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More on Energy Efficiency

by Michael Levi
December 22, 2010

My post last week on the “Jevons Paradox” – the claim that increased energy efficiency actually raises energy consumption – generated a good bit of feedback, both in the comments and in my email. The New Yorker article that inspired my post also spurred several strong rebuttals elsewhere.

Since energy efficiency is such a commonly discussed topic in energy policy, it’s worth addressing some of the most important concerns. Here are three that I think matter:

We can’t decarbonize economy unless we decarbonize our energy supplies, so how can energy efficiency ever solve our problems? It can’t, alone. But energy efficiency matters when economics and politics collide. Say my monthly electricity bill is $100. If policymakers want to force me to use renewable power, that bill might double – and I might reject such a big increase. Now imagine that energy efficiency has let me cut my bill to $25. I might be more open to the doubling of energy prices, since my bill would now only increase by $25, and still be half of its original amount. Think about this another way: If we can double the efficiency of wind farms or solar panels, we’re thrilled. We should be just as pleased if we can double the efficiency of the things that wind farms and solar panels power.

What about the fact that people use more cars/AC/fridges/whatever? People are richer than they used to be. They use more stuff. Yes, the fact that these things have become cheaper (including through lower energy costs) also increases their use. But if you ignore income growth, you’re missing a huge part of the picture.

Haven’t you ignored the multiplier effect of energy efficiency savings? In my post, I argued that if I saved $100 on gasoline, and spent it on a broad basket of goods and services, I’d end up cutting into society’s energy savings by about $6-$8, since energy costs are about 6-8% of GDP. Several people pointed out that my $100 of spending can generate more than $100 in increased GDP, since my money can circulate through the economy multiple times. They’re right, and I was wrong: it’s plausible that my $100 of spending could increase GDP by as much as $200-$300. But that would still leave society with only $18-$24 in extra energy costs, and a big net savings in energy consumption.

Let me make myself clear: energy efficiency is often oversold as a policy panacea. Many energy efficiency policies that are sold as win-wins aren’t actually so once you account for all the costs. But to argue that promoting energy efficiency invariably undercuts progress toward curbing resource demand and greenhouse gas emissions is wrong.

Post a Comment 7 Comments

  • Posted by Josiah

    I agree with your basic point, so far as I am able to not being an economist. Have you considered or discussed the expansion of energy uses to do work it had not done before as a result of the reduction in price through efficiency? Something akin to “mission creep” for energy?

    For example, the gasoline demand in the country might be relatively inelastic. If cost dropped by 50% people would not respond by driving twice as much. But they might instead find that uses for gasoline which had previously been cost ineffective become cost effective, and use the energy for this new purpose.

    I’m not sure if this happens or not, but has this been considered and/or discussed?

  • Posted by K T Cat

    Decarbonize our economy? Really? Indonesia + China + India = more than 3 billion people. We’re 350 million. Decarbonizing our economy is pointless unless they do it, too and it’s not looking too promising. Meanwhile, many of the global warming predictions from a decade ago have been total failures.

    If people want to peddle decarbonization on an irrelevant scale, then they should start with their own families. They should move into one of these. It will accomplish everything decarbonizing our economy would. It will do nothing globally to stop a non-existent danger, but will provide them a feeling of moral superiority to everyone else. When Doomsday doesn’t come, they can take the credit. We won’t mind.

  • Posted by Roger Pielke Jr.


    Three responses:

    [ML: Roger: Thanks for the comments. See my responses below]

    1. “Now imagine that energy efficiency has let me cut my bill to $25 . . .”

    This is great, but your numbers are indeed imaginary. Efficiency gains are, at best, a percent or 2 per year, with some considerable effort they might be doubled. On the other hand Baksi and Green 2007 argue that there are very hard limits on how fast efficiency gains can occur, and a doubling of the rate might not even be possible:

    We should be so lucky as to have efficiency gains that are larger than the price differential between clean and dirty energy. The reality (on a temporally equivalent time frame) is more like an order of magnitude (or more, maybe two orders) difference in the other direction.

    [ML: Your 2% figure refers to the overall efficiency of the economy. That isn’t what I’m talking about: I’m talking about the efficiency of particular appliances. That said, my 4X improvement was indeed imaginary, and is much higher than people will achieve. I don’t see, though, how this undermines my basic point: greater efficiency makes higher energy prices more tolerable.]

    2. Income growth and efficiency gains are inter-related. We are richer, in part, due to efficiency gains — think Henry Ford.

    [ML: Yes — “in part”. It’s also important to note that the automobile wasn’t just an energy efficiency improvement — it also improved labor productivity, among other things, which is a big part of why it had such a huge impact. Too many of the studies that show backfire lump all efficiency improvements together and then give all the credit to energy efficiency.]

    3. You focus your math on energy costs, in terms of emissions the difference between $100 of spending and $300 in increased GDP is — all else equal — a 3x increase in emissions based on that $100 (Kaya Identity logic).

