My previous two posts have been about ways that we can apply a cost to the emission of carbon dioxide, through either a carbon tax or an emissions trading system. Both of these work through making existing polluting technologies more and more expensive to run until they force the adoption of cleaner, greener technologies.

Today’s post is looking at what I am calling ‘Green Obligations’. Instead of applying a cost to negative behaviour, we put a premium, or a requirement, on clean behaviour.

In this context, the term ‘Green Obligation’ refers to a minimum level of a product that must be done in some pre-defined green, and sustainable way. The government specifies a steadily increasing target that industry must reach in order to be allowed to continue to operate without being slapped with a hefty penalty. We’ve got examples of this running already in Canada. In Ontario, fuel suppliers were obligated to supply fuel with a minimum content of 5% ethanol by 2007.

A much bigger scheme operating outside this country would be the Renewables Obligation operating in the UK. Under this program, anyone selling electricity must ensure that a minimum amount of the electricity that they sell comes from renewable sources. Currently, this is set at 9.1%, rising to 15.4% by 2016. Suppliers who fail to meet their obligation must make a penalty payment, that is then shared amongst the suppliers in proportion to the amount of renewable electricity that they generated. This incetivizes generators to meet, and even exceed the obligation level.

Related to a minimum obligation is the idea of a feed-in tariff. Under this system, a supplier is guaranteed a minimum level of payment for producing a product with fewer emissions than the traditional method. This minimum level of payment is set at a level above the normal market price of the product in order to encourage its growth, and offset the cost of the more expensive method of production.

The most well known example of this is in Germany. There, electricity suppliers must purchase renewable energy supplied to the grid by anyone in the country at a fixed price. The rate varies from a low of €0.03/kWh for large scale hydro power, to €0.54/kWh for domestic scale solar power. Each year the minimum amount payable reduces in order to incentivise continued improvement. Some of these rates are substantially above the cost of generating electricity from coal, which makes everyone’s electricity bill slightly more expensive, but that is essential in order to develop these emerging technologies. In 2007, renewables in Germany provided 14.2% of the countries electricity, double what it was in 2002, at an additional cost of about €4bn per year (about $75 per person per year). It’s worth pointing out though that approximately 230,000 people were employed in the renewables sector in 2006 in Germany, and it has become a global leader and exporter of renewable technologies.

There are two major benefits of obligations or feed-in tariffs. The first is that it guarantees suppliers that there will be a defined market or level of financial return for their product. The second is that is forces investment into technologies that might otherwise be ignored, bringing the costs down.

The disadvantage is that by choosing specific technologies, we may not be choosing the most cost effective solution to reduce carbon dioxide emissions. The incentive of a feed-in tariff, or the requirement of an obligation on a less effective technology can lead to under-investment in a more effective parallel technology.