Policies for a More Sustainable Energy Future
Report Number	E992
Author Info	Howard Geller
Details	Executive Summary World energy use has increased ten-fold since 1900 and more than four-fold since 1950. During the past twenty years, world energy use grew on average about 1.7 percent per year. This rapid growth in energy use during the 20th century helped to propel industrialization and economic growth. It also provided expanded levels of energy services and a wide range of amenities for a large fraction (but not all) of the world's growing population. If current energy policies and trends continue along with fairly robust economic growth, it is estimated that global energy use will double from its 1990 level by about 2025, triple by 2050, and further rise in the latter half of the 21st century. The majority of this growth is expected to take place in developing countries, which could pass industrialized countries in total energy use by around 2025. This level of energy use growth, around 2.5 percent per year in the near term falling to 1.0 –1.4 percent later in the century, could present a variety of problems and challenges for mankind including • High capital investment requirements • Local environmental degradation • Increased greenhouse gas emissions and global warming • Increased oil import dependency in many nations • Ignoring needs of the poor For these reasons, a business-as-usual energy future is not desirable. Nor is it inevitable. By emphasizing energy efficiency improvements, renewable energy options, greater utilization of natural gas, and the needs of the poor, all of the problems listed above can be mitigated. However, energy efficiency, renewable energy (excluding large-scale hydropower), and clean, innovative fossil fuel technologies face a host of barriers limiting their introduction and deployment throughout the world (see Table ES-1). Some of the barriers will shrink as these technologies gain acceptance and market share; others are likely to persist unless directly confronted and reduced or removed through policy interventions. Energy Policy Options There is no "silver bullet" for overcoming the barriers listed above, for moving away from business-as-usual energy trends and moving towards a more sustainable energy future. Many policy instruments are available and are needed for overcoming the multiple barriers that exist. (see Table ES-1: Barriers to the Adoption of Energy Efficiency and Renewable Energy Technologies ) RD&D. Research, development, and demonstration (RD&D) is critical for maintaining the pipeline of innovative energy supply and end-use technologies. Government-funded RD&D has helped to advance a number of energy efficiency and renewable technologies during the past twenty years, e.g., wind turbine innovations, electronic lighting ballasts, high-efficiency appliances, and new window technologies (to name just a few). In performing energy RD&D, partnerships between universities and other research institutions and the private sector have been especially productive. Greater international cooperation in energy technology RD&D could have a wide range of benefits including cost and risk sharing, faster learning, increased access to global markets, and better prospects for rapid deployment of innovative technologies worldwide. Financing. Financing at attractive interest rates is critical for the successful diffusion and market sustainability of end-use energy efficiency and renewable energy technologies. Traditional lenders such as national development banks or private banks have been reluctant to provide loans for these technologies because of small project size, unfamiliarity with the technologies, and other considerations. Innovative credit schemes are facilitating the adoption of off-grid household solar photovoltaic (PV) systems in a number of countries. Third-party financing, usually without subsidies, has been a key part of the energy service company (ESCO) industry now well-established in North America. The adoption of a small charge on all electricity sales (known as a public benefits or systems benefit charge) is one way to help finance investments in energy efficiency and renewable energy sources, as well as provide incentives and support RD&D. The charge is usually a few percent or less of the total electricity price. Financial Incentives. Financial incentives can help to get new technologies established in the marketplace, encourage early adopters, scale up production levels, improve performance, and reduce costs. This process is often termed "driving costs down the learning curve." There are many examples of incentive programs for energy efficiency and renewable energy technologies. In designing financial incentives, experience shows that is important to: (1) select technologies that have good prospects for competitiveness and viability in the marketplace once they are well-established; (2) use incentives strategically to move particular technologies down the learning curve; (3) leverage available incentive funds and set incentives to match incremental costs on a life-cycle basis; (4) phase out incentives as technologies gain market share and drop in cost; and (5) reward performance in order to minimize "free riders" and maximize energy supplied or saved, not dollars expended. Pricing Policies. Low energy prices diminish incentives for using energy more efficiently or substituting cleaner, low carbon or renewable energy supplies. It is desirable to price conventional energy resources to reflect not only direct costs but also indirect costs due to environmental and social "externalities." Many (but not all) nations recognize the broad costs associated with