Well before the Third Conference of the Parties to the United Nations Framework Convention on Climate Change (UN FCCC) in Kyoto, Japan, in December 1997, concern over climate change had begun to shape renewable energy markets. During the 1970s and 1980s, energy security, air pollution, acid rain, and nuclear fears were the dominant catalysts for renewable energy development; during the 1990s, the need to reduce emissions of greenhouse gases has become an increasingly important impetus. With oil prices at their lowest levels in decades, climate change has become a key policy driver for renewable energy.

The connections between climate policies and renewable energy markets are best seen in Europe. With strong public backing, parliaments in several European countries responded -- even before the signing of the climate treaty in Rio de Janeiro in 1992 -- with a host of important new policy initiatives. In Germany, a generous "electricity feed law" passed in 1991 allowed renewable electricity generators to receive 17 pfennigs (10ó) for each kilowatt-hour generated. A similar law was passed in Denmark, bolstered by strong and consistent tax incentives. In Spain, an electricity feed law and other new incentives were introduced in the mid-1990s.²

In response to these policy changes, Germany's wind power installations went from less than 100 megawatts in 1990 to nearly 2,100 megawatts in 1997, making it the world's leading wind power user.³ Wind installations in Denmark grew from 400 megawatts in 1990 to 1,100 megawatts in 1997, providing 7% of the nation's electricity and making wind turbines its second largest export.⁴ Spain tripled its wind power capacity in 1996-97.⁵ Biomass energy development has also benefited from the new pro-renewable energy policies in Europe, particularly in the form of electric power and district heat systems fueled by agricultural and forestry wastes.

The Japanese government, driven by a push for dominance of the solar industry as well as by concern about climate change, quickly built up its solar photovoltaic (PV) market in the 1990s. The government's focus is on its solar home program, which includes a strong net-metering law as well as a generous government subsidy (although that is now being gradually reduced). PV systems were installed on 9,400 homes in 1997, and the program's goal is 70,000 homes by 2000.⁶

In the United States, Canada, and Australia, governments have been less responsive to climate change issues, and have done less to open new renewable energy business opportunities in the 1990s. Modest policies such as the U.S. renewable electricity generation tax incentive of 1992 have been negated by the early stages of electric industry restructuring and the associated financial confusion and defensive postures adopted by many utility companies. The U.S. domestic market now represents less than 10% of the global market in solar power and less than 5% of the worldwide wind energy market, though it does hold almost a third of the world's installed geothermal electricity capacity.⁷

In developing countries such as China and India, renewable energy markets have also begun to stir, though they are motivated more by a search for economical alternatives to fossil fuels than by a desire to reduce pollution. These efforts have been assisted, however, by climate-motivated international financing mechanisms such as the Global Environment Facility (GEF), which is providing limited but essential funds for innovative renewable energy projects in developing countries.

These developments have made wind power the world's fastest-growing energy source -- expanding at an annual rate of 25.7% between 1990 and 1997.⁸ (See Table 1.) The vast majority of that growth has occurred in Europe. Solar power, meanwhile, has grown at 16.8% a year this decade.⁹ This explosive, environmentally motivated growth in the wind and solar industries has not been replicated in biomass and geothermal energy -- at least so far. Biomass heating and electricity generation are growing rapidly in several Nordic countries, but they have stagnated elsewhere. Geothermal energy growth since the 1973 oil shock has been impressive, growing from 1000 MWp in 1973 to 8000 MWp in 1997. However, growth did slow in the early 1990s, as the least-expensive, most easily exploited geothermal resources are found in countries that have not yet taken climate change seriously, although there are significant exceptions.¹⁰

Renewable energy markets have begun to attract the interest of large energy companies in the last couple of years, at least some of it motivated by growing awareness of the climate issue. Enron Corp -- which in 1996 acquired the leading U.S. wind power company, Zond -- announced in 1997 its purchase of the German company Tacke, a wind turbine manufacturer.¹¹ The Japanese trading corporation Tomen, meanwhile, unveiled plans to invest $1.2 billion in wind projects.¹² Also in 1997, British Petroleum announced its intention to increase sales of solar products tenfold over the next decade, while Royal Dutch Shell made a $500-million, five-year commitment to renewables.¹³ These recent announcements virtually guarantee that the next few years will be a dynamic period for international renewable energy markets. But the rate of growth is likely to be affected by a number of uncertainties, including the pace of implementation of the Kyoto Protocol. And numerous important issues regarding key components of the protocol remain to be resolved, some of which will get addressed at the Fourth Conference of the Parties, in Buenos Aires in November 1998.

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