1c NCA Full report Energy saving ambitions and results (2011) (English)

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Algemene Rekenkamer (Netherlands Court of Audit)

Lange Voorhout 8 P.O. Box 20015 2500 EA The Hague phone + 31 70 342 43 00

e-mail: voorlichting@rekenkamer.nl internet: www.rekenkamer.nl

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Netherlands Court of Audit

Cover

Design: Corps Ontwerpers, The Hague Photo: Michiel Wijnbergh / Hollandse Hoogte

Graphics

Joris Fiselier Infographics

The Hague

November 2011

Audit team

Marcoen Roelofs (Project Manager)

Sylvia van Leeuwen (Deputy Project Manager) Cora Kreft

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Part I

Conclusions, recommendations

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1 About this audit

1.1 Context of energy saving policy

Reducing energy consumption has been an ambition of the Dutch government and the European Union for many years. The first national information campaign to increase public awareness of energy use dates from the 1970s. Energy savings will remain a priority for the future, too. Until 2010, the Netherlands' policy had been more ambitious than the EU's. This is no longer the case. The Rutte/Verhagen government that took office at the end of 2010 decided not to set a national policy goal for energy saving but undertook to 'continue and strengthen' the existing approach (Informateur, 2010). The European Energy Strategy 2011–2020 names energy efficiency as a major goal for 2020 and a key factor for the longer term (European Commission, 2011, p. 8).

The Dutch government thinks there are several important reasons to make more efficient use of energy:

 Firstly, energy efficiency reduces atmospheric CO2 emissions and thus helps combat climate change. In the scenario developed by the International Energy Agency to limit the increase in temperature to 2°C, 52% of the reduction in CO2 emissions required by 2030 must be achieved through energy savings (IEA, 2009).

 Secondly, more efficient use of existing energy sources will prolong the finite supply of fossil fuels (particularly oil, natural gas and coal).

 Thirdly, the efficient use of energy reduces dependence on foreign energy sources and keeps energy affordable.

The pursuit of energy savings chimes with the social context of steadily growing demand for energy. By way of illustration, household electricity consumption per person in the Netherlands quadrupled between 1950 and 2008. Annual energy consumption is still increasing but energy is also being saved each year. This apparent contradiction is due to the

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If an increase in production is greater than the saving, total energy consumption will be higher, although not as high as without the energy saving (see figure 1).

Figure 1 Definition of energy saving

Figure 2 below shows energy consumption in six sectors of the Dutch economy. The greatest consumer is the manufacturing sector (28%).1 Agriculture and horticulture use the least energy (4%).

1

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Figure 2 Energy consumption by sector*

Percentage in 2008*

1.2 Relationship with other policy

National energy saving policy is an integral part of the Netherlands' energy and climate policy. Until the end of 2010, the goal for energy saving policy (an annual improvement in energy efficiency of 2%) was one of the climate targets for 2020. The others were: a 30% reduction in CO2 emissions relative to 1990 and an increase in the share of renewable energy to 20%.

The Netherlands' energy and climate policy is in turn embedded in European energy and climate policy. The goal of European energy policy is to base the economy on the efficient use of a sustainable, competitive and continuous energy supply. The European energy saving target is: a reduction in energy consumption of 20% by 2020, compared to the level reached in a situation of unaltered growth from 2005. This target is not binding on the EU member states. The European Commission has

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target for the Netherlands as a member state is a share of 14% of final energy consumption (Directive 2009/28/EC, 2009, p. 46).

As noted above, the Rutte/Verhagen government abandoned the energy saving policy goal when it took office towards the end of 2010. Pursuant to the coalition agreement, the new government seeks a 'continuation and strengthening' of the national approach to energy saving' through a 'green deal with society' (Informateur, 2010). The Rutte/Verhagen government has not set additional national targets for CO2 emissions or the share of renewable energy. The European targets are now the national policy targets.

1.3 Financial importance

The funds earmarked for the Dutch energy saving policy are provided from several ministerial budgets. Not all these budgets specify

expenditure on energy saving policy separately; in such cases, the funds are part of a larger budget article. In consequence, the cost of the national energy policy cannot be calculated directly from the national budget.

Estimates, however, can be made. They indicate that about €300 million

of national funds has been spent on energy savings every year since 1999 (EZ, 2008; Harmsen & Menkveld, 2005). Tax schemes account for about half of the expenditure. The largest scheme is the Energy Investment

Allowance (EIA, €111 million in 2008). At the same time, however, the State has earned considerable amounts through the taxation of energy.

In 2008, energy tax raised just over €4 billion, of which €425 million from

the manufacturing and energy generation sectors. In principle, this income replenishes the public purse but in the past it was often returned to the taxpayer in the form of lower taxes on labour and profits.

1.4 Responsible ministers

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In addition, individual line ministers were responsible for the development and execution of energy saving policy in the sectors covered by their portfolios.2

Upon the inauguration of the Rutte/Verhagen government, ministerial portfolios were reshuffled and responsibility for energy and climate policy was reallocated. The newly formed Ministry of Infrastructure and the Environment (I&M) is now responsible for climate policy. The equally new Ministry of Economic Affairs, Agriculture and Innovation (EL&I)

coordinates energy saving policy and is responsible for the 'green deal'. Responsibility for specific energy consuming sectors was also changed.3

1.5 Our audit: audit background, questions and

objective

The annual monitoring data on energy savings show that the Netherlands has failed to achieve the government's ambitions for many years. The ambitions have been revised on several occasions since 1995, but they have rarely been achieved. A more detailed international comparison, furthermore, reveals that the Netherlands uses significantly more energy per unit of production than other OECD countries,4 even after correction for specific national features of the Dutch economy (CPB, 2010).

Against this background, the main audit questions were: 1. Why have the energy saving targets not been achieved?

2. What consequences does this have for the feasibility of the national (and European) energy and climate targets for 2020?

3. What opportunities are there to strengthen policy?

We answered the first two questions in respect of energy saving policy as a whole in the period 1995-2008. Our answer to the third question is confined to the manufacturing sector because manufacturing is the

2_{The responsibilities for specific energy consuming sectors were as follows: the Minister for}

Housing, Communities and Integration (WWI) was responsible for policy in the built environment sector; the Minister of Transport, Public Works and Water Management (V&W) was responsible for managing the volume of traffic in the transport sector; the Minister of Agriculture, Nature and Food Quality (LNV) was responsible for policy in the agriculture and horticulture sectors; and the Minister of Finance was responsible for the execution of green tax measures.

