This chapter highlights the numerous ways in which economic regulators may contribute to environmental goals by providing an overview of the tools connecting regulators’ functions to environmental outcomes. Each regulatory tool and its potential use to further environmental sustainability and the green transition is described and illustrated through examples and case studies.
The Role of Economic Regulators in the Green Transition
Driving Sustainable Change in Network Sectors
The Governance of Regulators
Abstract
Several functions that economic regulators routinely carry out can have important impacts on environmental outcomes and are therefore potential tools to contribute to environmental goals. The decisions and actions that regulators take when fulfilling their various functions may directly or indirectly impact environmental outcomes, for example through monitoring and enforcing compliance (direct) or shaping investment conditions to incentivise investment in green technologies (indirect).
Generally, regulators achieve their goals by influencing the behaviour of operators, businesses and consumers. To achieve this objective, regulators have similar tools to other government bodies, for example they may be empowered to enforce compliance, set economic incentives, change administrative processes, or provide information. Some of these tools are more applicable to, or more often used in relation to either operators or consumers, and some may be classified as “hard” regulation (e.g. mandatory standards or prohibitions) or “soft” regulation (e.g. communication campaign). Considering the typical functions of economic regulators in network sectors, this chapter focuses on the following tools: price regulation and tariff-setting; the regulation of network infrastructure; influencing consumer behaviour; influencing operator behaviour; collecting, analysing and communicating data; the monitoring and enforcement of standards or sector targets; and more broadly the choice of regulatory approach.
Whilst not all regulators hold the legal powers to consider environmental sustainability in their decision making, more than half of those that do report their powers apply in decisions relating to regulating prices or issuing guidelines and/or codes of conduct. Close to half (45%) of regulators may consider environmental sustainability when issuing or revoking licenses or authorisations. Whilst a third or more (between 33% and 39%) report having the powers to consider environmental sustainability when issuing industry standards, issuing consumer standards, or providing binding guidance or reviewing and/or approving contract terms (Figure 2.1). Around one-third (31%) of regulators apply powers to consider environmental sustainability in sector-specific scenarios (see To what extent are economic regulators utilising these tools today?).
Choice of regulatory approach
Before choosing to implement price regulation, collect data, launch communications, or pursue any of the other regulatory tools discussed above, economic regulators need to identify the overarching approach to be taken and ensure their actions are appropriate for meeting the applicable regulatory objectives. Whilst the rationale and aims of environmental regulation will typically be defined by government and set out in primary legislation, the exact approach taken to achieve regulatory objectives may be left to the discretion of regulators, or defined through secondary processes to which regulators provide input. When providing this input, regulators will need to understand whether traditional prescriptive regulatory approaches are suitable and ask questions about how their roles in regulatory design and delivery can be best managed. For managing the complexity associated with multiple objectives relating to sustainability, networks and consumers, regulators may benefit especially from the use of outcome-based, risk-based, and agile approaches, including experimentation.
For example, outcome-based rather than traditional input-based regulatory approaches may be more appropriate when there is a need to encourage innovation or retain flexibility, due to uncertainty on the part of the regulator or regulated entity. This approach may still involve the setting of targets or standards as part of the outcome framework, but these will naturally be more forward-looking and strategic than the compliance requirements regulated entities typically face. An outcome-based approach allows regulated entities the flexibility to find the most efficient and effective ways to achieve regulatory goals, which may be particularly appropriate in periods of transformation or crisis. The energy market is a clear example where specific outcomes relating to access, affordability and decarbonisation need to be managed and where periods of uncertainty, or volatility, for consumers and operators may merit a more flexible regulatory approach.
Relatedly, an agile regulatory approach may be particularly applicable to the green transition as regulations will need to be adaptable to new technologies, business models and market developments. Agile regulatory governance involves adapting regulatory frameworks and processes to be more flexible, responsive and iterative. Overall, an agile approach aims to promote regulatory effectiveness and efficiency by embracing uncertainty, promoting innovation, and fostering collaboration between regulators and regulated entities.
Regulatory experimentation in the form of rapid prototyping and testing of regulatory interventions fits within this agile approach (OECD, 2024[1]). Regulatory experimentation through regulatory sandboxes, pilot projects and pilot regulations can also be used to harness innovations that will have a beneficial environmental impact (Box 2.1).
The energy sector is changing rapidly. The achievement of global objectives to reduce CO2 emissions requires a massive development of electricity production from renewable energies. The often-intermittent nature of these renewable energies means that the electricity system must be made more flexible, to always ensure the right balance between supply and demand. At the same time, the development of new uses such as electric vehicles or self -consumption requires more intelligent and flexible networks. It is essential that the regulatory framework evolves to support these changes in the energy sector. The law of 8 November 2019 on energy and climate, known as the “Energy-Climate Law”, introduced a “regulatory sandbox” in the French energy sector. This regulatory sandbox allows France’s Energy Regulatory Commission (Commission de régulation de l'énergie, CRE) to grant exemptions to the conditions of access to and use of networks and facilities for the experimental deployment of innovative technologies or services in favour of the energy transition and smart grids and infrastructures. This new system provides a framework adapted to projects that allow testing of innovations that would ultimately require changes to the applicable regulatory and legislative framework.
