Tackling climate change, addressing other environmental threats, and achieving the green transition all require the profound transformation of network sectors such as water, energy, e-communications, and transport. As leading public bodies in the governance of network sectors, economic regulators can significantly affect environmental outcomes. This publication discusses the role of economic regulators and the tools they can use to contribute to environmental sustainability and the green transition in the sectors they oversee. Survey data and information gathered in collaboration with the OECD Network of Economic Regulators is used to analyse the use of such tools and regulator’s governance arrangements, highlighting a number of common challenges and opportunities. The publication includes data relating to regulators’ objectives, powers and functions, mechanisms for co-ordination, use of regulatory management tools, and levels of capacity and resources, and integrates OECD guidance related to these topics. As such, this publication will prove valuable to economic regulators, governments and legislators with relevant responsibilities.
The Role of Economic Regulators in the Green Transition
Abstract
Executive Summary
Regulation in water, energy, e-communications, and transport sectors may be one of government’s most effective tools for driving the “green transition”.
As leading public bodies in the governance of utility sectors, the activities of economic regulators can significantly affect environmental outcomes. Economic regulators may thus represent an under-utilised resource for achieving environmental sustainability. The urgent need for a green transition raises questions around current regulatory approaches and the role of sector regulators. Whilst these questions are not new, political attention is bringing them to the fore.
For economic regulators, regardless of the frameworks set by government, the green transition brings a set of common organisational, political, social, and technical challenges, which present institutional and operational risks. Regulators face the challenge of simultaneously managing disruption in the short term and anticipating and adapting to emerging risks in the longer term, even if their remit only relates to core economic regulation.
The evidence presented in this report shows economic regulators can make a positive contribution to the green transition in network sectors. However, their potential contribution to environmental goals depends on several considerations around internal governance, the arrangements and tools the regulator itself chooses to implement, as well as external governance, the arrangements put in place or tools mandated by government or the legislature.
There is large variation in the degree and scope of regulators’ contributions to the green transition and environmental sustainability. This variation is driven by differing institutional frameworks, which determine regulators’ objectives and functions, as well as their powers to consider environmental sustainability in decision making and execution of regulatory functions (Chapter 1; Chapter 2). These overarching arrangements shape the internal governance of regulators and choices made around tools, processes, capacity, and resourcing (Chapter 3).
There is currently no standard approach to the role of economic regulators in environmental sustainability:
While close to half of regulators report having objectives relating to environmental sustainability set in legislation, one-third of regulators surveyed do not. An additional share are required to adhere to overarching environmental objectives for public institutions.
Many regulators report that objectives can be vaguely defined and the regulator’s own interpretation and concern for acting beyond remit may limit potential action beyond information gathering and knowledge building, based on publicly available or voluntarily provided data.
Regardless of whether regulators have defined objectives, a significant proportion (42%) lack the legal power to consider environmental sustainability in decision making. Moreover, 10% lack the relevant legal powers, despite having objectives defined. These findings suggest a mismatch between mandates and relevant legal powers for some regulators.
Additionally, more than one-quarter of regulators who have been set environmental objectives lack data collection powers. For those who have the relevant powers, the nature of data collection varies significantly: close to one-third do not systematically collect data on the environmental sustainability of the sector despite having the power to do so.
Rail transport and e-communications regulators more often display a lack of defined objectives, powers to consider environmental sustainability in decision making, and powers to collect relevant data from the sectors they oversee, relative to regulators in other network sectors.
For those regulators that have the power to consider environmental sustainability, these powers tend to apply to specific issues and decisions, rather than across the full array of environmental challenges and regulatory decision-making:
Most regulators report that their ability to consider environmental sustainability only applies to specific areas. More regulators report that their powers apply to issues of greenhouse gas reduction, decarbonisation and water and air pollution, with fewer focused on resource management, waste management, circular economy, or biodiversity.
More than half of regulators with the legal powers to consider environmental sustainability report that they apply these powers in regulating prices or issuing guidelines and/or codes of conduct. Fewer regulators consider environmental sustainability in decisions relating to industry or consumer standards, or when issuing licenses and authorisations.
A broadened remit will require regulators to balance multiple objectives and may increase the complexity of their tasks, including the management of potential trade-offs:
Amongst economic regulators with the powers to consider environmental sustainability, close to half have encountered or anticipate trade-offs between “green” objectives and other policy objectives. Improving cost effectiveness is most frequently identified as conflicting with environmental goals, followed by promoting competition and promoting consumer welfare or social inclusion.
Regulators may face demands to consider a range of issues related to environmental sustainability, presenting even more complex decisions on trade-offs.
Co-ordination between economic regulators and other public institutions becomes vital in the context of a broadened mandate encompassing economic, social, and environmental objectives, given the complex interactions among these areas:
Less than half of regulators surveyed have formalised co-ordination mechanisms in place with other public authorities for issues related to environmental sustainability. However, co-ordination is more frequent for those regulators tasked with achieving or contributing to environmental objectives.
Overarching targets and objectives can help guide action across government and within sectors, though these measures alone are not sufficient. Around one third of regulators report that the sectors they oversee have quantitative targets relating to environmental sustainability that the regulator considers in decision making. For most regulators, however, decision-making is not affected since no quantitative targets have been set for the sector they oversee.
Regulators could take advantage of regulatory management tools and processes to support broadened remits. At the same time, regulators may need to reassess engagement processes and build sufficient capacity and capability:
Less than one-quarter of regulators are required to assess the impact of the regulatory framework or regulatory decisions on environmental outcomes.
For most regulators, environmental civil society organisations (CSOs) do not receive a specific request to participate but are nevertheless able to respond as part of an open call for comments. However, there are cases where environmental CSOs have no avenue for participating in the regulatory decision-making process.
More than one-third of regulators have built internal capacity in environmental sustainability expertise or plan to build capacity in the near future. Whilst some regulators make use of external expertise, a sizeable share of regulators are not building capacity in this area at all.
