Voluntary agreements with manufacturers

Through voluntary agreements, manufacturers commit themselves to increasing the energy efficiency of their product groups.
These agreements provide a long-term signal to participants, assuring greater continuity, specification, flexibility, and capturing a shared perception of solutions (IEA 1997).

Worldwide implementation status
Voluntary Agreements were implemented in many countries worldwide but only a few states have solid experience with this policy instrument.
The state of development and its role and priority within national policy strategies varies from country to country (IEA 1997).
The first voluntary actions were developed in the late 1970’s after the first oil crises. The primary concern was energy security and the energy efficiency of household appliances was not the focus of these agreements.
In the 1980’s one of the first voluntary agreements was the German government that entered into an arrangement with appliance manufacturers to improve the efficiency of refrigerators, dishwashers, washing machines, electric ovens and water heaters. The agreement was made between the federal ministry of economics and an association representing domestic appliance manufacturers in Germany.
Since the beginning of the 1990’s, under the growing pressure to reduce GHG emissions, voluntary agreements have seen a revival, for example in European countries.

Governance level
The policy can be implemented on national and trans-national level.

Related sectors

• residential
• services
• industrial

• Refrigerators and freezers
• Clothes Washers
• Clothes Dryers
• Kitchen stoves and ovens 
• Coffee machine
• Microwave
• Dishwasher
• Home Audio 
• Television
• Monitors
• Computer
• Office equipment (Copiers, Fax machines, Printer, Server etc.)
• Data centres
• Commercial Food Cooling Equipment
• Commercial Laundry equipment
• External power supplies

VAs are conceivable in every appliance category. However, it must be possible to define standardised units of systems with a standard test procedure for energy consumption or efficiency.

Related target groups

• Manufacturer: Manufacturers and importers are the primary target group for VAs on appliance energy efficiency improvement
• Trade association: While trade associations should not be the only partners on the industry side, they can support individual companies in living up to their commitments under a VA. In particular, associations may organise a monitoring of compliance, using an independent auditor to process confidential data from each manufacturer.

Direct beneficiaries

• Manufacturer

  Manufacturers may realise higher revenues and profits from selling more energy-efficient appliances, which can often be sold at higher prices. They can present themselves as caring for the environment and the consumer. In addition, manufacturers are directly involved in policymaking when entering a VA. Manufacturers also benefit indirectly: They can improve their competitiveness. As soon as further countries apply regulations or agreements, those manufacturers that have formally been subject to a regulation in other countries are highly competitive.

• Investor

  Investor-users are direct beneficiaries as highly efficient appliances penetrate the market gradually. They can save energy costs.

• User

  They save directly on their energy expenditure.

Indirect beneficiaries

• Governmental actor

  There is a minimal fiscal and political impact and voluntary agreements may achieve objectives faster than regulations.

Relevant barriers

• Knowledge and information barriers: As VAs can remove the least efficient appliances from the market or increase the average energy efficiency of appliances, they support purchasers in buying more energy-efficient alternatives without having to inform themselves a lot.
• Economic and financial barriers: If compliance can be ensured, VAs will achieve a minimum level of energy efficiency and reduce market complexity and transaction costs.
• The investor-user barrier: The investors may not be the ones who have the financial benefit. Therefore there is little incentive for investors who do not directly benefit (e.g. through cost savings). Standards facilitated by VAs safeguard a minimum efficiency level of energy-using products for all products on the market.

Relevant incentives

• Saved energy costs: After a period of time, the upfront costs, which are normally higher for energy-efficient products compared to their less-efficient counterparts, are amortised due to lower running costs. The VA can influence the consumer choice in order to enhance the market penetration and to replace old inefficient appliances.
• Improved reputation: An environmentally-friendly image has been considered very important for companies as they try to gain public support for what they are doing. VAs can provide a “green image” to participating firms.
• Directly increasing earnings or profits for actors on the supply side: An improvement in energy efficiency of appliances may need higher development and production costs, but also higher sales prices, which may improve earnings and or profits. The ability to offer very energy-efficient appliances at reasonable prices may also improve competitiveness, which can mean a gain in market share.
• Contribution to protection of the environment: This is a motivation for any actor and especially for governments as they have often set defined energy savings targets. Saying this, governments should promote voluntary agreements where MEPS are not considered a true alternative.