Source: Information provided by CRE, 2023.
Risk-based approaches can help prioritise regulatory resources and interventions based on the level of risk posed by different activities, industries, or entities. This approach may be particularly helpful where regulators are faced with competing objectives and limited resources – a risk-based approach aims to allocate resources where they will have the greatest impact in manging the relevant defined risks, which may include risks to safety, health, or the environment. Risk assessment, risk management, and prioritisation techniques are useful to decision-making at many levels of an organisation. In the context of designing a regulatory approach, these techniques can help identify proportional measures to mitigate risks and choose between the applicability of, for example, outcome-based and input-based approaches.
Price regulation and tariff-setting
Price regulation describes interventions to set or control prices for goods or services in a market. In the network and utility sectors, tariffs generally refer to the regulated prices that operators charge for services, such as the delivery of electricity, gas, and water, or for accessing infrastructure. Tariffs can take various forms and can be differentiated and targeted at different stages of the value chain. In the energy sector, tariffs may impact the production, transmission, distribution, or consumption of energy. In some cases, tariffs are used to incentivise certain behaviour, recover costs for a specific purpose, or address social issues, such as access and affordability. Often, tariff-setting represents a mechanism through which externalities (such as the costs associated with pollution or carbon emissions) are internalised, and passed through to end-users.
Economic regulators’ role in directly regulating prices (e.g. through price floors and price caps) or setting tariffs has the potential to shape environmental outcomes. Price is an important mechanism for influencing supply and demand factors and can be leveraged to promote certain behaviour on the part of both operators and service consumers. Approximately 85% of economic regulators report a direct role in price regulation and tariff setting (OECD, forthcoming1). Furthermore, results from the green governance survey show approximately 54% of regulators (57 of 106) have the power to consider environmental sustainability in decisions relating to price regulation, though this ability is more prevalent among energy and water regulators.
In the energy sector, the use of dynamic tariff structures could increase the flexibility of energy systems – incentivising demand to respond to periods in which there is a high supply of renewable resources. In the water sector, tariff setting methodologies can also be used to encourage both efficiency and sustainability outcomes, largely by acknowledging the costs associated with meeting environmental outcomes and allowing tariffs to become more cost-reflective. For example, Latvia’s PUC has amended the water tariff methodology to recognise the costs associated with energy efficiency and energy neutrality improvement measures (Box 2.2). Similarly, in Italy, the water sector regulator ARERA has recently approved a new tariff methodology that recognises costs associated with four key environmental sustainability objectives, including energy efficiency and energy recovery, plastic pollution, and water re-use (see Annex A).
Tariff-setting is also a tool that applies in the context of infrastructure regulation. Economic regulators can address infrastructure challenges through tariff setting arrangements in a number of different ways. Italy’s ARERA, in its revised water tariff methodology, has taken a wider view of the value stream to incorporate critical infrastructure and has allowed fixed and variable costs associated with the management and maintenance of large upstream infrastructure to be considered as resource costs. Italy’s transport regulator ART employs tariff modulation to regulate pollution levels across air, road and rail traffic and requires tariff levels to be reduced (i.e., limited cost recovery) where annual sustainability targets have not been met by operators (see Annex A). Other regulators are utilising a hybrid approach that incorporates tariff-setting alongside access rules and other incentive schemes (Box 2.3).
Since 9 November 2022, in Latvia’s water sector, according to the Methodology for Calculating Tariffs for Water Management Services, regulated service providers have the obligation to reduce the costs included in the draft tariff by the unforeseen revenue and the right to increase the costs included in the draft tariff by the unforeseen costs incurred in the previous period. The unforeseen costs and revenue originally consisted of changes in payments if one public water management service provider procured water management services from another public water management service provider, and changes in payments for the purchase of electricity, heating fuel, thermal energy, and gas.
On 28 December 2023, PUC made new amendments to the Methodology by adding the possibility to include in the unforeseen costs the capital costs (depreciation of fixed assets and return on capital) and credit interest payments and repayment of principal sum of the previous period (not longer than two years) related to energy efficiency improvement and energy neutrality promotion measures (Methodology p17). Usually, those measures include installation of solar panels, replacement of electrical equipment with more energy-efficient ones and insulation of buildings. Up till the end of 2023 capital costs and credit payments of such measures could be included only in the next draft tariff according to the residual value (as it is now with all the other capital costs). As a result of these latest amendments, service providers can recover the capital costs of the previous period related to the measures that were implemented with the aim to save energy resources and reduce the operational costs. It is also a kind of incentive not to delay the implementation of energy efficiency improvement and energy neutrality promotion projects.
Source: Information provided by PUC, 2024.
Tariffs also present a source of revenue which, with consideration for budgetary context and best practices, may be utilised for the promotion of green innovation and protection of vulnerable consumers, for example by creating a redistributive fund for use in periods of stress. With the costs of green transition often being passed on to consumers through tariffs, it is valid for regulators to consider distributive impacts and the need for addressing resulting inequalities in access.
