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Mangling Energy Efficiency Economics

by Michael Levi
December 14, 2010

Switch to a more efficient car, and you’ll drive a bit more, since extra gasoline now costs you less. This well-known phenomenon is known as the “rebound effect”. In the case of cars, it eats up about ten percent of the fuel savings from greater fuel efficiency. But at the level of economies, many believe, it’s much worse. All the money saved through more efficient automobiles and better refrigerators doesn’t just mean more summer road trips and Sub-Zeros – it means more money pumped into the whole economy, and hence greater emissions overall.

That’s a minority view, for good reason: it’s wrong. But in a long essay in the new issue of the New Yorker, David Owen buys it hook, line, and sinker. He’s enamored of the work of 19th century British economist Stanley Jevons, and while Stanford’s Lee Schipper clearly spent oodles of time trying to explain to him why what Jevons wrote doesn’t apply to today’s economy, Owen isn’t believing him for a second.

I was planning to go through the article and pick apart every instance of silly logic, but those piled up so high that that goal became unrealistic. Instead, let me focus on two passages that capture the essence of Owen’s mistakes. Here’s the first:

“[Energy Secretary] Chu has said that drivers who buy more efficient cars can expect to save thousands of dollars in fuel costs; buy, unless those drivers shred the money and add it to the compost heap, the environment is unlikely to come out ahead, as those dollars will inevitably be spent on goods or activities that involve fuel consumption – say, on increased access to the Internet, which is one of the fastest-growing energy drains in the world…. Schipper told me that economy-wide Jevons [i.e. rebound] effects have ‘never been observed,’ but you can find them almost everywhere you look: they are the history of civilization.”

How about we do a little simple math? Every dollar I spend on gasoline is, crudely speaking, a dollar spent on energy. (I say crudely because I’m including money spent on things like marketing and delivery.) On the other hand, as Owen acknowledges in the article, energy spending is equal to only 6-8% of GDP. If I save $100 on gasoline, I’ll spend it roughly the same way that I’d spend any other $100. This means that I’ll spend $6-$8 of my savings on more energy. (The number may be a smidge higher, since I may buy things produced elsewhere, where energy is a bigger fraction of GDP. [UPDATE: It's actually plausible that the number might be 2-3X higher, since my spending gets multiplied as it flows through the economy. But the qualitative conclusion doesn't change.]) The net result will be the consumption of $92-$94 less energy; there is a rebound effect, but it doesn’t come anywhere close to wiping out the gains. Schipper basically makes this point to Owen, without the numbers and without confronting this specific example; why Owen can’t see what it says about this particular case is beyond me.

Let’s drill down on the Internet bit for a moment, which slides quickly into absurdity. Say I do shift my $100 in savings to increased Internet access, as Owen suggests might happen. For my fuel savings to be wiped out, as Owens thinks will be the case, those Internet services will need to use the same amount of energy that I’ve saved. That will cost my Internet provider $100. (It pays the same rates for energy as I do.) How will it pay for everything else required to give me Internet services? The equipment? The people? The software? Will the provider give all that to me as a gift? Because in Owen’s picture, it’s already spent all my money on fuel.

Here’s the second representative passage that I want to look at:

“In less than half a century, increased efficiency and declining prices have helped to push access to air-conditioning almost all the way to the bottom of the U.S. income scale – and now those same forces are accelerating its spread all over the world.”

Owen repeats this theme over and over – people are using more energy, so how is it possible that efficiency has helped? I have no doubt that “increased efficiency and declining prices” help spread air conditioning. But let’s observe two things. First, declining prices appliance prices have nothing to do with increased efficiency – in fact, everything else being equal, increased efficiency leads to higher prices appliance prices (because the equipment seller captures part of the energy cost savings). Second, Owen is missing something huge: income growth. In fact, my guess is that the spread of air conditioners (as well as cars and other such things) is driven mainly by the facts that people have more money to spend and that the devices are cheaper. The reduced cost of fueling them, I suspect, is a distant third.

I don’t mean for this to be a paean to energy efficiency – I’m actually quite skeptical of many energy efficiency policies. But it’s useful to get our facts right.