3_{The Minister of BZK is now responsible for the built environment sector, the Minister of I&M for}

the transport sector and the Minister of EL&I for policy in the agriculture and horticulture sectors. 4

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largest energy consumer and because a major European study of the impact of energy saving behaviour in households, schools and offices commenced at the same time as our audit.

The audit of the manufacturing sector revolved around two questions. Firstly, is energy saving policy in the manufacturing sector more effective if it is consistent with the companies' reasons for behaving energy

efficiently? To answer this question, we held a survey of companies in the manufacturing sector. The main findings are presented in chapter 5 of this report. Secondly, are there inefficiencies in the energy saving policy for the manufacturing sector and, if so, where are they? To answer this question, we commissioned CE Delft, an independent research and consultancy organisation, to investigate the relationship between policy impact and associated costs (cost effectiveness). CE Delft will publish a report on its investigation entitled Evaluatie energiebesparingsbelied in de industrie. Kosten en effecten in de periode 1995-2008 (Evaluation of energy saving policy in manufacturing. Costs and effects in the period 1995-2008). Its main findings are presented in chapter 5.

The answers to these questions provide an insight into the results of the Dutch government's energy saving policy and its impact on CO2 emissions and energy security. They will also contribute to the social and political debate on reducing energy consumption and increasing the effectiveness of national energy and climate policy. The analysis of individual policy instruments will also complement the policy options presented in the report issued by the Energy and Climate Working Group set up for the Reassessment of government functions (AZ, 2010). The Working Group has not made a decision on the policy alternatives but has indicated that more study is necessary.

1.6 Organisation of this report

Chapter 2 of part I presents the main audit conclusions and

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2 Conclusions and

recommendations

2.1 Main conclusion

The Netherlands is not achieving the government's energy saving targets. Between 1995 and 2007, national energy consumption rose by 11%, versus a targeted increase of just 4%. As a result, CO2 emissions were 13 megatonnes higher than intended.

Our audit found three causes for the underachievement of the policy targets:

1. In recent years, fewer and weaker policy instruments have been used than ex ante evaluations had found necessary.

2. The policy conducted in the energy-intensive manufacturing sector in the period 2000-2007 increasingly became less compulsory. The policy had few results. The energy saving achieved (0.5% per annum on average) was less than the saving that would have occurred without policy (the autonomous development of 0.8-1% per annum). In the period 1995-2007, the manufacturing sector as a whole performed slightly better (1.5% per annum on average) than the national average (1.1% per annum). The national average, however, was significantly reduced by the transport sector.

3. Policy in the manufacturing sector only partially matches companies' reasons for investing in energy savings. Policy instruments in the manufacturing sector are targeted chiefly at lowering the direct cost of investing in energy efficient measures. In practice, however, other reasons also influence energy efficient behaviour.

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use or sell their excess emission allowances. This means there is less incentive to use energy as efficiently as possible, i.e. to save energy.5

The energy saving policy of the fourth Balkenende government was inadequate to achieve the policy goals and bring the 2020 energy saving targets within reach. The Rutte/Verhagen government said in the coalition agreement that it would 'continue and strengthen' the approach to energy saving. Since the government has set the same or even higher ambitions for energy saving, even more effective policy will probably be needed to achieve them. The Rutte/Verhagen government has not set a national goal for CO2 reduction but the European target still applies. It is unlikely that continuation of the Balkenende IV government's policy will achieve the Netherlands' CO2 reduction target. More effective policy will therefore be necessary to reduce CO2 emissions.

We consider this main conclusion in more detail in the sections below and make a number of recommendations to the ministers concerned at the end of this chapter.

2.2 Notes to the main conclusion

2.2.1 Use of policy instruments

In recent years, fewer and weaker policy instruments have been used than ex ante evaluations had found necessary.

The government's ambitions to improve energy efficiency varied from a 1.5% to a 2% energy saving per annum between 1995 and 2010. The actual average energy saving between 2000 and 2007 was 1.1% per annum, including the autonomous saving that would have been achieved without policy, for example on account of global oil prices and

technological advances.6

The Balkenende IV government's goal of a 2% per annum energy saving was technically and financially feasible only at very high national cost. In 2006, the ex ante calculation of the policy indicated that 2% would be barely feasible, if at all, if account was also taken of the impact of related policy (Daniëls et al., 2006, p. 40). A subsequent study concluded that a saving of 1.8% per annum could be achieved at relatively reasonable cost

5_{There are several ways to overcome this negative interaction, see section 2.3.1.}

6_{It can be concluded from the literature that the autonomous sav ing lies between 0.8% and}

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provided there was sufficient flexibility (Menkveld & Wijngaart, 2007, p. 21). It was therefore clear that every effort would be needed to achieve the target of 2% per annum. Most sectors, however, fell far short of this target.

 Only the agriculture and horticulture sector achieved a substantial energy saving in recent years. Since this sector accounts for only a modest share of total energy use, it has made only a limited contribution to energy saving.

 The measures introduced for the manufacturing sector were not sufficiently binding. The saving induced by the policy was therefore limited.

 In the built environment sector, savings were achieved chiefly on account of the European minimum efficiency standards for domestic appliances and buildings.

 Not enough instruments were used in the transport sector and virtually no saving was achieved.

The failure of the policy was predictable. It was clear in advance to successive governments that the energy saving ambitions were not backed up by appropriate policy instruments. Every effort would have to be made to have a chance of achieving the targets. A number of

important policy instruments, however, were not included in the policies announced, or were introduced far later or in a weaker form than foreseen. Studies carried out for the Ministries of VROM and EZ have consistently shown in recent years that the proposed policy measures would not achieve the targets. The ministers concerned did not respond to these warnings and use them to strengthen policy or review the targets.

This lack of effectiveness can be explained in part by the absence of clear agreements on the targets and responsibilities. In 2007, when the

national energy saving goal was last revised, no specific agreements were made on the secondary goals to be achieved in individual sectors or on the ministers who would be responsible for them. In the years that followed, it was therefore uncertain who was responsible for taking additional policy measures to make up or any underachievement. In consequence not all line ministers took decisive action when it became clear that the energy saving in their sectors was inadequate.