In France, biomethane production targets have been met thanks to a favourable framework, which CRE supports and is tasked to implement. To fulfil its potential and play its role in the decarbonisation of the gas sector, biomethane production needs to access the network, access the market, and be profitable. In this regard, the legal and regulatory framework consists of 3 main instruments:
A “right to injection” principle, which eases the access of biomethane production plants to the gas network;
A regulated feed-in tariffs system for small to medium-sized installations, which provides economic viability of the sector.
New schemes for bigger installations that will be soon implemented: tenders and biomethane production certificates.
First, CRE has acted on connection zoning: CRE has already validated 369 zonings and around 468 reinforcement works (over EUR 253 million in investments for distribution and around EUR 90 million for backhauls). In the medium term, over 1 200 projects (1,288 to date) could be carried out based on these validated zones, representing over 27.78 TWh.
Second, biomethane producers have also been benefitting since 2011 from a feed-in tariff. Since the end of 2020, the feed-in tariffs have been limited to small installations (< 25GWh). Production subsidies are guaranteed in France for 15 years, span from EUR 78 to EUR 188/MWh depending on the size of the production facility (maximum production capacity) and on the nature of the waste or organic material used; and have increased a lot during the last months because of the inflation and of the cost of electricity.
Third, for large-scale facilities (25 GWh annual production) which currently cannot receive public support, new tendering was implemented in February 2024.
From 2026, biomethane production certificates (an extra-budgetary mechanism) will also be implemented. Producers who do not receive public support will receive biomethane production certificates (number depending on volumes produced): these certificates will then be sold to gas suppliers with an obligation to purchase a certain volume depending on their level of gas consumption.
Source: Information provided by CRE, September 2024.
Revenue-setting and price controls
If not becoming directly involved in setting prices and tariffs, economic regulators may still incentivise environmentally sustainable decisions and investment by setting the overarching framework governing operators’ allowed revenues. So called price control frameworks can take various forms depending on the attributes of the sector, the ways prices are established in the market, and the objectives the regulator has in mind to achieve through the framework. The main distinction is between rate of return and incentive-based models. Regardless, these frameworks can be adjusted to consider the investments required to operate the network more sustainability, including more significant infrastructure change.
This is a complex and technical area of regulation where stability is also important to allow operators to plan effectively. Economic regulators are considering how the requirements of the green transition can therefore be best implemented within price control frameworks, which are often set for a period of around 5 years, with minimal interim adjustment periods (Box 2.4).
Ofgem is the national independent regulatory authority for gas and electricity markets in Great Britain. Ofgem’s role is to protect consumers now and in the future by working to deliver a greener, fairer energy system. Ofgem operates within a statutory framework set by Parliament, which establishes the authority’s duties and powers. Whilst government is responsible for setting policy for the sector, Ofgem has a clear role to play to support policy issues such as decarbonisation.
Adapting price control frameworks for the green transition
Ofgem is consulting on proposals to change the design of the price control framework that helps regulate the electricity and gas transmission and distribution networks. In the UK, decarbonisation goals will require a major transformation of the energy system, including investing, upgrading and relocating capacity, and reconsidering use of the existing network based on forecast needs.
Whilst price controls will still need to address traditional outcomes for consumers – high levels of service and everyday operation and maintenance delivered at efficient costs – and provide certainty for investors to reduce the cost of capital, they are also a tool that can be adapted to ensure the infrastructure that is needed is built before the demand for it materialises, and in an efficient manner.
In the UK, system planning will need to move away from the “connect and manage” regime that has led to high constraint costs and delayed connections to an “invest and connect” approach following system operator plans, which also meet net-zero targets at least cost to consumers. Alongside changes to network price controls, regulation of network charging, grid connection, and the ways in which planning interacts with energy markets will all need to be adapted. Ofgem’s aim therefore, is to make effective whole system plans the foundation of future price controls in gas and electricity. Furthermore, changing technology, digitalisation, and the increased availability of information makes new and alternative arrangements possible, and more attractive.
Future network price control options
Ofgem has proposed three alternatives for future network price controls.
The current ex ante RIIO (Revenues = Incentives + Innovation + Outputs) framework has several built-in mechanisms to deal with change and uncertainty during the control period, which could be incrementally adjusted to meet future needs. This is included as one archetype in Ofgem’s consultation (“ex ante incentive regulation”). However, this kind of framework remains best suited to deal with low value/high volume expenditure over a given period, rather than reacting dynamically to high value/low volume strategic expenditure. There is also a risk that further adjustments to this framework make it burdensome and complex to configure and manage, leading to misaligned incentives and network companies being distracted from the key task of delivering transformation for the benefit of consumers.