Voluntary agreements are seldom used in isolation but are combined with other policies and measures such as energy labels, training programmes, education campaigns, taxation, RDD efforts, financial incentives and fiscal instruments, and the threat of regulations to replace a VA that does not work as expected. The role and function of each needs to be carefully defined in order to avoid conflicts and contrary effects with other policy objectives (IEA 1997). Therefore attention should be given to the design of every policy so that they are reinforcing.
In order to implement voluntary agreements most effectively, governments can encourage the achievements through information, technical assistance, training and information programmes and taxation.
In addition, negotiated goals set via VAs should ideally be complemented with mandatory and voluntary energy labelling schemes or other informational or motivational instruments targeting consumer knowledge and attitude towards energy efficiency and finally motivating purchase of more energy-efficient appliances. These instruments are still needed to promote the most energy-efficient appliances and increase their market share.
Such a package could be sustained by a procurement policy that demands governmental authorities to purchasing energy efficient equipment only.
Moreover, an energy efficiency award scheme can be a motivational factor for manufacturers to reach for more ambitious goals than stipulated in the VA.

The following pre-conditions are necessary to implement Voluntary Agreements with manufacturers:
Agencies or other actors responsible for implementation
Governmental and industrial stakeholders can come together in a steering committee. The complete VA design and implementation process should be accompanied by governmental supervision. This concerns monitoring compliance and, if necessary, imposing sanctions in particular.

Funding
Some financing might be necessary to write a preparatory study and to work out the final arrangement between the various stakeholders. Moreover, if considered beneficial for the stakeholders, funding can be used to maintain a steering committee, a secretariat and/or some kind of minimum infrastructure administering the work and functioning as an addressee for the government. Funding also needs to be provided for the agency and cost of supervision by government. If the agreement is successful and experiences strong compliance, these costs will not be covered by sanctions, but will need to come from the government budget. However, they are likely to be quite small.

Test procedures
A test procedure is necessary to calculate the standard energy consumption and to define energy efficiency classes. This is one reason why VAs are best combined with an energy labelling scheme that has already been established or is created alongside the VA.
For the industrial side, testing is necessary to reach common agreements between the various industrial stakeholders.

The process starts with the selection of relevant stakeholders that may voice their opinion with regard to all future proceedings. If the VA is going to embrace all actors, representatives of NGOs and research facilities need to be included apart from industrial and governmental stakeholders. A steering committee can administer and co-ordinate future work. The challenge for government is to encourage industry to identify cost-effective solutions for energy efficiency improvements.
A (preparatory) study to analyse the technical potentials and country specific circumstances (stock, sales, consumer behaviour and specific standard and real-life energy consumption) will be a sound and transparent fundament. The target of the VA needs to become clear. Once the baselines, requirements, objectives and responsibilities have been agreed, results can be achieved relatively quickly. One study expected overall economic efficiency to be higher compared to traditional regulation (IEA 1997).
Furthermore, a monitoring and evaluation system by independent third parties must be introduced with a concrete time frame. In addition it needs to be stated what kind of sanctions non-compliers face. Penalties can depend on the degree of non-compliance. However, the more rigorous the sanctions, the less likely an all-stakeholder embracing VA is (EC 2010).
Advantages as well as the disadvantages relative to MEPS (see discussion in the summary section) should be considered and addressed. The success will often be influenced by various factors including the socio-economic situation, technological progress, market developments and changing regulatory context.