We consider the results of energy saving policy in more detail in chapters 2 and 3 of part II of this report.

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2.2.2 Policy effectiveness in the manufacturing sector

The policy conducted in the energy-intensive manufacturing sector in the period 2000-2007 increasingly became less compulsory. The policy had few results. The energy saving achieved (0.5% per annum on average) was less than the saving that would have occurred without policy (the autonomous development of 0.8-1% per annum). In the period

1995-2007, the manufacturing sector as a whole performed slightly better (1.5% per annum on average) than the national average (1.1% per annum). The national average, however, was significantly reduced by the transport sector.

Between 1995 and 2008 the policy for energy intensive manufacturing companies, which are responsible for 80% of energy consumption in the manufacturing sector, had little effect. There are several reasons for this:

 The government's main policy instrument for energy intensive

companies was the Benchmarking Agreement. A series of side letters, however, weakened the agreement's obligations and it ultimately had no effect: the 139 participating companies saved less energy than the autonomous saving.

 The European CO2 emissions trading system did not work in practice until 2008, chiefly because of the generous allocation of emission allowances.

 The most energy intensive companies were exempt from the top rate of energy tax on electricity consumption in 1995-2008 because they participated in the first multiyear energy efficiency agreements and then in the Benchmarking Agreement.7

 The statutory energy saving obligations the government introduced did not apply to energy intensive companies participating in the European CO2 emissions trading system.8 At present, the emissions trading system is the most important instrument to encourage energy intensive and many other medium-sized and large companies to save energy (and ultimately to reduce CO2 emissions). The instrument has had some effect since 2008 but at relatively high cost. This is because the price of an emission allowance (the 'working ingredient') is still low relative to the cost incurred by the government and the administrative burden on industry (see section 2.2.4).

7 _{This exemption is still available because the companies are now participating in the successor to}

the Benchmarking Agreement, the Multiyear Agreement on Energy Efficiency for ETS Companies (MEE).

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The cost benefit ratio of the various instruments in the national energy saving policy in 1995-2008 was mixed.

 Tax instruments. The Energy Investment Allowance (EIA) is the most important tax instrument introduced by the government. It is

effective and relatively inexpensive. Energy tax is also effective and relatively inexpensive but it would be even more efficient if the tax brackets were refined. Unlike income tax, the higher the energy tax bracket, the lower the tax rate.

 Multiyear agreements with industry organisations. The government has made several multiyear agreements with industry organisations with mixed results. It cannot be determined whether the first energy saving agreements had an independent effect (i.e. separately from other instruments such as grants and tax facilities). At the end of the first generation of multiyear agreements, a distinction was made between small energy consumers and large energy intensive companies. A second generation of multiyear agreements was introduced for smaller consumers. These agreements had an effect but at a high cost. Social pressure, a key factor in such agreements, does not seem to have had any demonstrable effect in the current arrangements. The government concluded the Benchmarking Agreement with energy intensive companies. The successor to the Benchmarking Agreement, the Multiyear Agreement on Energy Efficiency for ETS Companies (MEE), came into operation in October 2009.9_{It will be several years before it can be investigated whether} this instrument has had an effect on energy consumption.

In this section we considered the effects of the policy instruments separately from each other. As noted at the beginning of this chapter, however, there is a negative interaction between the European CO2 emissions trading system and the national energy saving policy. We return to this in section 2.2.4.

2.2.3 Agreement between policy and company behaviour

Policy instruments in the manufacturing sector are targeted chiefly at lowering the direct cost of investing in energy efficiency measures. In practice, however, other reasons also influence energy efficient behaviour.

The government's policy measures in the manufacturing sector consist chiefly of instruments to reduce the direct cost of investing in energy

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efficiency or to increase the return on such investments (e.g. by taxing energy consumption). Our audit found that financial incentives indeed were important for saving energy. Companies frequently expected energy savings to increase their market share. The presence of sufficient capital is also an important factor to invest in energy savings.

But there are also other reasons and factors that are not directly related to the direct investment cost. A company may decide not to take energy saving measures if it thinks they will disrupt its relationship with suppliers and maintenance contractors (a computer-controlled energy efficient production line, for example, might be too advanced for the tried and trusted maintenance contractor). Companies are also more willing to invest in energy saving measures at a natural moment (for example when a production line is expanded or machinery is replaced).

There are also non-cost factors for investing in energy savings and energy efficient products. One is the presence of knowledge, not only about the energy saving potential but also about the company's own energy management.

Our audit found that policy instruments that agreed with the reasons and factors given above were a greater incentive to manufacturing companies than policy instruments that did not. Aligning the current policy

instruments would therefore increase policy effectiveness. We return to this in the recommendations given in section 5 of part II of this report.

Our audit findings regarding the manufacturing sector's reasons for and against taking energy saving measures are considered in chapter 5 of part II of this report.

2.2.4 The European CO2 emissions trading system

Part of the energy saving is negated by the interaction between national energy saving policy and the European CO2 emissions trading system.

Since 2005, the EU has used the trading system to reduce the emission of greenhouse gases (see box). In the system, major emitters of CO2

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The European CO2 emissions trading system

In 2005, the European Commission set a ceiling on total CO2 emissions by industrial plants in

the EU. The plants include power stations, oil refineries, steel companies and glass, cement and paper producers. The companies in question are allocated emission allowances, which, in aggregate, make up the ceiling. If a participating company emits less CO2 it can sell its

unused allowances to other companies. If it emits more CO2 it must buy additional

allowances. This creates a price for CO2 emission allowances. The participating companies

are responsible for 40% of all CO2 emissions in Europe.

To date, the emission allowances have been allocated free of charge. The ceiling that will apply in 2020 was set in 2005. There has been some discussion of whether it should be lower (i.e. stricter) The ceiling for 2020 and subsequent years will be set in a series of steps, one being taken on 1 January 2013.

The CO2 emissions trading system will be an important factor in achieving the European

target of reducing CO2 emissions by 20% relative to 1990. Since it relates to only 40% of

total CO2 emissions, however, this is inadequate. To achieve the ultimate target, CO2

emissions must also be reduced in other sectors.