Therefore, Ofgem also propose two further price control archetypes. A “Plan and Deliver” archetype relies on information asymmetries being reduced by the needs being defined by the new strategic planning processes, with economic regulation taking advantage of this to make intelligent use of competitive tendering or other forms of efficient procurement to ensure that customers benefit from low costs. A ‘Freedom and Accountability’ archetype relies on increased ease of monitoring to allow companies bounded freedom in their choices: network companies pass costs through where they can demonstrate ex post that their expenditure forms part of an agreed plan to achieve net zero objectives at low cost. These alternatives may be more relevant because of the changed landscape presented both by institutional changes (Future System Operator), and opportunities from digitalisation.
For more information on how these archetypes may apply to electricity and gas transmission and distribution networks, and the detailed analytical framework, please refer to Ofgem’s consultation document.
Regulation of network infrastructure
Looking across the lifecycle, infrastructure assets could be better designed, delivered, operated, and removed, from a sustainability perspective, considering environmental impact as well as social and economic impacts. As institutions with responsibilities in the governance of network sector infrastructure, economic regulators will need to respond to these heightened risks and new objectives, with many countries considering infrastructure investment as, simultaneously, a way to design-in resilience and a lever to achieve the green transition (e.g., resilient renewable energy sources, nature-based solutions for safeguarding physical infrastructure, green building techniques for reduced resource-use and long-term energy efficiency).
Economic regulators are not the only actors involved in the governance of infrastructure but may interact with the operators of infrastructure throughout the infrastructure’s lifecycle — from the identification of needs, through planning, construction, and maintenance to its eventual decommissioning. There are therefore various moments when regulators may intervene to ensure more environmentally sustainable outcomes. Economic regulators are rarely involved in the detailed decision-making at each stage of the infrastructure project. Rather, regulators seek to influence the decisions taken by operators and investors to achieve efficient and effective outcomes (OECD, 2017[2]). For example, standards accompanied by an appropriate incentive framework of inspections and penalties can ensure proactive asset maintenance, and the proper planning and supervision of infrastructure decommissioning and site restoration. Linking to their role in price regulation, economic regulators may be involved in monitoring the prices and quality of regulated monopoly assets based on an agreed level of service, which may be defined to include or manage outcomes and risks related to environmental sustainability.
Infrastructure planning and lifecycle management
Regulators that have the function to approve infrastructure investment plans could ensure that such plans are coherent and aligned with environmental goals and targets, such as greenhouse gas (GHG) emissions reduction. This could involve requiring comprehensive Environmental Impact Assessments at the infrastructure planning stage that account for a broad range of environmental topics and impacts over the lifetime of the asset’s use. Planning and designing for environmental sustainability can be promoted through the tendering and concession process, or contractual drafting process if there is a clear link between the governing contracts and the management of the infrastructure. This is the case in Brazil’s road and rail transport sectors where concession contracts link to environmental licences and indicators (see Annex A – ANTT). As part of its task of processing calls for tenders for new renewable energy capacity, such as solar PV, the French energy regulator (CRE) has developed a tender evaluation methodology that allocates points based on various criteria (including the project’s price and environmental impact), with a significant portion of points dedicated to the embodied carbon content of the solar panels and equipment used. This approach incentivises developers to select equipment with a lower carbon content and directly impacts the selection of solar panels based on their manufacturing origin due to the differing carbon emissions associated with their production.
Regulators can also promote the re-use of existing physical infrastructure, the co-ordination of civil works and the co-location or sharing of infrastructure to reduce environmental impact (WIK-Consult and Ramboll, 2021[3]) (OECD, 2022[4]).
As noted, economic regulators may be involved too in monitoring the prices and quality of regulated infrastructure assets based on an agreed level of service, during the design, implementation or adjustment of price control frameworks, for example. As such, economic regulators are required to audit the asset base and understand the asset owner’s future capital and operating expenditure and the risks associated with those infrastructure assets. For key infrastructure assets across the water, energy, e-communications, and transport sectors, considering the lifetime of assets and the costs of retrospective maintenance (or “retrofitting”), the most efficient way to mitigate the risks of climate change, which will be felt incrementally and fully materialise in two decades or more, is to account and plan for these impacts in advance, at the time of construction and design of regulatory controls. For this reason, some regulators are already taking action to review price control frameworks, which are typically set for a relatively short-term of around five years, with limited interim adjustments. A challenge that may arise for regulators in this regard is around the justification for greater incentives and the recovery of costs that are required today, the benefits of which will materialise beyond the framework period and be enjoyed by future consumers.
Infrastructure access and use
In some sectors, regulators’ functions in approving access to infrastructure and resources could be used to promote environmental objectives. For example, spectrum management functions held by some e-communications regulators may offer possibilities to promote environmental sustainability objectives, for example by assigning radio spectrum rights to uses that enable reductions in GHG emissions, such as smart grids (WIK-Consult and Ramboll, 2021[3]) (OECD, 2022[5]).