Quantified target
The policy can and should have quantified targets. Targets can be formulated for the energy efficiency improvement of the sales-weighted average energy efficiency, the phase-out of appliances less energy-efficient than an agreed threshold, the energy savings per year and the impact on innovations (development of the market). Another target is the number of signatories and their participation during the implementation of the VA.
Results should be facilitated to national authorities, e.g. energy agencies.

International co-operations
Governments may learn from each other on the process of negotiating and implementing a VA. They may even try to enhance the effectiveness of a VA by setting the same energy efficiency targets for a type of appliance in a number of countries. This will increase the market and improve certainty for multinational manufacturers. The bigger market for energy-efficient appliances will mean higher production volumes and likely decrease costs via economies of scale.
Appliance manufacturers are often active in more than one country. Thus, the introduction of VAs in other parts of the world may have positive effects for those manufacturers because they can benefit from increased sales of energy-efficient products.

Monitoring
Monitoring is crucial for any energy efficiency policy to determine the success or failure of the programme. It is of particularly great importance and should therefore be a priority in the design and implementation of voluntary agreements. Monitoring not only has a controlling function but it is also a motivation for making progress, especially when results are discussed among the participating companies and the government.
Periodic reviews enable the early identification of problems, inefficiencies and changing conditions, and identify potential differences with the objectives and targets of the agreed action. Monitoring efforts need to be geared to daily operations; otherwise it will be too complicated, or impractical. Monitoring requirements can be a burden to voluntary action participants, but this burden should generally be preferable to more onerous requirements exacted through formal regulation (IEA 1997).
If a large number of products, which are not compliant with the VA, remain on the market, this will undermine the effectiveness of the instrument both directly (because of higher than targeted energy demand from the non-compliant products) and indirectly, because manufacturers will not trust the VA and try to circumvent them as well (IEA 2010).
Energy agencies or independent research institutions can carry out the monitoring of impacts. It is essential to calculate energy but also cost savings and to determine barriers and incentives for future policies.

Evaluation
Evaluation of voluntary agreements is a key element of the policy implementation. An independent body should assess the overall results and achievements in order to determine compliance and analyse the improvements needed (EC 2010) Key evaluation information sources are the changes in product range of suppliers, number, variety and (additional) costs of energy saving measures and the development of the market. The counterfactual i.e., the hypothetical market share and average energy consumption level of inefficient appliances that would have remained on the market without the VAs, should also be estimated. Energy agencies or research institutes can carry out parts of this evaluation. The evaluation process should be stipulated in the VA.

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: In principle, minimum standards or those on the average energy efficiency of appliances sold that are facilitated through VAs will stimulate innovation towards improved energy efficiency. Especially, government authorities should demand regular updates in order to tighten standards. To be effective, performance standards must be open-ended i.e. regularly revised and upgraded. There is no or little incentive for manufacturers to go beyond this where no stricter standards have been planned for the future (or that incentive must be created by other instruments).
• Avoiding lost opportunities: By removing least-energy-efficient appliances from the market, VAs avoid that consumers buy energy-wasting appliances (which would be a lost opportunity for saving energy). Mandatory or voluntary labelling schemes may contribute to avoiding lost opportunities as investors – having comprehensive product information – may opt for more energy-efficient alternatives.
• Minimising rebound effects: The VA aims at increasing the sale and purchase of energy-efficient appliances. Consumers may use the appliance more often as they think it is energy-efficient, which would be a rebound effect. For minimising such rebound effects, it is vital to accompany the VA with awareness raising campaigns on the issue of energy efficiency in the use of appliances but also on the appropriate size of an appliance.
• Minimising snap-back effects: To minimise snap-back effects, the VAs should be open-ended and the set standards should be regularly updated.
• Minimising free-rider effects: In terms of energy savings, free-rider effects depend on the ambition of the energy efficiency improvement targets and schedule agreed in the VA: if the target is an improvement in average energy efficiency of appliances sold in a market that is close to the baseline trend, there will be high free-rider effects. If the target is ambitious for the average improvement or the phase-out of inefficient appliances, free-rider effects will be small. As for the VA itself, there is the risk of free-riders which undermine the overall effectiveness of voluntary agreements, if not all manufacturers or affected parties within a sector are participating from the very beginning (IEA 1997). There is a risk of free-riding if manufacturers do not produce and sell their innovative products but wait for financial incentives or other support.
• Creating Spill-over effects: The knowledge generated through the development and marketing of energy efficient appliances is likely to be used for other product groups.