Post a Comment 10 Comments

  • Posted by Rolf Westgard

    DULUTH NEWS TRIBUNE May 2009

    Geologist’s view: Best way to improve fuel efficiency: Raise gas taxes

    The Obama administration is introducing a national 39 miles per gallon fuel-efficiency target for passenger vehicles, replacing a number of ineffective miles-per-gallon standards set by individual states. Meeting the new mileage target will result in fewer carbon dioxide emissions per vehicle mile — but it also will result in many vehicles traveling more miles, creating more traffic jams and fewer trips via fuel-efficient public transportation.

    Administration planners appear unaware of 19th-century British economist William Stanley Jevons, who studied the coal-fueled steam engines that powered the Industrial Revolution. Jevons noted that as those improving engines used less coal for the same output, their use grew, and the total consumption of coal actually increased. In his book, “The Coal Question,” Jevons set forth what is known as the Jevons Paradox: “It is wholly a confusion of ideas to suppose that the economical use of fuels is equivalent to a diminished consumption. The very contrary is the truth.”

    Between 1960 and 2004, U.S. energy efficiency per unit of output increased by more than 100 percent, but total energy fuel consumption increased by 100 percent. A recent Swedish study showed that each 20 percent increase in vehicle fuel efficiency results in a 5 percent increase in total fuel consumption.

    A direct, though unpopular, large increase in gasoline taxes both encourages fuel-efficient cars and limits excessive driving. It encourages the use of, and pays for, those new, expensive, light-rail systems — like the Central Corridor and perhaps the Duluth-to-the-Twin Cities Northern Lights Express — that are being built everywhere in the U.S.

  • Posted by Rolf Westgard

    Sorry Michael, but Jevons was right on. From my op-ed of May 2009:

    DULUTH NEWS TRIBUNE May 2009

    Geologist’s view: Best way to improve fuel efficiency: Raise gas taxes

    The Obama administration is introducing a national 39 miles per gallon fuel-efficiency target for passenger vehicles, replacing a number of ineffective miles-per-gallon standards set by individual states. Meeting the new mileage target will result in fewer carbon dioxide emissions per vehicle mile — but it also will result in many vehicles traveling more miles, creating more traffic jams and fewer trips via fuel-efficient public transportation.

    Administration planners appear unaware of 19th-century British economist William Stanley Jevons, who studied the coal-fueled steam engines that powered the Industrial Revolution. Jevons noted that as those improving engines used less coal for the same output, their use grew, and the total consumption of coal actually increased. In his book, “The Coal Question,” Jevons set forth what is known as the Jevons Paradox: “It is wholly a confusion of ideas to suppose that the economical use of fuels is equivalent to a diminished consumption. The very contrary is the truth.”

    Between 1960 and 2004, U.S. energy efficiency per unit of output increased by more than 100 percent, but total energy fuel consumption increased by 100 percent. A recent Swedish study showed that each 20 percent increase in vehicle fuel efficiency results in a 5 percent increase in total fuel consumption.

    A direct, though unpopular, large increase in gasoline taxes both encourages fuel-efficient cars and limits excessive driving. It encourages the use of, and pays for, those new, expensive, light-rail systems — like the Central Corridor and perhaps the Duluth-to-the-Twin Cities Northern Lights Express — that are being built everywhere in the U.S.

    [ML: These studies ignore income effects. Between 1960 and 2004, U.S. income roughly tripled.]

  • Posted by Tom Davey

    This is a pretty impressive takedown. As a New Yorker subscriber, I will be reading Owen’s piece with a lot less credulity than I customarily give the magazine. The New Yorker is famous for checking facts; it’s understandably harder to check logic.

  • Posted by mike

    Owen might be wrong on the specific point that energy efficiency savings are automatically and directly transferred into higher energy purchases, but I think you are kind of missing the big picture which he might have been alluding to somewhat clumsily. Our modern global capitalist economic system is constructed around economic growth= energy consumption increase. Until this basic equation is solved either by finding a new economic system to run the globe, or by discovering a magic new limitless energy source, energy efficiency can at best only be a sticking plaster to deal with our enormous and growing problems.