Regulators are in a unique position to provide input, based on their experiences designing, implementing and enforcing regulation, into reviews of the regulatory stock. Regulators can recommend or take responsibility for steps to adapt existing regulatory requirements to ensure flexibility and the removal of burden from the regulatory processes surrounding infrastructure development (Box 2.5). Doing so can promote the acceleration of green infrastructure deployment across sectors. In the energy sector, in many jurisdictions, there is an urgency to accelerate the integration of renewable energy sources and address issues that delay grid connection, such as the need to invest to accelerate grid expansion or the removal of unnecessary burdens and delays from the licensing and operational testing process. Action in this area could amount to a saving of 58 gigatons CO2 emissions. In some countries, such as Germany, the regulator has become more deeply involved in transmission line siting, with responsibilities to approve the overall framework for network expansions, revising and approving the network development plans of transmission system operators. In this case, parliament also assess the environmental impact of transmission projects and may allow early construction to begin, before final planning approval is obtained (RETA, 2024[6]).
Europe's energy shortage is significantly impacting citizens and industries, highlighting the urgent need for efficient, green, and secure energy solutions. One promising alternative is geothermal energy, which Hungary is leveraging to achieve energy security. Recognising the potential of geothermal energy, the Supervisory Authority for Regulatory Affairs set a target for 2022 to streamline its use. This initiative aims to reduce administrative burdens and address project management bottlenecks.
To promote this, a one-stop shop system was introduced on 1 March 2023, centralising responsibilities under the Mining Authority. This system simplified and accelerated the administration of geothermal projects by maintaining a public register of exploration areas. Key measures included standardising procedures for exploration, licensing, and regulatory supervision, and reforming rules to expedite project preparation and implementation.
Additionally, the Supervisory Authority for Regulatory Affairs introduced instruments to boost geothermal energy use. A new complex research program was launched, focusing on data-driven approaches to support market needs and feasibility studies for investors. Under the new regulations, geothermal energy extraction requires a fixed-term contract with the Mining Authority, conditioned upon an agreement for its use and the reinjection of extracted water whenever feasible. Prior to these reforms, the complexity of procedures hindered geothermal project initiation, involving multiple authorities, and complicating the promotion of sustainable green energy.
Source: Information provided by MEHK, 2024.
Influencing consumer behaviour
Regulators can use communications, awareness raising and other behaviourally informed techniques to encourage consumers to adjust their consumption patterns to reduce environmental impact (OECD, 2019[7]). For example, consumers shifting the timing of their energy use (flexibility) will play an important part in the transition to net zero GHG emissions (Ofgem, 2013[8]) (Ofgem, 2021[9]). Regulators can encourage the use of smart appliances or smart heating that help consumers use energy flexibly. Informing and empowering consumers with environmental information (“sunshine regulation”) could also create incentives for operators to move to more sustainable practices. At the same time, informing and empowering consumers can enable them to be better protected against unfair practices, such as greenwashing, a focus of recent legislation within the European Union (Box 2.8).
Approximately 47% of economic regulators report duties relating to issuing consumer standards (OECD, forthcoming2). Furthermore, results from the green governance survey show approximately 33% of regulators (35 of 106) currently have the power to consider environmental sustainability when issuing such standards. Relatedly, 36% of regulators may consider environmental sustainability when providing binding guidance or approving contract terms between regulated actors and consumers or other market actors.
Influencing operator behaviour
Aside from tariff and price regulation, different tools and techniques to influence operators’ behaviour can be envisaged. Regulators could help identify and encourage environmentally friendly practices developed by the industry with relevant authorities (BEREC, 2022[10]). Regulators can develop codes of conduct to steer regulated entities towards more sustainable practices, or design reward tools to incentivise utilities to offer products and services with positive environmental externalities (Box 2.6), such as reducing GHG emissions (WAREG, 2021[11]). In these cases too, the use of sunshine regulation may forewarn operators and provide the incentives and necessary encouragement to adopt more sustainable practices.
Approximately 78% of economic regulators report duties relating to issuing industry standards (OECD, forthcoming2). Results from the green governance survey show approximately 39% of regulators (41 of 106) currently have the power to consider environmental sustainability when issuing such standards. Relatedly, 45% of regulators may consider environmental sustainability when issuing or revoking licenses or authorisations, and 52% when issuing guidelines or codes of conduct.
In Italy, while ecological transition constitutes a key axis of the national Recovery & Resilience and 2030 Energy and Climate plans, no specific duties or mandates are placed on the transport regulator concerning environmental sustainability.
However, some regulatory tools can be deployed to promote more environmentally sustainable behaviour. ART has provided for regulatory incentives to apply in several areas falling within its remit. To be enacted, these measures must be incorporated in contractual agreements between third parties (awarding authorities/regulated companies).
Regulating public service contracts
Concerning the regulation of services, incentives apply in different phases of the administrative procedure leading to the award and in the performance of the contract concerning public transport services. Starting with planning, ART’s regulation on the design of service supply areas, including transport by rail, bus and waterborne transport, provides that “the most sustainable multimodal solution should be preferred.” Additionally, solutions alternative to public financing, such as pollution charges and congestion charges, should be sought to compensate for service contracts. With regard to the tendering phase, for the award of transport services by bus, efficiency KPIs may include environmental standards upon which a pricing/penalty system is applied. In addition, in the case of transport by rail, tariff updates are conditional, among others, upon the efficient use of energy and fuels. Similar provisions are under way in transport by bus.