Our audit found that the CO2 emissions trading system probably did not produce any energy savings in the Netherlands in 2005-2007. The allowances allocated to the Netherlands were higher than the actual emissions. Companies did not have to buy additional allowances until 2008, after which the system probably had an appreciable effect. Since then, however, there has also been a negative interaction with the national energy saving policy. This interaction occurs in two instances: 1. when the national energy saving policy is directed at companies

subject to the CO2 emissions trading system;

2. when the national energy saving policy is directed at reducing electricity consumption by companies or individuals that are not participating in the emissions trading system but do influence the electricity production of power stations. Power stations participate in the CO2 emissions trading system.

In both instances, energy savings lead to companies or power stations holding unused emission allowances. Sooner or later, these allowances will be used, after having been sold or otherwise, in the Netherlands or elsewhere in the EU. The CO2 emission initially avoided thanks to the measures taken in the Netherlands will then occur at another date and probably in another EU member state.

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have only limited effect at European level.10 _{At a European level, national} funds for energy saving policy are spent inefficiently if the CO2 emissions trading system works correctly. We drew the same conclusion in our 2007 audit of the implementation of the CO2 emissions trading system

(Netherlands Court of Audit, 2007).

The negative interaction does not mean there is no point to national energy saving policy. Since the European CO2 emissions trading system had very little effect during its first three years, the Netherlands would have been in a worse position without a national policy on energy savings and CO2 emissions. National policy has also increased the share of

renewable energy. In our recommendations, we consider ways to use the energy and climate policy instruments so that they strengthen rather than weaken each other (see section 2.3).

We consider the interaction between the energy saving policy and the CO2 emissions trading system in more detail in chapter 4 of part II of this report.

2.2.5 Feasibility of the energy and climate goals

The fourth Balkenende government's energy saving policy was inadequate to achieve the policy goals or bring the energy saving targets for 2020 within reach. The Rutte/Verhagen government undertook in the coalition agreement to continue and strengthen the approach to energy saving.

Since the government's energy saving ambitions are unchanged or higher, an even more effective policy will be needed to achieve them. The Rutte/Verhagen government has not set a Dutch goal for CO2 reductions but the European goal still applies. It is unlikely that

continuation of the Balkenende IV government's policy will achieve the Netherlands' CO2 reduction target. Therefore, the need to reduce CO2 emissions is another reason why a more effective policy is needed.

The most recent estimates indicate that the Balkenende IV energy saving

target for 2020 (2% on average per annum over the period 2011-2020) will not be achieved, not even if the 'intended policy' proposed at the time is implemented on time and in full (Daniëls et al., 2010). Virtually the same is true of the European target to reduce CO2 emissions by 2020.

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This is true not only of the policy instruments to save energy but also of policy instruments to stimulate renewable energy, to commission new nuclear power stations and to capture and store CO2. Owing to the negative interaction with the emissions t rading system, all these

measures ultimately lead to a very limited reduction in CO2 emissions if unused allowances are

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The target requires the Netherlands to reduce CO2 emissions that are not subject to the emissions trading system by 16% 2020 relative to 2005. According to the most recent estimate, the probability of this target being

achieved is less than 50% if the Balkenende IV policy is continued. Only if the 'intended policy' proposed at the time were implemented could the target be achieved.

At present, energy saving is one of the most readily available and most affordable options to cut emissions without reducing production. Alternatives to reduce CO2 include:

 large-scale generation of renewable energy;

 increased share of nuclear power;

 carbon capture and storage;

 reduced energy consumption in absolute terms.

At present, however, these alternatives are not readily available on a scale large enough to have a meaningful impact on CO2 emissions.

Achieving the energy and climate goals is complicated by inconsistencies

in the various targets. The carbon capture and storage target, for

example, might bring the goal of reducing CO2 emissions a step closer but a power station with a carbon capture and storage facility currently uses more energy than one without such a facility. In chapter 6 of part II of

this report, we provide more examples of inconsistency between the energy and climate goals.

Other targets of the Dutch energy saving policy, such as reducing reliance

on foreign energy sources and energy affordability, are not quantified. It cannot be said what impact failure to achieve these targets will have on the policy goals.

We consider the consequences of energy savings for the energy and climate policy in chapter 6 of part II of this report.

2.3 Recommendations

2.3.1 New vision of energy and climate policy

Our audit found that the Dutch energy saving policy has not been

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energy in the decades ahead. The new European energy strategy gives high priority to energy efficiency. To keep in step with EU policy, the Netherlands will have to give higher priority to energy efficiency than it has in recent years.

We recommend that the government formulate an integrated vision of energy and climate policy that clarifies:

1. the economic and social benefits of energy savings, renewable energy and a low-CO2 energy supply;

2. the energy and climate policy goals and the relationship between them (particularly the relationship between energy saving policy and CO2 emissions trading).

Integrated vision

Our recommendation that the government formulate a new vision of energy and climate policy is consistent with the motion passed by the House of Representatives on 27 October 2010. The motion called for 'the development of an integrated vision of the government's goals for the environment, nature and climate, accompanied by an integrated impact assessment by the Netherlands Environmental Assessment Agency and the Energy Research Centre of the Netherlands as is customary, and to present it to the House on Budget Day 2011' (House of Representatives, 2010). The motion underlined not only the need for a coherent policy but, the ensuing debates revealed, also a sense that the House was not always informed clearly and on a timely basis (House of Representatives, 2008b; 2009).

The government's vision should also clarify the new line ministries' responsibilities and powers in their respective sectors (manufacturing, built environment, transport, and agriculture and horticulture) and how the ministers will inform the House of Representatives of the progress made and of further decision-making on sectoral policy. In view of the low saving rate and the failure of policy intentions in the transport sector, the government's vision should pay particular attention to transport.

1. Economic and social benefits

To make the transition to clean and renewable energy, the government is heavily reliant on the behaviour of individuals and enterprises. To create the support necessary for change, it must clarify the economic and social benefits of investing in renewable energy, energy saving technology and low-CO2 processes. Various energy and climate advisory councils

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benefits of renewable energy (Innovation Platform, 2010; Council for the Rural Area et al., 2010; VROM Council & General Energy Council, 2004).

2. Coherent energy and climate policy

The government's vision should clarify:

 the relationship between energy policy and climate policy;

 the necessary instruments and their principal goals;

 the route to achieve the goals.