    [ML: I'm not sure that that's what he's saying. He argues that energy efficiency makes emissions worse. That's not a "sticking plaster" -- it's a self-inflicted wound.]

  • Posted by Marc Gunther

    Thank you for this analysis. When I read the New Yorker article, I wondered why McKinsey and Stephen Chu and EDF and others put so much emphasis on energy efficiency if it is, in fact, such an effective tool for curbing climate change. Now I understand why the rebound effect has “never been observed” at the macro level. I’m surprised that Lee Schipper was unable to explain to Owen why his logic was faulty.

  • Posted by Bob Bevins

    Michael — Aren’t you ignoring Owen’s point that you can’t calculate energy savings on a micro level? You can’t simply do these one-to-one swaps (e.g. $100 less on gas versus a $100 smart phone)to get the real energy picture: Using the $100 freed up from paying less on gas will not only pay for the energy costs of that substitute item but for the wages of workers who will in turn buy more stuff on their own — all of it with energy costs. Also, if your gas savings mean $100 per year more in bank deposit savings, banks will lend part of your savings to others to invest in other stuff with embedded energy. Haven’t you heard about the multiplier effect?

    Also re a point above, in discussing US aggregate energy use, you should also keep in mind off-shoring of energy fuel consumption as more manufacturing is being done abroad.

    [ML: I should indeed have included a multiplier effect. But that doesn't change the qualitative conclusion. Unless energy savings somehow have a >10X multiplier effect, which is implausible, I don't see how economic growth overwhelms the efficiency savings. We would have seen much more stimulus from last year's stimulus package if that was the case.]

  • Posted by Bob Bevins

    Multipliers are tricky -and of course difficult to calculate. But I’d say energy efficiency is a wash all things being equal. As to the stimulus, it was a paltry one and largely offset by state gov. layoffs and consumer retrenchment -so I’m not surprised by the lack of results.

  • Posted by Jack Newton

    Michael, I think you’re taking a somewhat poorly articulated piece of an argument and trying to make it seem like the whole argument. David Owen seems to believe that increasing energy efficiency creates more emissions — but correlation needs to be separated from causation. Increasing energy efficiency or investing in renewables could not make the nation carbon negative, it could only lower the rate of consumption. It takes a lot of oil and resources to produce and transport goods, so there really is no free lunch — increasing efficiency does not solve the finite resources problem, it only is helpful in managing expanding demand for resources and increasing emissions.

    [ML: Not sure I follow. I didn't read him as arguing that energy efficiency wasn't a solution alone -- I'd have agreed with that. I read him as arguing that energy efficiency didn't buy you any environmental benefits at all.]

  • Posted by Adam

    I disagree with your argument that increased efficiency leads to higher appliance prices. If engineers can figure out how to perform a process more efficiently, that can mean that they can build the appliance with fewer costly materials, reducing price. Furthermore, if there are efficiency measures taken in the manufacturing process, that would further lower the price. And finally, past experience (refrigerators, ACs) shows efficiency gains have been accompanied by price drops, not increases.

    I agree with your criticism of Owen not addressing income growth though. It seems to be particularly relevant for the developing world.

  • Posted by D J Roach

    Wm. Jevons observations pertained to the steel making industry of his day. Improved blast furnaces reduced the consumption of coal per ton of iron produced, lowering the manufacturing cost and increasing the output of iron and steel. The increased output allowed steel to substitute for inferior products and to find new uses, thus increasing the consumption of steel and leading to the increased consumption of coal.

    The analog of this process today is the Internet. The Internet has benefited from improvements in the technology of moving electronic data through networks which have extended their reach and efficiency multi-fold. The result is increased energy consumption in the course of sending messages even though the energy consumption per message is now a small fraction of what it was previously. This can be seen in the rise of data centers, and cell-phone data transmission networks. Improvements in the technology lead to lowered cost and greater availability which in turn displaces older less efficient technology, and greater consumption of the new goods relative to the rate of consumption of the old.

    The phenomenon that Wm. Jevons observed and described is present today. Neither Owen or Levi have made a compelling case for their respective views, but Owen is more likely to have the better part of it, though his explanation lacks rigour.

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