive policy chain for the energy transition should be designed to span a wide variety of sectors, including the energy systems sector, the supply sector, and the demand sector [4].

By definition, policy design consists of the adoption of policy instruments to achieve a set of objectives, and tries to answer the main question as to which actual policy design characteristics must be adopted to achieve the desired results and the ways in which governments steer their policy systems by adopting specific sets of policy tools [5][6].

Existing studies on policy mixes lack consistent terminology and fail to define the policy design that interlinks policy instruments and policy outcomes [5][7][8][9]. Indeed, researchs attempts to answer the following questions:

What are the main links of the conceptual framework in the energy transition policy chain from innovative and economic perspectives? What are the main sub-indicators of each link? How do the supportive policies influence the progress of energy transition? What are the results of reliability testing of each of the links in the conceptual framework?

Policy Mix Typologies 

The complex characteristics of socio-technical transition require balanced thinking. This means that, instead of thinking based on the best type of instrument, one should think about balancing the strengths of different instruments across a complex mix [10][11].

With regard to analyzing the relationship between the design of policy mixes in economic regulation and innovation strategies for the energy transition, the literature on regulation design to determine which policy instrument has the strongest effect is reviewed. A growing number of studies in various fields of transition studies use the concept of mixes of policies or innovation policies to analyze the impact of different packages of policies on renewable energy diffusion [12][13].

The research on the energy transition draws on a variety of sources, ranging from public policy studies to environmental economics, innovation, and transition studies. Each scholar has their own interpretation of what constitutes a policy mix and how key terms should be defined [14][15].

The research on the energy transition draws on a variety of sources, ranging from public policy studies to environmental economics, innovation, and transition studies. Each scholar has their own interpretation of what constitutes a policy mix and how key terms should be defined [16][17] (Figure1).
Sustainability 15 12693 g002
Figure 1. Different scholars’ approaches to policy mix studies.
Economists are increasingly focusing on R&D and patents as indicators of the energy transition. They identify market barriers, with a focus on profitability and return on investment, and make policy recommendations to address such issues. However, the roles of the invisible agenda, such as informal institutions, norms, and cognitive routines, are undervalued [14]. In environmental economics, policy mix analyses are comprised of the optimal combination of policy instruments that address the failures of adopting different tools and the complementary or supplementary nature of such instruments [15].
This calls attention to one field of policy mix research, mostly within economics, which has focused more on the interaction between multiple policy instruments that are primarily supportive of one another rather than antagonistic.
As specified by Grubb (2017), the portfolio of policy tools for sustainable development comprises three domains. The first domain is concerned with the influence of behavioral economics and social characteristics on the deployment of cost-effective technology. This domain characterizes the “satisfying” behavior of any technology deployment, beyond cost–market components. For instance, consumers should be able to satisfy energy efficiency measures on their own or through organizational arrangements [14].
The second domain characterizes neoclassical economic principles in terms of optimizing behaviors. In this domain, consumers and agents evaluate decisions based on cost minimization and benefit maximization. Innovation occurs through the “innovation possibilities frontier” and is limited to the existing infrastructures and institutions. Policy instruments have a tendency to relate justifiable market prices to direct market externalities and failures [14][18].
The third domain utilizes innovation systems to define evolutionary and institutional change. This domain encompasses the roles of formal and informal institutions, infrastructures, and technological innovation. This part embodies longer time scales (decades or more) and broader contributions from national-level decision makers and governments [14][19].
The interdisciplinary field of innovation studies is interested in the role of policy combinations in fostering technological innovation. Some of the literature in this field concerns the design features of individual instruments in the mix [20], the building blocks of the policy mix [7], and the overall characteristics of mixes [21] and policy processes [22].
While environmental economics pay more attention to traditional market failures, such as underinvestment on R&D or the negative environmental externalities of greenhouse gas emissions for policy interventions, innovation studies place great emphasis on structural and transformational system failures, such as institutional failures or failures regarding the direction of transformation.

2. Policy Chain of Energy Transition

Overall, these three academic fields (economics, innovation, and public policy studies) have determined that a single instrument is insufficient for the energy transition and that a combination of innovation and economic stimulus could respond to a comprehensive market and policy design [2][23].
These instruments are commonly deployed in bundles, mixes, and portfolios, which may have counterproductive, complementary, and interactive effects [5].

In an attempt to define the policy of energy transition, the paper complements the existing literature by proposing an analytical framework, adopted from Grubb’s economic conceptualization to supplement the existing literature [20]. Grubb’s framework was combined with the innovation and policy studies in energy transition to develop a five-link conceptual framework for the policy chain of energy transition.

The links are as follows: supportive policies of decarbonization, transformation of technologies (patents), renewable energy deployment, justification of reduced energy consumption (energy saving), and CO2 emissions (Figure 2).