When setting the goals and priorities, it should be borne in mind that a substantial and cost-effective reduction in CO2 emissions can be achieved chiefly by means of energy savings.

Estimate of policy impact and inconsistent policy goals

The policy instruments must be selected so that their expected and reasonably estimated effects can achieve the policy goals. If it is known in advance that they will not, the ambitions must be lowered. If policy implementation or effects do not match the ambitions, additional measures will have to be taken.11

Given the inconsistent and sometimes contradictory energy and climate goals, the government must make clear to the House of Representatives the principal goal of each policy instrument and its potential

consequences for other energy and climate policy goals. A coal-fired power station, for instance, will strengthen energy security but will not reduce CO2 emissions. Inconsistent policy goals can lead to contradictory policy. Dutch energy and climate policy should be checked for

inconsistencies and revised where necessary. In this respect, we would remind the government that the Netherlands signed the G20 Pittsburgh declaration of intent in 2007 to phase out fossil fuel subsidies in the medium term because they deter investments in clean and sustainable energy.

Relationship with CO2 emissions trade

Available instruments and resources should be used as efficiently as possible. We pointed out to the government in the past that the

introduction of CO2 emissions trade reduced the effectiveness of all other policy instruments. We also recommended that an assessment be made of the costs and benefits of all CO2 emission reduction instruments

(Netherlands Court of Audit, 2007). The government has not yet followed up this recommendation. We therefore repeat our recommendation that

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all energy and climate policy instruments be aligned to reinforce each other wherever possible. Alternatively, if the government and parliament decide to retain instruments that, on account of international emissions trade, are less cost effective, they should clearly explain the reasons and consequences.

We have identified three ways in which energy and climate policy instruments can strengthen rather than weaken each other. The three options described below are not mutually exclusive.

1. A first option is to focus energy saving policy on consumption that is not subject to the CO2 emissions trading system: (a) gas consumption by manufacturing companies not participating in the CO2 emissions trading system, (b) gas consumption in the domestic, trade, services and public sectors, and (c) energy consumption in the transport sector.

2. For the sectors participating in the CO2 emissions trading system, a second option is to target policy instruments at the development of innovations that are profitable in the long term, for example innovations in the biobased economy or alternatives to fossil fuels. At present, emissions trade encourages measures that are profitable in the short term.

3. A third option is to strengthen the operation of the CO2 emissions trading system by pricing emission allowances at such a high level that companies invest in significant improvements in energy efficiency and in renewable, clean energy. This can be done by reducing the emissions ceiling before the next trading period (after 2012) or by significantly lowering the emission ceiling after 2020. This will require a decision at European level. As a member state, the Netherlands can support this option. If a decision is not taken in Europe, the

government could buy up CO2 emission allowances to take them (temporarily) out of the market. This is an expensive option and would require concerted action by several European countries. The operation of the CO2 emissions trading system could also be strengthened by critically reviewing the implementation of foreign clean technology investment projects for which Dutch companies are allocated emission allowances.

2.3.2 Revision of energy saving policy in the manufacturing sector

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instruments for manufacturing companies that are not participating in the European CO2 emissions trading system.

Improved application and greater enforcement of environmental permits

Pursuant to the Environmental Management Act, provinces and

municipalities are responsible for ensuring that companies that consume a certain volume of energy take compulsory energy saving measures, on condition that the company's financial situation is adequate and the costs are recovered within five years. Studies have found that the Act is not implemented in full and its effects are very limited (De Buck et al., 2007; Haskoning, 2009; Majoor & De Buck, 2010). It is curious, we think, that the Act makes local authorities responsible for assessing a company's financial situation. We recommend that the Minister of Infrastructure and the Environment review the Act's cost effectiveness and inform the House of Representatives of its findings.

Modification of energy tax brackets

With a view to cost effectiveness, energy tax could be spread more evenly over the various consumption brackets. This would reduce overall costs because the most profitable measures would be taken before more expensive measures were considered. Relatively low tax rates for the largest consumers give them a competitive advantage over foreign companies. The fiscal options to encourage energy intensive companies to save energy should be studied.12 Tax incentives will have little effect, however, if the government continues to exempt wholesale electricity consumers from the top bracket if they are party to an energy efficiency agreement.

The importance of knowledge

Our audit revealed the importance of knowledge about ways to save energy. Companies must also have an insight into their own energy consumption. Large companies are more than capable of collecting and using such knowledge but medium-sized companies need support. The multiyear energy saving agreements between the government and the various consumption sectors provide the best opportunities to share knowledge about ways to save energy (see below).

Stricter multiyear energy saving agreements

The multiyear energy efficiency agreements the government has concluded with various sectors have not exerted a great deal of social

12_{Such a study could also consider compensation for negative income effects, for example in the}

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pressure.13_{There would be more pressure if individual companies were} aware of each other's performance. Studies of the agreements' operation reveal that this is an important incentive, provided it does not discourage energy savings (Lokhorst, 2009, pp. 80-81). A 'big stick' (the government taking more stringent measures if the agreements are not kept) would also increase an agreement's effect (Dijkgraaf et al., 2009).14 Multiyear agreements would also be more effective if the associated activities were directed principally at medium-sized companies and at increasing their knowledge of energy savings.

Public procurement of sustainable products

Companies are more inclined to take energy saving measures that increase their market share. There is therefore more than one benefit from the government stimulating the market by procuring energy efficient and low-CO2 goods and services. We recommend that the Minister of Infrastructure and the Environment continue to execute a sustainable procurement policy.

2.3.3 Stricter EU policy

National binding targets for energy saving

The EU energy saving targets are not currently binding on the member states. The European Commission has announced, however, that it will consider setting binding national savings targets if it is thought in 2013 that the EU energy saving goal will probably not be met by means of the member states' energy efficiency measures. We recommend that the government clarify the energy saving goals it has set. It should also call in Brussels for binding national goals for all member states. Binding national goals would level the playing field between the member states as they would prevent some countries doing little and benefiting from the steps taken by the others.

Active implementation of EU directives

New and stricter directives on energy efficiency in the various energy sectors will be negotiated in the EU in the coming years.15_The

13_{The effect of the second generation of multiyear agreements is also due to their influence on two}

other key factors: the expected consequences of energy saving and the perceived feasibility.