Note: Please refer to full case study submissions provided in Annex A.
Source: Information provided by ART, 2024.
Data collection and analysis
Regulators’ detailed knowledge and understanding of the sectors they oversee rests on the data and information that they collect. Furthermore, for regulators’ decisions to remain evidence based and to act on emerging trends, or remedy any harmful market practices regulators require a detailed and up-to-date view of the sector. With regards to the environmental sustainability of the sector, survey results indicate that 45% of regulators (82 of 184) hold the legal power to collect relevant data, with only 21% regularly collecting such data.
Early work on environmental sustainability by European e-communications regulators has concentrated on data and measurement issues, in particular to understand the impact that the sector has on environmental sustainability (BEREC, 2022[10]) (Box 2.7). In this regard, many regulators have stressed the potential role that they could play in developing common methodologies to ensure comparable and reliable data (WIK-Consult and Ramboll, 2021). Regulators could also initiate studies into relevant aspects of environmental sustainability to expand the knowledge base – a recent study by Finland’s Traficom implemented a pilot data collection on the energy consumption of networks for the largest telecommunications operators in the country (see Annex A).
Measuring environmental impact to identify levers for action
The French Government tasked the communication regulator, Arcep (Autorité de Régulation des Communications Électroniques, des Postes et de la Distribution de la Presse), and the agency for ecological transition (Agence de la transition écologique, ADEME), to carry out a study quantifying the current and future environmental footprint of digital technologies. The first two volumes of the study were delivered in January 2022 and assessed the current impact of digital technologies on the environment. In the study the two agencies made a life cycle assessment (LCA) of the environmental footprint generated by one year of digital (uses and goods) in France in 2020 applying a multicriteria, multi-tier and multi-stage methodology. A prospective assessment of the evolution of footprints to 2030 and 2050 was also provided, identifying a number of levers for action to initiate and amplify the development of digital uses that are less carbon- and resource-intensive.
Arcep began collecting environmental data from the four main telecoms operators in 2020 (the only players for which it had collection powers at that time), which led to the publication of the first edition of the annual survey in April 2022, covering 3 categories of indicators (GHG emissions, network energy consumption and the sale, collection, recycling and reconditioning of mobile phones). In 2021, the data collection was enriched with new indicators on the reconditioning and recycling of Internet boxes and TV set-top boxes, and led to the publication of the second edition of the annual survey in April 2023, still covering telecoms operators.
Source: Information provided by Arcep, 2024.
As noted in Chapter 1, the prevalence of environmental issues and their interaction with regulators’ traditional areas of activity are creating new challenges. One noticeable example in the realm of consumer protection is the issue of greenwashing (Box 2.8), which has arisen since companies and service providers have become aware of customer concerns around environmental impact and their preferences for ‘green’ or “sustainable” products. Building awareness among businesses and consumers on the regulations against unfair practices is one way to combat this issue. Regulators may also collet and share information relating to the environmental claims of service providers and operators to allow consumers to make more informed choices. In this regard, data collection and sharing is in itself a “soft” mechanism for influencing consumer and operator behaviour, as well as being a process that underpins the regulator’s decision-making in relation to other tools or mechanisms that may be classified as “hard” regulation (e.g. standards and prohibitions).
Greenwashing by Businesses in Australia
Building on its functions established by the Competition and Consumer Act (2010), the ACCC conducts research on consumer-related matters and informs consumers about their rights and obligations under Australian law. Thus, the ACCC plays a critical role in educating businesses and consumers, accepting reports on misleading claims, and conducting research to guide consumers. However, the ACCC does not resolve individual disputes or provide legal advice, focusing instead on broader compliance and enforcement.
In this light in December 2023, the ACCC published its Greenwashing by Businesses in Australia report, providing guidance for businesses who make environmental claims. The report states that businesses must ensure their environmental claims are accurate and substantiated, avoiding broad and unqualified statements. Important information should not be hidden, and any conditions or qualifications should be clearly explained. Claims should use clear language, and visual elements should not mislead. Transparency about sustainability efforts is crucial to maintaining consumer trust.
EU Directive on greenwashing
In January 2021, the European Commission and national consumer authorities released the results of a website screening (“sweep”) to identify breaches of EU consumer law, focusing for the first time on greenwashing. This analysis covered various business sectors such as clothes, cosmetics, and household equipment. The findings revealed that in 42% of cases, environmental claims were exaggerated, false, or deceptive, potentially qualifying as unfair commercial practices under EU rules.
The sweep found that in more than half of the cases, sellers did not provide adequate information. In 37% of cases, claims included vague and general terms like “conscious,” “eco-friendly,” and “sustainable”, giving unsubstantiated impressions of environmental benefit. Additionally, in 59% of cases, traders did not provide easily accessible evidence to support their claims. This lack of transparency highlights the need for stricter regulations, as 86% of EU consumers desire better information on product durability.