personal vehicle use and consequently heavily tax gasoline. This has contributed to much lower dependence on automobile use in Europe compared to North America. Five countries—Denmark, Finland, the Netherlands, Norway, and Sweden—have enacted taxes on carbon emissions or fossil fuels as part of a revenue-neutral tax shift strategy. Taxes on carbon emissions or fuel use are offset by reductions in other unpopular taxes such as personal income or employment taxes. In some cases, a portion of the tax revenue is targeted for funding energy efficiency and renewable energy programs. Net metering is another pricing policy that can be used to encourage renewable electricity generation. Customers who produce more electricity than they can use feed the electricity into the grid and run their meter backwards, thereby selling power to the utility at the retail price rather than wholesale price. Testing, Labeling, and Voluntary Agreements. Setting up appliance and equipment testing laboratories, test procedures, and testing and labeling programs can be useful for informing consumers about the relative energy efficiency of different products. This strategy enables labeling and promotion of the top products available at any particular time, e.g., as is being done through the Energy Star® labeling program in the United States. Voluntary agreements between governments and the private sector establishing energy efficiency improvement targets for manufactured goods or industries have been adopted in a number of countries. The Netherlands, for example, has implemented a relatively successful program involving agreements with industries for reducing the average energy intensity of manufacturing (see case study). In Thailand, a voluntary agreement among the government, a utility, and manufacturers succeeded in phasing out less efficient fluorescent lamps. Voluntary agreements of this type can be easier to adopt than mandatory regulations. On the other hand, voluntary agreements are not legally binding and consequently the targets may not be achieved. Codes and Standards. Minimum efficiency standards either remove the least efficient products from the marketplace, leaving consumers to choose from an array of more efficient products with other desired options and features, or require that all new products meet a certain efficiency level on average. By making more efficient products the norm, economies of scale occur and the cost per unit of energy savings is reduced. In addition, efficiency standards can provide market pull for new technology. Minimum efficiency standards have been successfully adopted in a number of countries for mass-produced goods such as cars, domestic appliances, heating and cooling equipment, motors, and lighting products. Most industrialized countries and some developing nations have adopted building energy codes that specify minimum energy efficiency requirements in new residential and commercial buildings. Experience has shown that training, monitoring, and enforcement are important for maximizing the impacts of building energy codes. Information, Education, and Training. Many governmental and utility energy efficiency programs include information dissemination through energy audits and dissemination of printed materials. Evaluations of these efforts often show that information dissemination, by itself, results in limited energy savings. Information programs are more effective when combined with other initiatives such as financing, incentives, direct installation services (e.g., through ESCOs), or standards. Information and training also can be important for promoting renewable energy. Informing consumers about the sources of power they are purchasing and the levels of pollution being emitted can lead to greater consumer demand for cleaner power sources. And training is critical for successfully disseminating small-scale solar water heating, photovoltaic power, and other renewable energy devices. Procurement Policy. Large-scale purchases by government authorities and/or the private sector can help establish a market for new clean energy technologies, as well as save the government money on a life-cycle basis. Governments—federal, state, and municipal—buy large numbers of lamps and other lighting products, air conditioning equipment, motors, vehicles, appliances, etc. Governments own large numbers of buildings that can serve as users of building-integrated renewable technologies, fuel cells, etc. And governments can purchase "green power" with a high renewable energy content. In the United States, for example, if federal facilities obtained just 1 percent of their electricity from photovoltaic cells, they would utilize 334 megawatts (MW) of PV capacity—more than six times the capacity produced by the U.S. PV industry in 1997. Market Obligations and Reserves. Utilities can be required to supply or purchase a specified amount of renewable-generated electricity, expressed as either a fixed amount of capacity or a percentage of total electricity sales. In the United Kingdom, the government mandated that utilities acquire 1,500 MW of renewable capacity by 2000 through a series of auctions—a policy known as the Non-Fossil Fuel Obligation (NFFO). The auctions, starting in 1990, have led to increasing amounts of capacity proposed and steadily declining prices for the winning bids. Providing long-term concessions to renewable energy developers in off-grid rural areas is another type of market reserve that could boost renewable energy use. Argentina, for example, is using this approach to promote renewable energy use and electrification in rural areas. Market obligations and reserves also can be used to stimulate