14_{Such a threat must be credible and the instrument must be effective. An international}

comparative study by Dijkgraaf et al. shows that energy taxes are the most effective instrumen t, especially in combination with a mechanism to return the tax income back to industry so as not to distort competition.

15_{The new European energy efficiency plan was issued in 2011. It includes new directives and a}

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3 Response of the minister and

the Netherlands Court of Audit's

afterword

3.1 Response of the minister

The Minister of EL&I responded to our audit on 6 September 2011. He wrote on behalf of the Ministers of the Interior and Kingdom Relations (BZK), Finance and I&M. His response is summarised below; the full text can be read at www.rekenkamer.nl.

The Minister of EL&I noted that some of our recommendations were consistent with policy developments launched by the government. The House of Representatives would be informed of some of the initiatives soon. They include the Green Deal, the Local Climate Agenda and the Sustainability Agenda. The minister also referred to the Minister of BZK's Built Environment Energy Saving Action Plan that was recently submitted to the House (BZK, 2011).

The minister confirmed that the binding European goals on CO2 reduction and the share of renewable energy were the guiding principles of the government's energy and climate policy. Energy savings were a means to achieve these goals. The energy saving instruments applied by the previous government would be continued and refined where necessary to strengthen their effectiveness.

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The minister will partially adopt our recommendation that policy for the manufacturing sector be revised and potential improvements be

identified. A study will be conducted of the consequences for the competitiveness of Dutch industry of the further greening of the tax system. The government believes there are openings to increase the minimum European tax rate on energy products and electricity. The minister expects the ETS companies 'to take a step' in the field of energy efficiency through the Multiyear Energy Efficiency Agreement for ETS Companies (MEE Agreement) and through the conclusion of Green Deals.

The Green Deal, according to the minister, should better match entrepreneurs' reasons for investing in energy savings. The minister would consult the participating companies regarding our recommendation to increase the social pressure of voluntary agreements by informing them of each other's performance. The sustainable procurement policy will be continued and the government will scale up innovative projects and act as a launch customer for new products. An action plan is being prepared to improve both compliance with and enforcement of the Environmental Management Act. The minister thought our

recommendation to study the cost benefit ratio of good enforcement was unnecessary because studies have shown that investments that recover their costs within five years are among the most cost effective options in the climate policy.

The minister agreed with two of the options we gave to overcome the negative interaction between national energy saving policy and the ET S: directing energy saving policy at sectors not participating in the emissions trading system and supporting long-term innovation. Existing energy saving measures in non-ETS sectors will be continued. But the minister will not continue to support the ETS sectors. The MEE Agreement and the Green Deal, he wrote, were necessary to overcome barriers to profitable energy saving investments in energy intensive industries.

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The minister does not think it necessary to strengthen the form or intensity of energy and climate policy. The minister does not share our conclusion that the 2020 CO2 target will probably not be achieved; recent data suggest that the policy the new government has introduced and proposed will achieve the CO2 reduction target in 2020. The minister briefly considered our recommendation to formulate a government vision of the coherence, priorities and route to the energy and climate policy targets and of the interaction between national policy and the European emissions trading system. The minister noted that the government had already set out its vision in the coalition agreement. The government will ask the European Commission to analyse the relationship between reducing greenhouse gas emissions and renewable energy on the one hand and the Commission's proposals for compulsory energy efficiency measures on the other. This might prevent the compulsory energy efficiency measures having a negative impact on the CO2 emissions trading system.

3.2 Netherlands Court of Audit's afterword

The minister does not disagree with our conclusion that previous

governments' energy saving policies were too weak to achieve the targets and that this was often known on their introduction. He writes that the problem has been resolved because the Rutte/Verhagen government no longer treats energy saving as a separate goal. Energy saving is still an integral part of most policy measures to reduce CO2 emissions. It is therefore important to clarify the relationship between goals and

resources, to periodically monitor the results and to inform the House of Representatives of them. The importance of energy saving is self-evident. Specific goals provide clarity to parliament and the public.

The minister refers to the coalition agreement in his response to our recommendation to develop a vision to clarify the relationship, priorities and route to the policy goals. We would draw attention in this respect to the following points.

Achieving the CO2 reduction target in 2020

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decision-making often takes longer than foreseen and leads to less potent results than the Netherlands had anticipated.

Energy saving by energy intensive industries

The Minister of EL&I wrote that energy intensive industries were particularly slow at investing in energy savings and that the MEE would help overcome the barriers. This raises questions because the results of the Benchmarking Agreement (the predecessor to the MEE) have not been satisfactory. The minister will submit the monitoring results for the first year of the MEE to the House of Representatives shortly.

We recommend that the minister use the results to explain what he expects from the MEE.

Costs and benefits of enforcing the Environmental Management Act

The Environmental Management Act requires entrepreneurs to invest in energy saving measures that recover their costs within five years. Since most entrepreneurs set considerably stricter conditions on cost recovery, enforcement is expected to be difficult and expensive. The study report the minister refers to does not mention the cost of enforcement. The costs and benefits of enforcing the energy clause in the Environmental Management Act should still be studied.

Limiting the negative interaction between national energy saving policy and the European emissions trading system

The minister said he agreed in part with two of the three options we gave to reduce the negative interaction. We assume that he will follow them up appropriately and mobilise funds so that more are targeted at non-ETS companies and/or long-term innovation.

Clarity for the House of Representatives

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Main conclusions, recommendations and undertakings

Place in part I

Conclusions Recommendations Undertakings

2.1 Fewer and weaker policy instruments have been applied than thought necessary in advance to achieve the energy saving goal.

Policy instruments must be selected so that reasonably estimated effects will achieve the policy goals. If the policy or its impact is inadequate it must be revised.

Since there is no energy saving goal, the minister of EL&I does not think this is relevant.

2.2 Policy instruments had little effect in the manufacturing sector in 1995-2008. The reasons include: energy saving agreements in energy intensive industries have become increasingly less strict and the CO2 emissions trading system

has had little effect so far.

Policy for energy intensive industries must be revised:

study options to improve the cost benefit ratio by spreading energy tax more evenly among user groups; strengthen the CO2 emissions trading

system by supporting calls to lower the ceiling in 2020.

The Minister of EL&I will support the increase in European minimum rates of energy tax.

The government will work at European level to improve the operation of emissions trading.