In response, the new EU Directive amends the Unfair Commercial Practices Directive (UCPD) to introduce stricter rules on environmental claims; the Directive must be incorporated into national legislation by March 27, 2026, and enforced starting September 27, 2026. The Directive defines misleading environmental claims as any commercial communication implying a product or trader has a positive or less damaging environmental impact without substantiated evidence. The aim is to ensure that environmental claims are accurate and verifiable, promoting consumer trust and genuine sustainability in the market.
Monitoring and enforcement of standards and targets
Economic regulators may have functions to monitor whether regulated entities meet environmental standards, or are compliant with other policies relating to environmental sustainability, which will be underpinned by a regulators ability to collect and analyse data as note above. Colombia’s transport regulator (Aerocivil) verifies compliance amongst aeronautical officials, airline companies, workshops, training centers and users of the air transport sector in general with requirements originating in legislation. Costa Rica’s energy regulator, ARESEP, has a duty to verify providers’ compliance with environmental protection obligations and sanction in the case of non-compliance.
In the water sector, regulatory authorities can be tasked with monitoring whether water utilities meet standards for storm discharge flows, which have been put in place to protect the environment and public health. In fact, many standards used in the water sector are closely related to issues of environmental sustainability, typically being concerned with sustainable use, pollution, and outcomes for human health (for example, see the macro-indicators set by ARERA – Annex A). In Brazil’s transport sector, new highway concession contracts are aligned with the 17 Sustainable Development Goals and the Paris Agreement and ANTT closely monitors environmental performance (Box 2.9). Similarly, in Italy, the ART may include environmental standards in tenders and service contracts. In some jurisdictions, reflections are ongoing whether the goal of achieving climate neutrality could be monitored by sectoral regulatory authorities (European Commission, 2022[12]).
Other regulators monitor compliance with policies relating to environmental sustainability and may have enforcement powers to sanction non-compliance.
ANTT has a data management approach to measure sustainability, which incorporates an indicator called IDA, which evaluates various aspects of environmental performance.
ANTT’s actions include granting concessions for highways and railways, providing permits and licenses for interstate and international transportation, and registering road freight transportation companies. Before granting concessions, ANTT requires a social environmental study to assess environmental risks and, even after obtaining the concession, highway concessionaires must provide documentation showing they are taking actions to obtain necessary environmental licensing. New contracts are aligned with the 17 Sustainable Development Objectives and the Paris Agreement.
To influence the behaviour of operators, Brazil’s National Agency of Land Transportation (Agência Nacional de Transportes Terrestres, ANTT) uses an indicator of environmental performance (Índice de Desempenho Ambiental – IDA) that considers water and effluent use and treatment, solid waste, biodiversity, environmental accidents, governance, culture and community, energy efficiency and emissions. The indicator is currently used for highways and railway concessions and there are plans to develop an indicator similar to IDA for the road freight transportation. Highway concessionaires are required to report on their social and educational actions, and ANTT monitors their progress in obtaining environmental licenses and taking specific actions to decrease environmental impact. The agency monitors concessionaires’ environmental progress through biannual reports and monthly meetings with environmental entities. ANTT also requires highway concessionaires to report on their social and educational contributions, which are then made public on the regulator’s website. Railway concessionaires also voluntarily report on good environmental practices. All of these activities involve collecting and managing sustainability-related data.
The implementation of the IDA by ANTT is part of the Social Environmental and Territorial Agenda of the Ministry of Transport and aims to verify the qualitative evolution and socio-environmental commitment of the sector and shall serve as a parameter to evaluate the efficiency and quality of environmental management in transport infrastructure projects, evaluating and stimulating good practices in socio-environmental management. The adhesion to the indicator is voluntary. Nevertheless, in 2022, 18 of the total 22 highway concessionaires and 11 of the 16 railway concessionaires and sub-concessionaires agreed to be evaluated.
Source: Information provided by ANTT, 2023.
Regulators’ actions around data, monitoring and enforcement have already led, naturally, to the development of environmental sustainability indicators (BEREC, 2023[13]). Such indicators could be considered as a common tool in all sectors to build momentum and a common understanding of progress. However, indicator development and use rests first on the availability and accessibility of data. In its first sustainability report, BEREC noted the significant challenges, particularly the scarcity of data and the need for unified methodologies and standards to evaluate the environmental effects of digital technologies (BEREC, 2022[10]). BEREC’s most recent report considers sustainability indicators in more detail and summarises the activity of e-communications regulators (Box 2.10).
In June 2022, BEREC released its initial sustainability report (BEREC, 2022[10]). This report revealed that some regulatory authorities have actively gathered data on the environmental impact of digital services. Nonetheless, the report also identified significant challenges, particularly the scarcity of data and the need for unified methodologies and standards to evaluate the environmental effects of digital technologies.
BEREC’s second report on sustainability (BEREC, 2023[13]) focuses on sustainability indicators for electronic communications networks and services, collating information on current regulatory and non-regulatory initiatives at the European level, considering new data on the actions of regulatory authorities, and the results from stakeholder workshops and industry player questionnaires which indicate support for the development of different indicators.
