Why I'm sceptical about energy efficiency

May 25, 2012


May 25, 2012

Chris Webber

Former Senior Editor

Chris is a former senior editor with the Economist Intelligence Unit. He covered a range of business, economics and technology issues for the Economist Intelligence Unit. His recent work has included projects on how workplace practices need to adapt in the face of rapid technological advance.

I've been struck by the amount of emphasis I've heard being placed on energy efficiency over the past year or so.

Whether they've been writing or speaking about it at events, many of the commentators I've come across have highlighted the central role they think energy efficiency can play in helping solve our energy and environment problems.

On the odd occasion I've decided to challenge this argument, at our recent UK Energy Summit, for example, I've never really been persuaded by the response. To avoid going around in circles, I thought I'd summarise the reasons for my scepticism here on the blog and request that someone out there helps me understand where I'm going wrong.

Let me begin by stating that I'm not against energy efficiency per se. All else equal, it clearly makes sense for us to use energy as efficiently as we can. The same goes for any other resource. We shouldn't waste something if there's no good reason to. That much is obvious.

My main problem is with the claim that, by becoming more efficient in our use of energy, we will significantly reduce the overall amount of energy that society uses (or wants to use). The example that's often rolled out to support this argument is housing. People normally only want to heat their flats or houses to a certain temperature, so if they can reach that temperature using less energy – by better insulating their properties, for instance – then we've managed to achieve the same outcome, but have used less energy in the process.

Understandably, those making this argument often then say that if we can make these kinds of energy efficiency improvements across the entire economy (e.g. by making properties, vehicles, production processes and electrical products more energy efficient) then we can significantly reduce our overall energy consumption.

I can appreciate why this is appealing, but, to my mind at least, the problem comes when we ask what happens next. What happens after we make our houses, offices, appliances and cars more energy efficient? After all, isn't improving energy efficiency simply the equivalent of reducing the price of energy? And doesn't economics tell us that if we reduce the price of something then our demand for it will rise? 

I'm not just being a contrarian here. I think it's fair to say that improvements in energy efficiency have been a key feature of the industrial age. As far as I'm aware, however, they've rarely if ever led to a reduction in our total energy consumption. In fact, the exact opposite seems to have been true.

The first person to spot this was a Victorian economist named William Jevons. Writing in 1865, he compared the demand for coal before and after James Watt introduced his design for a significantly more efficient coal-fired steam engine and found that Watt's invention had caused the demand for coal (and the energy that it produced) to soar. Similar arguments can be made about cars or electrical appliances today. When we make engines or fridges more efficient, we make it cheaper for people to drive or own them. The result is that they end up driving more or owning two fridges instead of one.

There's another angle to this too. Even if we accept that our demand for energy might be reduced by improving energy efficiency, what do we expect people to do with the money they save on their energy bills? If they follow the normal pattern, they'll save a bit and spend the rest. That means improved energy efficiency will increase our consumption of other goods. Put another way, improving efficiency will make us wealthier and we'll consume more as a result. That's good for the economy, but it's not at all clear to me that it's good for the environment.

Those questioning the environmental benefits of energy efficiency have sometimes shot themselves in the foot by oversimplifying their argument. To avoid making that same mistake, let me say that I'm aware of on-going debates about the scale of direct and indirect rebound effects, the technical terms given to the scenarios I describe above. Moreover, I'm also aware that many researchers believe that rebound effects could be as small as 10%. 

If it can be demonstrated that the nationwide or (more importantly) worldwide rebound effects of energy efficiency improvements really are that small, then my scepticism about the issue would disappear. However, I'm not convinced it's quite as simple as that. The best report I've come across on nationwide rebound effects is a 2007 paper by Steve Sorrell at the University of Sussex, where he argues that "it would be wrong to assume that… rebound effects are so small that they can be disregarded" and "the potential contribution of energy efficiency policies needs to be reappraised."  

If this is true, then we should applaud energy efficiency as a way of increasing our prosperity (or reducing fuel poverty), but we should be sceptical when people claim that it can be a major part of the solution to our energy supply or carbon reduction challenges. At the very least, advocates of energy efficiency should surely admit that the arguments surrounding its environmental benefits are more complex than they are commonly portrayed. Please feel free to set me on the straight and narrow if you disagree.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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