MEE will encourage energy intensive industries to invest in energy savings. 2.3 Policy instruments for the

manufacturing sector are more effective if they agree with the reasons why companies take energy saving measures. Many policy instruments only partially recognise these reasons.

Policy for the manufacturing sector must be strengthened through better agreement with the companies' reasons to save energy:

 higher priority for knowledge;  stricter multiyear agreements;  increased market for energy efficient

and low carbon goods and services through public procurement of sustainable goods and services. The costs and benefits of environmental permits should be studied further.

The Green Deal will improve the agreement.

Disclosing each other's performance will be discussed with the participants. Sustainable procurement will be continued. A plan will be drawn up to strengthen compliance with and enforcement of the Environmental Management Act. Studies show that the Act is a cost effective option; additional study is not necessary.

2.4 Part of the energy saving is negated by the interaction between CO2 emissions trade and other

energy saving instruments.

Three options (not mutually exclusive) to overcome the negative interaction with CO2 emissions trade:

1.focus energy saving policy on sectors not participating in emissions trade; 2.target policy for ETS sectors on

long-term benefits;

3.strengthen the operation of emissions trade by lowering emissions ceiling as from 2020 or by having the Dutch government buy up emission allowances.

The Minister of EL&I says that, despite the emissions trading system, targeted policy efforts are still required to promote profitable savings options for energy intensive industries.

Innovations that produce alternatives to fossil fuels will be promoted. Buying up emission allowances is inappropriate. The government prefers an extension of emissions trading to other sectors. The government will support the better operation of the trading system at European level. 2.5 Continued implementation of the

Balkenende IV energy saving policy will not bring about the stronger approach as promised by Rutte/Verhagen. The binding EU CO2 emission reduction target will

probably also not be achieved.

A new vision of energy and climate policy is required that clarifies the relationship, priorities and route to the goals, with particular attention for the relationship between national energy saving policy and CO2 emissions trade.

According to the Minister of EL&I the vision is set out in the coalition agreement. Existing instruments complemented with such plans as the Green Deal, Local Climate Agenda and Sustainability Agenda will be adequate to achieve the European CO2 reduction

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1 Introduction

1.1 Organisation of part II

We presented our audit conclusions in part I of this report. In part II we provide background information and further reasoning for the conclusions presented in part I. We begin by providing background information in chapter 2 on energy saving policy and the results achieved. Chapter 3 contains an evaluation of the policy. We explain the expected results of the proposed policy and consider the extent to which that policy was actually implemented. In chapter 4 we look at the interaction with the CO2 emissions trading system and describe the options available to refine policy. The findings of our in-depth audit of the manufacturing sector are presented in chapter 5. We discuss the main motives and obstacles revealed by a survey we held among companies in the manufacturing sector. We also look at the costs and benefits of the policy instruments the government has introduced to save energy in the manufacturing sector in recent years. In chapter 6, we describe the relationship between the individual goals of Dutch climate policy and the impact that failure to achieve energy savings would have on the other goals of national and European climate and energy policy.

1.2 Terminology

Terms are frequently used in part II to refer to energy and CO2 emissions.

Joule is the unit of energy. As one joule is a very small quantity of

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2 Results of energy saving policy

Monitoring data released by the Ministry of Economic Affairs (EZ) in recent years show that energy savings in the Netherlands have been systematically lower than the government's ambitions. The ambitions have been raised and lowered on several occasions since 1995 but the targeted energy saving has not been achieved in any single year. Feasibility studies of the energy saving targets indicate that they can be achieved but only at very high national cost and with the broad support of the public and enterprises. Ex ante studies indicate that the goal for 2020 is not feasible. This chapter outlines the development of the policy goals in the period 1999–2007 and the actual energy saving achieved each year.

2.1 Energy saving targets

2.1.1 European targets

The European Commission adopted a new energy policy at the end of 2006 (European Commission, 2007, p. 46). The European Commission is seeking an economy that runs on sustainable, competitive and secure

energy and low energy consumption.

Energy saving

The EU member states have committed themselves to reducing energy

consumption of 20% by 2020, compared to the level reached in a situation of unaltered growth from 2005. At first sight, this target seems straightforward but it is open to several interpretations because a fixed measurement method has not been agreed. Furthermore, the European

energy saving target is not binding. The two other European climate targets are binding. They relate to a reduction in CO2 emissions and an increase in the share of renewable energy (see below).

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2001-2005). This target, too, is indicative in nature and entails no legally enforceable obligation on member states (Directive 2006/32/EC, p. 2). The Netherlands has adopted the target proposed by the European

Commission in its NEEAP. This means that the Netherlands must have saved 189 PJ in 2016 relative to its average consumption in 2001-2005 (EZ, 2007).

CO2 emissions

The Netherlands must reduce its greenhouse gas emissions that are not subject to the European CO2 emissions trading system by 16% by 2020 relative to 2005.

Share of renewable energy

Renewable energy must account for 14% of the Netherlands' total energy consumption by 2020 (Daniëls et al., 2010, p. 14).

2.1.2 National targets

There have been several national energy saving targets and definitions in the period between 1995 and 2010. Table 1 presents the targets set since 1995. The Clean and Efficient working programme set an energy saving

target in 2007 of 2% per annum as from 2010. At the end of 2010, the Rutte/Verhagen government decided not to set a national energy saving target but to 'continue and strengthen the national approach to energy saving'. To this end, the government will make a 'green deal with society'

(Informateur, 2010).

Since the successive targets have been based on different definitions and measurement methods, for comparative purposes we have restated all

the targets in accordance with the PME definition16 (third column). Since the energy saving target in the Clean and Efficientworking programme was again based on a new definition, the targets have also been restated in accordance with that definition (fourth column).

16_{The method used to measure energy saving was set in the Energy Saving Monitoring Protocol}

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33 Table 1. National energy saving targets since 1995

Source Target as originally formulated 2002a) and EZ Budget 2003 (EZ, 2002b)

Coalition Agreement 2010 No national target, continuation and strengthening of policy

- -

Table 1 shows that the ambitions for energy saving policy have fluctuated over the years. In 1999, the target was raised to 2% per annum (EZ, 1999). In 2002 it was lowered to 1.5% per annum, or as much as

necessary to meet the Kyoto target17 (EZ, 2002a; 2002b). In 2005 the House of Representatives passed the Van der Ham/Spies motion (House of Representatives, 2005). The motion claimed that the ambition was too low and asked the government to raise it to 2% per annum, to be

achieved as from 2010. The motion was implemented in the Clean and Efficient working programme.