BEREC takes the first experiences of NRAs on environmental data collection and the contributions of the industrial players and classifies indicators into three preliminary categories:
Indicators already collected by NRAs and are presented by the surveyed companies as relevant (high or medium), such as energy consumption, carbon emissions, water consumption or e-waste. These indicators are characterised by a higher degree of maturity as they are already collected and relevant methodologies and studies have been published, even if challenges remain, for instance in calculating Scope 3 emissions.
Indicators not yet collected by NRAs but which benefit from a medium support from the industry.
Indicators with low support and adoption from the industry. Although, some of these indicators could still be considered relevant for further research in the context of the EU’s environmental targets.
Source: (BEREC, 2023[13]).
As demonstrated through the examples and case studies shared above, regulators with the powers to consider environmental sustainability in their decision making are already employing these tools. The qualitative examples illustrate regulators are active in utilising all of the tools discussed, and this is supported by the results of the green governance survey. However, it is important to note that not all regulators hold these powers – around 58% of regulators report they hold the legal power to consider environmental sustainability in regulatory decision making, but 42% lack these powers.
More than half of regulators with the legal powers to consider environmental sustainability report these powers apply in their decisions relating to regulating prices or issuing guidelines and/or codes of conduct. Fifty-four per cent of regulators with the legal powers to consider environmental sustainability state those powers apply when making decisions to regulate prices, and for 52% when issuing guidelines and/or codes of conduct. Close to half (45%) of regulators may consider environmental sustainability when issuing or revoking licenses or authorisations. Between 33% and 39% report having the powers to consider environmental sustainability when issuing industry standards, issuing consumer standards, or providing binding guidance or reviewing and/or approving contract terms (Figure 2.1). Around one-third (31%) of regulators apply powers to consider environmental sustainability in sector-specific scenarios.
By decision area
Note: Only regulators who responded they have the legal power to consider environmental sustainability in their decisions are included in this analysis – the relevant sample consists of 106 regulatory authorities.
Whilst most regulators (86%) specified holding powers to consider environmental sustainability in relation to at least one of the defined decision-making situations, some regulators specified only “other” situations, which were mostly related to sector-specific decisions. For example, the energy regulator of Great Britain (Ofgem) considers environmental sustainability in decisions relating to electricity network charging and incentives. In Portugal, the e-communications regulator (ANACOM) considers the environmental sustainability impact of infrastructure planning and access and sharing rules, whilst the air transport regulator (ANAC) noted its role in implementing carbon taxation rather than direct price regulation in the sector. Only 13 regulators (12%) reported that their legal powers applied to all types of decisions (Figure 2.1). On average, regulators consider environmental sustainability in three of the six defined decision areas, and this is consistent across sectors.
The extent to which regulators can use these functions to attain environmental goals will depend on governance arrangements. For example, lacking or unclear legal mandates for many regulators to intervene regarding environmental sustainability may limit potential action beyond information gathering and knowledge building, though even information gathering can be shaped by regulator’s legal powers and perceived remit. Furthermore, economic regulators would not be able to promote environmental goals using the tools mentioned above if doing so would compromise the attainment of their primary objectives as defined in legislation (WIK-Consult and Ramboll, 2021[3]). These considerations relating to regulators’ mandates, legal powers and the management of trade-offs, alongside other important governance arrangements, are the central topic of the following Chapter 3.
References
[13] BEREC (2023), BEREC Report on Sustainability: Indicators for electronic communications networks and services, https://www.berec.europa.eu/system/files/2023-10/BoR%20%2823%29%20166%20Final%20Report%20on%20sustainability%20indicators%20for%20ECN%20ECS.pdf (accessed on 2024).
[10] BEREC (2022), “BEREC Report on Sustainability: Assessing BEREC’s contribution to limiting the impact of the digital sector on the environment”, BEREC BoR (22) 93, https://www.berec.europa.eu/system/files/2022-07/10282-berec-report-on-sustainability-assessing_0_3.pdf (accessed on 2024).
[12] European Commission (2022), Study on Green Cloud Computing and Electronic Communications Services and Networks: Towards Climate Neutrality by 2050, https://digital-strategy.ec.europa.eu/en/library/study-greening-cloud-computing-and-electronic-communications-services-and-networks-towards-climate (accessed on 2024).
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[11] WAREG (2021), Better Regulation for a Greener Europe: 2nd European Forum on the Regulation of Water Services, https://www.wareg.org/documents/efrws-2021-agenda/ (accessed on 2024).
[3] WIK-Consult and Ramboll (2021), Environmental impact of electronic communications: Final Study Report for BEREC, https://www.berec.europa.eu/sites/default/files/files/document_register_store/2022/3/BoR%20.
← 1. A separate OECD publication on the Governance of Sector Regulator indicators and related data is forthcoming, expected to be available in Q4, 2024.
← 2. A separate OECD publication on updated Governance of Sector Regulator indicators and related data is forthcoming, expected to be available in Q4, 2024.