commercialization of advanced vehicle technologies, as California is doing with electric, fuel cell, and other very low emissions vehicles. Planning Techniques. Energy planning can be used to develop focused or comprehensive energy efficiency and/or renewable energy strategies. To be successful, energy plans should contain achievable goals, and measures and actions adequate for achieving the goals, as well as monitoring and evaluation procedures. Integrated resource planning (IRP) is a process whereby a planning authority identifies the mix of supply and demand-side resources that meet energy service needs at the lowest cost. IRP uncovers the largest and most cost-effective energy savings opportunities, often prompting policymakers to increase support for energy efficiency efforts. Better urban and transport planning also is needed to reduce urban congestion, improve air quality, reduce transport energy use, and reduce the cost of mobility. Integrated land use and transport planning can lead to more efficient land use patterns and greater reliance on public transit systems, as exemplified by Curitiba, Brazil. Case Studies of Market Transformation The individual policies described above were successful in some instances but were more likely to have a significant impact when implemented in combination. It is often necessary to reduce or remove a number of these barriers using a "policy-assisted, market-oriented approach" in order to achieve large-scale results and ultimately transform energy markets. This integrated approach often consists of both "technology push" through RD&D and "demand pull" through consumer incentives, procurement initiatives, market reserves, etc. A market transformation approach attempts to make the energy efficiency or renewable energy technology or practice the norm through a set of coordinated market interventions. This type of approach has led to deployment of energy efficiency or renewable energy technologies in a number of countries, as illustrated by the following case studies. Brazil: Ethanol Fuel. Brazil has one of the largest renewable energy programs in the world—production of ethanol fuel from sugar cane. As of 1997, ethanol provided about one-third of the fuel consumed by cars and light trucks in Brazil. Production of ethanol was stimulated through: (1) low-interest loans for the construction of ethanol distilleries; (2) guaranteed purchase of ethanol by the state-owned oil company at a price considered adequate to provide a reasonable profit to ethanol producers; (3) pricing of neat ethanol so it is competitive if not slightly favorable to the gasoline-ethanol blend; and (4) tax incentives provided during the 1980s to stimulate the purchase of neat ethanol vehicles. Guaranteed purchase and price regulation were ended recently, with relatively positive results. In addition to these other policies, ethanol producers in the state of Sao Paulo established a research and technology transfer center that has been very effective in improving sugar cane and ethanol yields. Brazil: More Efficient Electricity Use. Brazil's national electricity conservation program (PROCEL) promotes end-use electricity conservation through projects in the areas of RD&D; education and training; testing, labeling and standards; marketing and promotion; private sector support; and implementation in partnership with utilities, states, municipalities, and businesses. PROCEL has saved about 5.3 terawatt-hours (TWh) per year as of 1998, equivalent to approximately 1.8 percent of total electricity consumption in Brazil. This level of electricity savings has enabled utilities in Brazil to avoid around $3.1 billion of investment in new power plants and transmission and distribution (T&D) facilities. In contrast, PROCEL and its utility partners spent about $260 million on energy efficiency and power supply improvement projects during 1986–98. The primary areas of electricity savings include: efficiency improvements in new refrigerators and motors; growing markets for energy-efficient lighting technologies; reducing electricity waste in industries; and installing meter in previously unmetered households. China: National Energy Efficiency Program. In the early 1980s, China began a national energy efficiency program focused mainly on industrial energy use. The program included regulations, mandated reductions, and a monitoring system for industrial facilities; an energy efficiency financing scheme; and support for RD&D. By 1983, over 10 percent of China's energy investments were in energy efficiency. Energy demand growth during 1981–86 fell to half that of economic growth. Additional policies implemented in the late 1980s included: creation of energy conservation service centers; energy intensity standards for boilers and kilns; more favorable terms for energy efficiency loans; and allowing firms to retain the financial benefits of energy savings projects. This comprehensive energy efficiency program was extremely successful—China's overall energy intensity fell by more than 50 percent between 1980 and 1997. Part of this reduction was due to structural shifts, but most was attributed to technical efficiency improvements. China: Improved Cookstoves Deployment. China has implemented the most sweeping and successful improved cookstoves program in the world. Around 130 million improved biomass-based stoves were installed in rural areas during 1982–92, meaning that over half of rural households in China obtained an improved stove. The Chinese National Improved Stove Program used the following strategies to disseminate improved stoves on this massive scale: (1) research and development (R&D) through a network