2.1.3 Targets by sector

The Clean and Efficientworking programme set a national energy saving target of 2% per annum as from 2010. The ministries concerned did not make formal agreements on targets for individual sectors. According to the Ministry of Housing, Spatial Planning and the Environment (VROM), which was responsible for coordinating climate policy until the end of 2010, the Clean and Efficientworking programme was based implicitly on the allocation shown in table 2.

17_{Pursuant to the Kyoto Agreement, the Netherlands must reduce its greenhouse gas emissions by}

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34 Table 2. Targets by sector

Sector Responsible ministry Energy saving target per annum

Built environment Housing, Communities and Integration 2.4%

Manufacturing Economic Affairs 1.7%

Agriculture Agriculture, Nature and Food Quality 2.4% Transport Transport, Public Works and Water

Management

1.7%

Source: official comment by the Ministry of VROM, 28 June 2010

As expectations and responsibilities were not specifically agreed and documented, it has been unclear in recent years which ministry was responsible for taking additional measures to make up for the disappointing results. According to the then Clean and Efficient

programme managers at the Ministry of VROM, the line ministries were responsible for proposing and costing additional policy. The policy officers at the line ministries thought that the coordinator at the Ministry of VROM was responsible for initiating new policy and that they themselves could decide on its implementation and funding. Owing to this uncertainty, not all line ministries took appropriate action when the savings in 'their' sector were below target.

2.1.4 Feasibility of the 2% target

Feasibility studies carried out for the Ministers of VROM and EZ in recent years show that an energy saving rate of about 1.6% per annum18 could be achieved at relatively low cost to society (Daniëls & Farla, 2006b, pp. 6-7 and p. 35). They concluded that achieving the 'last little bit' (the remaining 0.4%) would be disproportionately expensive (Daniëls & Farla, 2006a). One of the studies found that a package of technical measures could reduce energy consumption by up to 720 PJ (Daniëls & Farla, 2006a, p. 53). This potential is equal to about 2.3% per annum. However, the cost of the final 60 PJ would exceed €200 million per PJ while the cost

of the first 660 PJ would be €25 million or less per PJ. For the calculation, the researchers assumed that 80% of the total technical potential energy saving would actually be achieved (Daniëls & Farla, 2006b, p. 46). This means, for example, that double glazing would be placed in 80% of all houses where it was technically possible. This would require very broad support throughout society. Later calculations also found that the 2% per annum energy saving target as from 2010 would be just about feasible but would be far more expensive and difficult than a slightly lower saving

of 1.8%, possibly as much as €3 billion for a 2% saving against €0.3

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billion for a 1.8% saving (Menkveld & Wijngaart, 2007, p. 20). According to the researchers themselves, however, these calculations are very sensitive to the assumptions made on the saving potential.19

2.2 Results in 1995-2007

Actual annual energy saving rate

In 1995-2007 the average energy saving achieved in the Netherlands was 1.1% per annum. In 2000-2007 the average energy saving was 0.8% per annum (Gerdes & Boonekamp, 2009; Netherlands Environmental

Assessment Agency, 2009). In the preceding period (1995–2000) the rate had been higher: about 1.4% on average per annum (Boonekamp et al., 2004a). As can be seen from figure 3, the actual saving rate throughout the entire 1995-2007 period (with the exception of 1999) was lower than the policy target applicable at the time.

Figure 3 National targets and actual savings, 1995-2007

The Energy Research Centre of the Netherlands (ECN) calculates the actual energy saving each year on behalf of the Ministry of EZ under the auspices of the Energy Saving Monitoring Platform.20 For methodological reasons, the saving is calculated and presented in two ways: as an average over an increasing number of years since a reference date and a s

19 _{According to the report cited, a slightly more generous estimate of the saving potential in the}

transport sector would reduce the estimated cost to €2 billion.

20_{This platform is made up of ECN, NL Agency, the Netherlands Environmental Assessment Agency}

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a moving average over the previous three years.21_{The latter provides} more insight into recent fluctuations in annual savings. A margin of uncertainty is assumed in the national saving figure of about 0.3 percentage point per annum (Gerdes & Boonekamp, 2009).

The three-year average (figure 3, light grey bars) shows that the

calculated savings differ from year to year (Gerdes & Boonekamp, 2009). The fluctuations are due in part to the margin of uncertainty and in part to actual differences in the saving rate (explained orally by ECN, February 2010).

Absolute volume of energy saved

In the period 1995-2007 energy consumption increased by 400 PJ less than it would have done without the energy saving measures (Gerdes, 2010). Figure 4 shows that temperature-adjusted energy consumption22 increased by 307 PJ in 1995-2007. This represents an increase of more than 11% (Gerdes & Boonekamp, 2009).

Figure 4 National energy consumption

In comparison with consumption without saving measures and with energy saving according to the policy targets, 1995-2007

21_{At the close of data collection (May 2010) the most recent monitoring data related to 2007.} 22_{Annual energy consumption is influenced by chance weather conditions. Less heating is needed}

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Figure 4 shows that if no savings had been made after 1995, energy consumption would have risen by more than 700 PJ by 2007, i.e. by more than 25%. The energy saving is about 400 PJ, as shown in figure 5 (Gerdes, 2010). The volume of energy saved is nearly as great as all the domestic energy consumed in the Netherlands in 2008 (CBS et al., 2010a).

Figure 5 Energy consumption in the Netherlands and energy saved

in PJ

If the energy targets set for 1995-2007 had been achieved, energy consumption in 2007 would have been just 100 PJ higher than in 1995, an increase of 4%. The consumption avoided would have been about 600 PJ. Since the saving targets were not achieved in 1995-2007, actual energy consumption was 307 PJ higher in 2007, an increase of 11% on 1995.

2.2.1 Energy saved as a result of policy

The actual saving is due in part to autonomous developments and in part to the government's energy saving policy. Autonomous savings are those that are achieved regardless of policy, for example when old machinery is replaced with new, more efficient machinery or because old, poorly insulated homes and offices are demolished and replaced with new ones. An increase in fuel prices is also an incentive to cut energy consumption.