Design for sustainability aspects
Other sustainability aspects, such as water efficiency, and environmental impacts can (and should) be a part of the regulation e.g. health aspects or other resources (e.g. refrigerants in cooling, mercury in lighting). That is why a preparatory study with a life cycle analysis is essential to cover all relevant aspects and to enlarge the focus (not only energy efficiency).

• Delays in development of calculation method.
• Lack of compliance and/or resources for ensuring it.
• Weak standards due to political processes and lobbying.
• Manufacturers may feel justified in not participating because targets are too low, too high or are inappropriate
• Scepticism expressed by regulatory authorities, environmental NGOs and the public is possible
• • It can be quite time-consuming to negotiate the agreement, as well as costly and bureaucratic

The following measures can be undertaken to overcome the barriers
Voluntary agreements should focus on a consensus building approach with the support of all participants. These agreements should promote the continuous dialogue between the industry and the government.
A comprehensive time schedule and sufficient funding are essential to implement this kind of policy. Adequate energy efficiency standards that are high but feasible are likely to overcome scepticism.

Depending on product specific requirements (are they ambitious?) high or low energy savings can be realised. VA standards can just follow the market trend i.e. they exclude products from the market that had fallen to a very small market share anyway. They may also set an improvement of the average energy efficiency as the target that is little or no more ambitious than the market trend. Such VAs will save almost no energy in addition to the trend. Or VA standards can achieve almost 100 % of the potential by making the highest available energy efficiency levels the standard. VAs have, therefore, an impact greatly depending on the efficiency level agreed. Dynamic requirements, moving to lower levels of standard energy consumption over time at regular intervals, are essential to realise long-term targets in accordance with market development.
According to IEA (1997) past experiences with voluntary agreements confirm that voluntary actions can achieve significant energy reductions, sometimes even exceeding those of MEPS. Furthermore these agreements can help to integrate other goals like economic and environmental goals.
For example the expected result of the code of conduct organised by the European Commission to minimise the energy consumption of external power suppliers were savings of a maximum of 5 TWh per year from 2010 (EC 2004). Another example is the VA between the European Commission and the manufacturers of complex set-top boxes. The VA is estimated to reduce the energy consumption of this product group significantly (accumulated savings of 44 TWh between 2010 and 2020 have been calculated).

Voluntary agreements are often keen interest to the government and the manufacturers because under the right circumstances, they can result in energy efficient appliances at lower (administrative and implementation) costs than regulatory or economic instruments (IEA 1997).
However, new regulations can often take several years to develop i.e. the transaction costs can be generally high. VAs may also take some considerable time to be negotiated.
The costs for the government largely depend on the VA as such. If the preparatory study as well as the compliance regime remain in the hands of the industrial stakeholders, costs are close to zero. However, if government authorities want to keep some leverage over manufacturers (e.g. through penalties for non-compliers), it is necessary to use funds for surveillance purposes.

If energy efficiency standards facilitated through VAs are based on a life-cycle cost (LCC) calculation and then set at levels of the least LCC, this will lead to a net benefit.
Two examples from Europe are the code of conduct to reduce the energy consumption of external power suppliers and the VA for complex set top boxes. For the external power supplies total savings of 500 million Euro per year were calculated. For the VA for complex set top boxes, accumulated savings of 6 billion Euro between 2010 and 2020 have been estimated.