of research institutions along with independent testing and monitoring of potential stove designs; (2) decentralized training, promotion, and monitoring through Rural Energy Offices (REOs), starting in the counties with the greatest need and interest; and (3) promotion of rural companies manufacturing, installing, and servicing improved stoves, including low-interest loans to help such companies get started, tax incentives, and continued support from the REOs. Improved stoves are sold by these companies for around $9 per stove on average, without direct government subsidy except for free stove parts provided to very poor households in some regions. Denmark: Wind Power Deployment. The Danish government has aggressively supported wind power development and deployment through RD&D programs, capital subsidies, and tax incentives. Furthermore, electric utilities have been required to purchase output from wind turbines for about 9 cents per kilowatt-hour (kWh), while receiving about 1.5 cents per kWh from a subsidy pool created by fossil fuel taxes. These policies made wind power cost-effective for both private owners and utilities in Denmark. Installed wind power capacity reached over 1,400 MW at the end of 1998, with wind power providing nearly 10 percent of electricity in Denmark. Moreover, about 60 percent of new wind turbines installed worldwide in 1998 were made in Denmark, with the Danish wind turbine industry realizing revenues of nearly $1 billion that year. Eastern Europe: Energy Efficiency Improvement. The formerly centrally planned economies of Eastern Europe and the Soviet Union wasted vast quantities of energy. Consequently, Bulgaria, the Czech Republic, Poland, Russia, and Ukraine created national energy efficiency centers during the 1990s. The centers provide policy analysis for reform and greater efficiency, business development through market conditioning and assistance to private firms, demonstrations of new technologies, training, information dissemination, and outreach. Among their accomplishments, CENEf in Russia developed energy efficiency standards for new apartment buildings; Arena-Eco in the Ukraine helped develop energy efficiency standards and an energy efficiency loan fund; FEWE in Poland created an ESCO that has retrofit major apartment complexes; SEVEn in the Czech Republic drafted portions of a national energy efficiency law and prepared energy efficiency plans for a number of Czech cities; and EnEffect in Bulgaria conducted analyses that helped Bulgaria to participate in the Framework Convention on Climate Change. India: Renewable Energy Implementation. The Indian Renewable Energy Development Agency (IREDA) was established by the government of India in 1987 to finance and promote the manufacturing and adoption of renewable energy technologies. IREDA provides low-interest loans with a 5–10 year repayment period, training in technical and business skills, publicity campaigns, resource assessments, case studies and manuals, and business development and export assistance. Concurrently, the Indian government has supported RD&D of renewable energy technologies. And the government offers one-year depreciation and elimination of import duties and taxes to further improve the economics of renewable energy adoption. This comprehensive market-oriented approach has achieved impressive results. For example, over 450,000 solar PV systems aggregating to 40 MW were installed as of 1998, making India the largest user of solar PV systems in the world. Wind power also expanded rapidly for a number of years although the wind power deployment slowed in 1997 and 1998. Netherlands: Energy Efficiency Improvement Targets and Agreements. The Dutch government has adopted formal agreements containing negotiated energy intensity targets with 31 industrial and 6 service sectors. In order to contribute to the industry target, participating companies agree to develop and implement an energy efficiency improvement plan, and improve energy efficiency wherever technically and economically feasible. Companies also agree to report on progress annually. In return, the government provides detailed energy audits of industrial facilities, tax incentives for investments in energy-efficient technologies and other subsidies, and protection from mandatory energy efficiency regulations. The average energy efficiency improvement as of the end of 1996 was 12.5 percent, meaning the participating companies were on track for achieving a 20 percent improvement on average by 2000. United Kingdom: Shift from Coal to Natural Gas-Based Power Plants. Starting in 1990, the U.K. power industry was largely privatized and restructured. Competition was steadily increased, subsidies for coal production were cut, natural gas production was privatized and deregulated, and regulations to cut emissions of acid rain precursors were implemented. These policies led to natural gas achieving a 30 percent market share for power production as of 1998 compared to virtually no natural gas use for power production prior to 1990. The fraction of power production from coal fell from 65 percent in 1990 to around 38 percent by 1998. The shift from coal to natural gas for power production reduced carbon emissions by about 14 million metric tonnes, equivalent to an 8 percent reduction in total U.K. carbon emissions. United States: Appliance and Vehicle Efficiency Improvements. The energy efficiency of domestic appliances and other types of mass-produced equipment dramatically improved in the United States during the past 25 years. This was a result of enacting mandatory efficiency standards—first at the state level and later at the national level—along with