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Rethinking Energy-Efficiency Policies

Advocates of energy-efficiency policies suggest that there is a significant “energy-efficiency gap”: governments and businesses have overlooked and forgone investments that could significantly reduce energy consumption at low cost. In fact, there is little evidence of people behaving so irrationally, or of any significant gap.

KRAKOW – Improving energy efficiency is a fashionable policy that governments worldwide promote. On paper, it seems a no-brainer: improving energy efficiency is sold as cost-reducing, job-creating, and planet-saving. Win, win, win – and the media often help close the deal, focusing entirely on all the supposed upsides. But there is another side – a downside – to the story.

After spending £240 million ($316 million), the United Kingdom ended government funding for its flagship energy-efficiency-loan program last year, after a scathing report from the National Audit Office showed the program was neither attracting people to sign up, nor delivering cost-effective energy-saving measures for those who did. The policy “did not persuade householders that energy efficiency measures are worth paying for,” according to the auditors, and “failed to deliver any meaningful benefit.”

And a much-touted California energy-efficiency policy looked a lot less impressive when environmental economist Arik Levinson – a former senior economist for environmental issues with the Council of Economic Advisers under President Barack Obama – took a closer look. When the efficiency standards were launched, the California Energy Commission projected that homes built under them would use 80% less energy – a phenomenal achievement.

But it never happened. There is no evidence, Levinson concluded, that homes constructed since California instituted its building energy codes use less electricity today than homes built before the codes came into effect.

One reason for that is the “rebound” effect. Improving energy efficiency can actually lead to more energy consumption. As our cars, planes, buildings, and appliances all become more efficient, we continue to find new and creative ways to consume energy. Consider the technology around you, right now. In the developed world, we are surrounded by all kinds of technological staples – iPads, smoothie-making blenders, automatic vacuum-cleaning robots – that our parents neither had nor imagined that they would need.

Advocates suggest that there is a significant “energy-efficiency gap”: governments and businesses have overlooked and forgone investments that could significantly reduce energy consumption at low cost. In fact, there is little evidence of people behaving so irrationally, or of any significant gap.

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Real improvements in energy efficiency can be very expensive. In an assessment for the Copenhagen Consensus Center, the think tank I direct, researchers examined the cost of the United Nations’ objective to “double the global rate of improvement in energy efficiency” by 2030. This is one of the 169 new targets that will shape how development money is spent for the next 15 years.

Current investments in energy supply amount to more than $1.6 trillion annually, with $130 billion going to energy efficiency and $250 billion to renewables. The International Energy Agency expects the total to rise to $2 trillion in 2035, with expenditure on energy efficiency increasing to $550 billion. The researchers found, however, that it would cost $3.2 trillion to achieve the target of doubling the rate of improvement in energy efficiency.

Of course, doing so would yield benefits: $3 trillion saved by avoiding the need for other infrastructure investment, benefits to industry and consumers of around $500 billion, and reductions in CO2 emissions worth somewhere between $25 billion and $250 billion annually by 2030. So, in total, the benefits would be 2.4-3 times the cost. This sounds fairly impressive – until one compares this outcome with another approach to energy.

Let’s recognize, first of all, that we are still a long way from ending our reliance on fossil fuels. So, if we are serious about tackling climate change, we need to develop green technology to the point where it is cheaper than oil, gas, or coal.

As with claims about an energy-efficiency “gap,” some say that green energy already is cheaper, and that all that is lacking is political will. But this simply is not true. Green energy costs $168 billion in subsidies each year, and by 2040, we’ll actually be paying even more –$206 billion per year. And, even with these massive subsidies, just 2.4% of our energy will come from green sources in 2040, according to an estimate by the International Energy Agency.

The way to make renewable energy competitive is to innovate its price downward. We need a dramatic increase in funding for research and development to make the next generations of wind, solar, and biomass energy cheaper and more effective.

Our research shows that if we were willing to devote just 0.2% of global GDP to green-energy R&D, we could dramatically increase the chance of a breakthrough. The smarter UN target, then, would be “double research, development, and demonstration (RD&D) in energy technologies.” Doing so would have benefits worth 11 times the amount spent.

This approach would be much more effective than inefficient subsidies, or focusing on incremental efficiency improvements. A technology-led plan would focus not just on solar and wind power, but also on a wide variety of other alternative-energy technologies.

This is not to say that we should ignore opportunities to make energy more efficient, or that we should invest solely in RD&D at the expense of improvements to today’s grid. But we should be far more skeptical about policies that claim to have nothing but upside implications for people and the planet.