Why market incentives could potentially do more harm than good in the field of renewables

When discussing the way forward to maximizing renewables in Egypt, tax incentives almost always make their way into the discussion as a quick and effective policy change that would attract investors to the market. But is it really the best way to go?

As part of Business Forward’s 2019 Anniversary, hosted by the AUC School of Business at the Oriental Hall in AUC Tahrir on December 2, a fireside chat on environmental economics concluded the night, featuring AUC professors Abeer El Shenawy  and Angus Blair, and KarmSolar founder Ahmed Zahran. The rich discussion exemplified the clash between theory and practice in the field of renewables.

“Egypt is on the right track when it comes to reforms in the energy sector, and removing energy subsidies has been a step in the right direction,” said Shenawy. “Removing the subsidies will cause less pollution as it promotes energy efficiency, and, most importantly, promote the use of renewable energy. Making fossil fuel cheap means that renewable energy can’t compete.”

Another approach Egypt is enacting to protect the environment, according to Shenawy, is mandating a maximum level of CO2 emissions for businesses, with those surpassing the mandated limit having to pay a fine.

“This fine is still very low, and usually firms would compare the abatement cost with the fine, they find that the fine is lower than the cost of abatement, so they prefer to pay the fine,” she added.

On tax incentives, Shenawy recommends that Egypt moves toward market-based incentives, which she said the government is already contemplating. “These market-based incentives are much more efficient because they not only ensure that firms reduce pollution, but they do so at minimum abatement cost,” concluded Shenawy.

On the other end of the spectrum, Ahmed Zahran of KarmSolar argued that tax and market-based incentives do more harm than good.

“I come from the other side of the ecosystem; the business side,” started off Zahran.”Let me tell you that doing market-based and tax incentives to encourage businesses to reduce their carbon footprint; it actually doesn’t work.”

Working as part of a EU-wide scheme aiming to incentivize businesses to reduce their emissions by introducing market incentives, Zahran says, has given him valuable insight into the matter. He’s seen examples of EU countries offering all types of market incentives, including very low and very high ones. And what he eventually concluded was that such incentives inadvertently cater to the opportunist, not the well-intentioned.

“What actually happens is that those types of market incentives give opportunity for businesses to cheat them,” explained Zahran. “This always happens, and the reason is that the main incentive for businesses is that they try to outsmart the system. Once you put a tax or credit incentive, you’re actually giving an opportunity to those who would be able to get the upper hand and outgrow the others who are sticking to the rules.”

Zahran carried on: “Let’s deal with reality; very few people actually care about the environment and the planet. Most of us really don’t care, and it’s not because we’re bad people but this is how we were designed.”

How to realistically tackle the environmental impact and preserve the planet for future generations then?

“Humans are designed in a way in which they react to certain incentives, with the most important one of them being self-interest,” elaborated Zahran. “Those who care about the environment, planet and sustainability; they should stop talking about it because that’s the thing that actually kills it. If you have access to education, resources or new ideas, work on integrating them within the mainstream economy; produce products or services that are targeted at the self-interest of people.”

As it stands, the cost of power generated by solar energy, for instance, stands at almost double that produced by coal. Zahran argues that focusing on bringing the cost of solar down via legit market competition is the only way that has the potential to reap significant benefits.

“If you have a problem with coal or diesel, the answer to that is not giving incentive to renewables. Actually most incentives make renewable companies stupid,” exclaimed Zahran. “The only incentive should be is that the renewable energy company that gets to cut its cost below that of coal, would be the one to survive and grow in the market.”

“If you believe in sustainability, you should be offering electricity that is cheaper than traditional energy sources. That’s the only thing that works. Why? Because that’s the only thing that people understand,” he further explained.

“We are always trying to touch the good within the people, and that works one time out of a thousand times. But talk to me about my self interest (i.e. cheaper price), and almost 100% of the times I will do what you expect me to do.”

Professor Angus Blair apprehensively agreed with Zahran that self-interest is a main motivation, however he argued that it’s not the only one.

“I think education is another key point,” said Blair. “If we improve that, people can want change because I think by nature, people are good and want to leave a better legacy and a positive impact.”

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