utility incentive payments, government-funded RD&D, and labeling of efficient products. These complementary policies are expected to reduce U.S. electricity use by 88 TWh (2.7 percent) in 2000 and 193 TWh (5 percent) in 2010, leading to net savings of over $160 billion for consumers and about 60 million metric tons less carbon emissions in 2010. Efficiency standards on cars and light trucks (known as Corporate Average Fuel Economy (CAFE) standards) are largely responsible for the near doubling in the average fuel economy of new cars and the more than 50 percent increase in light truck fuel economy from 1975 to 1985. A tax on inefficient "gas guzzlers" also contributed to the overall increase in fleet fuel economy during the 1980s. Had these improvements not occurred, the U.S. car and light truck fleet would have consumed an additional 3 million barrels of gasoline per day as of 1995. United States: More Efficient Electricity Use in California. Utilities in the state of California have implemented large-scale demand-side management (DSM) programs for about 15 years. The programs included rebates for consumers that purchase efficient appliances, air conditioners, and lighting products; free retrofits for low-income households; support for implementation of building energy codes; and technical assistance to businesses and industries. During 1990–94, these programs in aggregate saved over 5,000 gigawatt-hours (GWh) per year at a cost of saved energy of around $0.025 per kWh, providing consumers in California net benefits of $2.2 billion. The California Public Utilities Commission encouraged these efforts by allowing utilities to recover lost sales revenues and keep a portion of the net societal benefits resulting from their DSM programs. As part of electric utility restructuring legislation adopted in 1996, the California legislature mandated a "wires charge" to maintain funding for energy efficiency and other "public goods" programs. Greater emphasis is now devoted to creating a robust energy efficiency services industry as well as supporting a range of market transformation programs. Special Considerations in Developing Countries Developing countries present some special needs and opportunities when considering policies for advancing energy efficiency, renewable energy, and clean fossil fuel technologies. First, developing countries often lack institutions and capacity for promoting and implementing these technologies on a large scale and in a sustained manner. Second, energy policies should take into account social and economic conditions and priorities such as job creation and poverty alleviation. Third, developing countries present opportunities for technology innovation and leadership since they still putting into place their industrial, transport, buildings, and power infrastructures. Capacity Building. Capacity and institution building is essential if energy efficiency, renewable energy, and clean fossil fuel technologies are going to make a major contribution to future energy resource and service needs in developing countries. These countries require multi-disciplinary expertise in • technology development, adaptation, and testing • manufacturing and marketing • deployment and behavioral issues • monitoring and evaluation • training energy managers and end-users • policy development and implementation Capacity and institution building are needed to form and staff public sector agencies, research institutes, and the private companies that will produce, market, and install energy efficiency, renewable energy, and clean fossil fuel technologies. The Global Environmental Facility (GEF) could devote more resources to capacity and institution building (and less to discrete projects). Energy and Social Links. There are strong links between energy production and use on the one hand and social conditions on the other. Lack of modern energy sources (especially in rural areas) contributes to poverty, poor health and education, unemployment, and high population growth. Conversely, provision of clean, efficient, and modern energy sources reduces burdensome manual labor requirements, enhances education opportunities, lowers population growth, strengthens public health, and creates job opportunities. Providing renewable-based fuels and electricity, improved cookstoves, mechanical water pumping, and mechanized farming equipment should be given high priority in national and regional economic and social planning, not just energy planning. Likewise, energy policies and programs should pay special attention to serving the needs of low-income households in both urban and rural areas. Fostering Technological Innovation and Leadership. Developing countries have some features that could enable them to be leaders in worldwide sustainable energy innovation. These features include plentiful renewable energy resources and energy efficiency opportunities; large, untapped markets; nascent industrial, transport, buildings, and power infrastructures; and rapid growth rates. As developing countries progress economically and socially, they have the opportunity to "leapfrog" over the inefficient, fossil fuel-based, and polluting energy production and consumption patterns commonly found in industrialized nations. The policies that can foster energy technology innovation and leadership in developing countries include: (1) supporting RD&D that emphasizes clean energy supply and energy end-use technology innovation; (2) encouraging development of new industries and introduction of new technologies through international joint ventures and other mechanisms; (3) adopting and enforcing strong energy efficiency and environmental standards