Energy Efficiency: Paid Lunch or False Shortcut?

Energy efficiency should not be seen as an easy way around hard measures to reduce energy consumption. That said, energy efficiency measures and energy taxes are not mutually exclusive.
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Energy efficiency appears to offer a perfect solution for our energy problems. Efficiency improvements not only reduce the energy consumption of appliances, cars and industrial processes, but typically pay for themselves. They are "not a free lunch, but a lunch you're paid to eat," Ernst Ulrich von Weizsäcker, Amory Lovins and Hunter Lovins argued in their influential book, Factor Four. Their twin benefits make efficiency improvements politically more palatable than measures such as carbon taxes.

A recent story in The New Yorker magazine has cast doubts about the effectiveness of energy efficiency. "The problem with efficiency gains is that we inevitably reinvest them in additional consumption," argues David Owen in his article, "The Efficiency Dilemma." His story has triggered a heated debate in the blogosphere. The issue at stake is as complicated as it is important. Here is an overview.

David Owen illustrates his critique with the example of refrigeration. A study by the World Economic Forum found that the average refrigerator sold in the US today uses three quarters less energy than in 1975, even though it is 20% larger. This looks like the perfect win-win situation for the environment and consumers. Yet, says Owen, "the issue may be less straightforward than it seems." The cheaper use has allowed refrigerators to proliferate in ever new areas (such as hotel rooms). And it has helped boost the wasteful frozen food sector, which may cancel out the gains achieved through efficiency improvements. Such indirect impacts are called the "rebound effect" or, after a British economist from the mid-19th century, the Jevons paradox.

Charles Komanoff, an energy economist from New York, followed Owen with his own critique in the online journal Grist. He pointed out that in spite of important breakthroughs in energy efficiency, overall energy consumption in the US in 2008 was 38% higher and electricity consumption twice as high as in 1975. He concludes that "efficiency advocates have been winning the micro battles but losing the macro war. Through engineering brilliance and concerted political and regulatory advocacy, we have increased energy efficiency in the small while the society around us has grown monstrously energy-inefficient and cancelled out those gains. Two steps forward, two steps back."

Not so, argue energy experts such as Amory Lovins, the founder of the Rocky Mountain Institute. Energy demand has soared not because efficiency improvements have caused prices to drop, but because overall income has increased. Yet even with higher incomes and lower prices, demand for frozen food, car miles and other energy uses will eventually be saturated and taper off.

Responding to Komanoff's growth figures, Amory Lovins points out that while energy consumption grew by 38% 1975-2008, the US economy grew by 171% during the same period. If it had not been for efficiency gains, energy consumption would thus have grown 4.5 times faster than it actually did. In nine of the past 34 years, says Lovins, efficiency gains outpaced economic growth "without our even paying attention." This shows that if efficiency improvements were pursued more seriously, they could reduce overall energy demand.

But could they do so on their own? In a rejoinder, Komanoff argued that energy consumption fell during the years when prices jumped. "Contrary to your assertion," he reminded his friend Lovins, "we were paying attention: prices compelled us to." This suggests that the best way to reduce energy consumption - "the antidote to the Jevons paradox" in Komanoff's words - is to make energy more expensive, for example through a carbon tax. Energy efficiency, maintains F. James Handley, "seems to have offered a 'false short cut' around the hard path of pricing carbon."

At the end of the day, it is impossible to quantify to what extent gains in energy efficiency are lost to the rebound effect. But money saved through efficiency gains will almost always be spent on something else, with associated environmental impacts. In contrast, argues Blake Alcott, an environmental economist and old friend from my activist days in Zürich, emission caps, carbon taxes, consumption quotas and similar measures will translate into a direct reduction in energy consumption.

Does this make energy efficiency a useless or even counter-productive tool? I don't think so. The environmental impacts of efficiency improvements may indeed be limited, but their welfare benefits are important. They allow us to consume more for the same amount of environmental impact. My personal welfare is not improved by frozen food and additional car miles. But the situation in poor countries is different. Efficiency improvements allow poor societies to increase their use of much-needed goods and services without a commensurate increase in environmental impacts.

Energy efficiency should not be seen as an easy way around hard measures to reduce energy consumption. But energy efficiency measures and energy taxes are not mutually exclusive. To the contrary, efficiency improvements can make the required hard measures politically more feasible. We need to protect fragile ecosystems from oil exploration, coal mining and dam building. We need to drastically reduce our energy consumption through emission caps and carbon taxes. The vast potential of energy efficiency means that we can do so without sacrificing jobs, quality of life, and development for the poor.

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