    [ML: I don’t follow. $300 in increased GDP corresponds to substantially less than $100 increased spending on energy.]

    You conclude: “to argue that promoting energy efficiency invariably undercuts progress toward curbing resource demand and greenhouse gas emissions is wrong”

    It is equally wrong to suggest that promoting energy efficiency invariably advances progress toward curbing resource demand and greenhouse gas emissions.

    [ML: Sure. I’m not arguing that.]

    Energy efficiency is very important and should be pursued aggressively as it has many benefits, but efficiency gains will not alter the basic fact that to stabilize greenhouse gas emissions will require a near complete decarbonization of energy supply.

    [ML: I don’t disagree with your second point; I just think that efficiency makes that job easier. Oddly enough, on your first point, I’m not as enthusiastic. In some sense, this is consistent: I just don’t think energy efficiency policy is super-awesome for GDP, which means I’m neither all that worried about backfire nor too hopeful that it will be a huge growth bonanza.]

    I haven’t read the New Yorker article (behind a paywall) but to whatever extent it over reaches, so too does your critique.


  • Posted by Roger Pielke Jr.

    Thanks Michael, I don’t think we have much disagreement here, but we do appear to have somewhat difference conceptions of energy efficiency (have you defined somewhere what you mean by the concept?) and, in particular, the scale on which it matters. Happy Holidays!

  • Posted by Jack Newton

    I posted last week and have found this whole discussion really interesting. I wonder how far apart we see things.

    When you create new, more efficient products you are using oil and resources to do so. When you build sources of renewable energy, you are using oil and resources to do so.

    The old product lines are then either considered trash or recycled. Trash results in increased methane production, a very potent greenhouse gas.

    What I am trying to get at is that we are looking at energy efficiency in a world of ever-increasing demand. Boosting efficiency would enable more people to have access to goods or energy, and investing in renewables would supplement energy supply when oil gets more expensive.

    Any efficiency gains we get from new product lines are further mitigated by the inefficient nature of the grid, which cannot store energy but only transport it (and loses a lot of energy with distance).

    I think Owen is undoubtedly right in a sense — increasing efficiency will coincide with increasing emissions. Efficiency gains alter the aggregate rate of consumption that has been increasing and I do think that increasing efficiency will be necessary and inevitable, but I think it would be wrong to think of efficiency as a tool to combat greater emissions — because curbing emissions through efficiency would not affect the big picture when it comes to increasing emissions. If you were to look at a graph for the rate of human use of CO2, you would see that the rate has only increased with time. I don’t think that trend could reverse with efficiency gains.

    You point out that the spread of air conditioners has been caused by rise in income at least as much as increases to efficiency – so isn’t this saying that economic activity has driven increased emissions and thus the demand for efficient products?

    If we wanted to get atmospheric CO2 ppm (now at ~395ppm) to say, 350ppm, that would require going carbon negative, meaning worldwide aggregate emissions would have to significantly fall for a while and then stay neutral, not just emissions per head – while avoiding setbacks to economic growth and globalization. This is why pricing carbon or raising gas taxes or consumption taxes could not really move the economy to be carbon-negative. And there is so much warming in the pipeline that even changing our lifestyles at this point is probably not feasible or likely to make much measurable difference. I don’t see how efficiency gains could reverse the trend rate of ever-increasing emissions.

    Efficiency gains might be generally good, but only decentralized energy production and big lifestyle changes could significantly reduce worldwide aggregate CO2 emissions, and no one in the US has the will to do so. If you reduce the rate of consumption through any policy utilizing the inefficient centralized grids, it will nevertheless result in ever-higher rates of emissions and sooner or later price rises due to constantly-expanding demand.

    I think most climate scientists would agree that geo-engineering is the only option we will have to significantly reduce CO2 emissions, and that carbon capture technology will be the only worthwhile endeavor (because it would actually remove carbon from the atmosphere unlike other short-term fixes).
    Thank you.

  • Posted by Leonard Weinstein

    The use of Carbon based fuels is a readily available low cost source of energy. This allowed rapid and extensive expansion of society. Due to the finite availability (although large), at some point we have to convert away from that. Wind and solar are of some limited use, but never would do the full required job. Nuclear is the only practical long term solution. Power for homes and industry, and ground based electric powered vehicles could all be supplied with nuclear electricity. Air travel may still require a Carbon based fuel, but that is a small fraction of total demand. There is a natural and presently doable solution, but it will be a gradual transition, and should be left to free-enterprise market forces for greatest efficiency.

  • Posted by Tama Copeman

    I agree that many energy policies aren’t win-wins when all the costs are considered. In the established energy, chemical and material process industries, capital cost and energy efficiency trade-offs are part of an overall cost optimization. Lasting gains tend to come from more than one source, including improvements in the supply chains, manufacturing, designs, and technologies. The consumption chains, with associated wastes, also should be considered in the overall picture.

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