so that new infrastructure is state-of-the-art rather than outdated; and (4) providing attractive financing, market development assistance, and government procurement to clean energy technology entrepreneurs. International Policies Cooperation among countries can be useful in achieving market transformation, especially for mass-produced products that are manufactured and sold on an international scale. Cooperative efforts are underway to increase the energy efficiency of automobiles in Europe and office equipment in the United States, Japan, and the European Union. International policy cooperation faces a number of challenges including establishing key technical parameters, program coordination, and program administration. Technology transfer between industrialized and developing countries is one element of sustainable energy development worldwide. Encouraging joint ventures, licensing, and technology acquisition can be effective strategies for transferring clean energy technologies to developing countries. Joint ventures and licensing can help developing countries obtain state-of-the-art technologies at attractive prices. Governments can encourage joint ventures and licensing of sustainable energy technologies and services by providing financing, tax incentives, and/or market development support. Furthermore, strengthening intellectual property rights protection can facilitate the flow of advanced technology to developing countries. A number of industrialized countries have increased their bilateral support for sustainable energy development and deployment in Third World countries in recent years. But bilateral assistance tends to be project-focused, controlled and carried out by industrial nation representatives, and driven by political considerations. Greater emphasis should be given to longer-term and multi-pronged efforts aimed at barrier removal, capacity and institution building, and market development in developing nations. The World Bank and other multilateral development banks (MDBs) are important lenders for energy development in the Third World. Historically, the vast majority of their energy sector loans went to large-scale hydropower, fossil fuel, and energy infrastructure projects. Very little lending was devoted to energy efficiency or smaller-scale renewable energy technologies. This is starting to change. But the World Bank and other MDBs should devote a greater portion of their energy lending to sustainable energy technologies. As the markets for and capability in sustainable energy technologies grows, the MDBs should phase out their funding for conventional energy projects and focus entirely on sustainable energy technologies. To facilitate this transition in priorities, the MDBs should increase their own capacity and expertise in energy efficiency and renewable energy technologies. The Kyoto Protocol to the Framework Convention on Climate Change allows joint implementation (JI) between industrialized and transition nations. The Kyoto Protocol also provides for a Clean Development Mechanism (CDM) that could foster additional investment in renewable energy, energy efficiency, and natural gas projects in developing countries. The CDM allows parties in industrialized nations to receive emissions credits for investing in projects that reduce greenhouse gas emissions in developing countries. However, the fate of the Kyoto Protocol is unclear. If the Protocol is ratified by enough countries so that it enters into effect, the detailed structure and functioning of the JI and CDM provisions need to be worked out. The definition of baselines, procedures for certification, monitoring and verification of emission reductions, and whether or not there will be a limit on the use of credits are some of the issues that still need to be resolved. Conclusion The case studies presented show that policies can have a significant impact on energy supply and consumption patterns. But much more needs to be done. Many of the successful policies and programs outlined above need to be expanded. Moreover, comprehensive energy efficiency and renewable energy policies and programs like China's energy efficiency programs, the Danish wind power program, Dutch industry agreements, U.S. appliance efficiency standards, PROCEL, and IREDA are needed in every nation, rich and poor. While national policies and programs are the foundation for successful market transformation, the participation of state and local authorities and action at the regional and local level can be critical to the success of national policies and programs. Likewise, international agencies such as the MDBs and Global Environmental Facility can play a key role in financing national efforts, as well as in supporting capacity and institution building. And international cooperation should be expanded where appropriate, such as in promoting efficiency improvements in mass-produced products that are manufactured and sold worldwide. The private sector should be involved in policy development since it plays a key role in implementation. Private sector cooperation can determine whether not a policy (or set of policies) succeed(s). While some companies have a vested interest in maintaining an inefficient and carbon-intensive energy future, other companies are actively developing, producing, or investing in high-efficiency, renewable energy, and advanced fossil fuel technologies. Policymakers can work with these innovative companies to develop and implement progressive policies and programs that will lead to a more sustainable energy future.
Other Info	72 pp., 1999, E9992
Publication Price	$ 17.00 each
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