Link1: Supportive Policies of Energy Transition

The policy chain of the energy transition applies a wide scope effect of short-term policies in the market and grid stability together with long-term policies on the climate change and decarbonization strategies in accordance with non-energy market changes [24].
Such a problem-oriented nature of energy transition substantially calls for mixes of policy instruments. For instance, R&D support policies, internalization of negative externalities, and information-related policies could be combined to strengthen niche actors and destabilize regime actors [25][26]. A network of technology-push and market-pull policies supports the major energy consumer sectors, including industries, transportation, building, and households. Energy consumers develop from curiosity and niche innovations to diffusion and consumption as the market matures [27]. Technology-push policies, such as RD&D grants, loans, and tax incentives, are strongly deduced from strategic investments and are typically founded by the public sector [28].
In the same way, the degree of certainty of future development, combined with positive government incentives, encourages private sectors or large corporations to make strategic investments [29][30].
The earliest phase of energy transition is essential for new inventions from R&D-based organizations to contribute to new marketable productions. Hence, managerial skills, interaction with the private sectors, and linkage to other supply chains will be required to transform technology into a product and a business [29][31][32].
At this stage, demand-pull policies such as standards and regulations can be linked to the organisation of new structures and the development of the initial customer base. Regulations are designed to encourage the adoption of consumption behaviours in various sectors, particularly for incumbent products with new technologies [33][34]. As technologies approach the market, however, barriers such as incumbent interests and regulatory complexity prevent the rapid expansion of new technologies, and more time is required to reform market design and energy consumption adaptation regulations [14][35]. In this regard, energy subsidies resulting from taxation measures and affecting the effective tax rate support the entrants of the energy transition.

Link2: Transformation or Technology Development

Increasing the share of R&D spending accelerates technological advancement and subsequently reduces the costs of new technology combined with novel applications and deployment [36].
The implementation of market-based policy instruments, such as taxes and tradable permits, is more likely to result in technological innovation in comparison to direct environmental policy tools such as technology-based standards. The main reason for this principle is that market-based instruments enable firms to employ the most efficient methods to attain environmental targets. Costantini et al. (2015) found that a balance between market-pull and technology-push policies creates strong incentives for the patenting of technologies rather than imbalanced policy instruments [37][38].
The research of Bettencourt (2013) shows that patents continue to increase despite the relatively modest R&D expenditures of companies, thereby validating the significance of public R&D funding in driving innovation activities in various stages of technological maturity and market development [39], in spite of the fact that, from 1990 to 2010, increasing energy prices were a major incentive for the explosion of patents in low-carbon technology in fossil fuels, alongside PV, wind, and biofuel patents; batteries; and electric vehicles [40][41].
Patents are an indicator of innovation and technological changes.

Link3: Renewable Energy Deployment

In comparison to other technology sectors such as IT or medicine, the production process in the energy and electricity sectors takes a long time to implement. Some wind and solar power plant demonstration phases can last up to ten years or more.
As a result, variations in the energy sector are typically difficult, and aside from incremental improvements for traditional generation, radical innovations necessitate government intervention [42].
In this regard, tax expenditures in various forms of energy subsidization of the power market, including FiTs, along with strong R&D programs focusing on leading beneficial technologies in the power industries, significantly advanced the supply chain and power industries [14]. The economic incentives provided by FiTs, which usually fix the price for 10–20 years, especially when it comes to pricing and emission targets, captures the level of certainty of investors and encourages more patenting and innovation in renewable energy [7][29]. For instance, the German EEG increased the installation of wind and solar power plants by guaranteeing investors payment for twenty years [2][43].

Link4: Justification of Less Energy Consumption

Reaching the energy transition goals requires the acceleration of energy efficiency enhancement and replacing the fossil fuel energy sources [44][45].
Whilst tech-push policies drive technological transformation in the energy sector, the challenge of consumer product differentiation remains. This means that new technology produces the same product as incumbent technology (electronic). Therefore, the strategic market-push and demand-pull policies for rising demand in current markets are necessary [29][46].
Big private investors and other entities in industry and electricity generation evaluate the costs and benefits of incumbent equipment and new efficient technology substitution, resulting in cost reduction and energy saving; for example, different fuels for power generation and low-grade heating forms in buildings [14][32].
So, the justification of reduced energy consumption referred to energy saving is a proxy for to what extent the supportive policies result in energy savings and satisfied energy consumers in industry, households, and transportation for adopting their behavior in the consumption of new efficient technology.

Link5: CO2 Emission

There are many ways of generating energy. Coal is the primary source of energy for heavy industries and power generation, which accounts for around 40% of total GHG emission [47]. Natural gas is an additional energy source for power generation in electricity production and heating buildings. However, natural-gas-generated electricity emits half as much carbon dioxide per unit of electricity produced as coal-fired resources [48].
Due to the fact that natural gas consumption accounts for a fifth of total CO2 emissions, the proportion of natural gas in electricity generation has increased, and this period has been called the “Golden Age of Gas” [49]. By increasing policy support in a growing number of nations, technologies have advanced and the cost of technology has consequently decreased. Thus, renewable energy and energy efficiency have advanced, resulting in a decrease in CO2 emissions.

Figure 2. Conceptual framework of energy transition policy chain (proposed by the authors).

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Hamid Mostofi
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Update Date: 28 Sep 2023
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