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energy costs were lower than the

Communication labour costs, for example. It is not


surprising that this led to demand
Energy efficiency and economic fallacies growth. But if energy efficiency is the
goal, rather than the means, then the
driving force is entirely different - and
so are the macroeconomic implica-
The sharpening energy efficiency debate has revived claims that the apparent tions.
savings from using more efficient technologies would be largely offset by the Consider for example a sector
macroeconomic response - the tendency to use more energy services because they where the energy-using activity is re-
are made cheaper. When energy price or availability constrains demand this is latively unresponsive to price. In the
correct. In more normal circumstances, it may be true for efficiency changes course of natural developments there
which occur as part of general economic trends, but not for policy-driven may be little incentive for efficiency to
measures aimed at bringing more efficient technologies into imperfect markets. In improve, irrespective of the technical
such cases there will usually be real net energy savings only slightly smaller than potential. Yet these are precisely the
those suggested by a simple engineering analysis, and clear economic benefits. sectors which are likely to offer the
greatest energy savings. Conservation
policy can choose to focus upon such
Recent communications in Energy ment contains at least two major areas, including those dominated by
Policy by Brookes 1 and Greenhalgh 2 flaws. The first, and lesser, flaw is to market failures, where the implicit
have disputed the claims of those who assume that future economic reactions price falls from increased efficiency
believe that improving energy efficien- will parallel those of the past. There have little impact on activity levels.
cy can provide large energy savings. It are several reasons why this is not so. Macroeconomic data aggregates the
is argued that the macroeconomic re- The bulk of historic data (up to 1973 - behaviour of end-uses which span a
sponse to improving efficiency, and the period since then has been partly wide range of elasticities and other
the associated fall in energy costs, will energy-constrained and this is not the market responses. In many respects
offset any apparent savings. This is not main data Brookes uses) is gathered the focus and implications of efficien-
a new argument, and is known as the from an era of declining real energy cy improvements which result from
'rebound effect'. prices, very rapid electrification, and policies aimed at saving energy will be
Brookes offers the most cogent h~s- economic development based on the opposite of those occurring natur-
torical macroeconomic analysis and heavy industry, with domestic demand ally, which tend to focus on the areas
arguments. He rightly points out that growth based on satisfying fairly basic where activity levels are most respon-
when energy supply or price is a con- desires such as adequate warm homes. sive to implicit price falls. Conse-
straint on economic activity, impro- The last two decades have shown great quently, little or nothing can be
ving efficiency will not help to reduce changes in the pattern of energy and learned from general historic trends
demand. In the much more usual economic development. Few people about the energy or economic implica-
situation, where energy is not a con- believe that a long era of steadily tions of policies directed explicitly at
straint, historical trends at least up to declining fossil fuel prices will ever saving energy. This is an important
1973 show that although energy pro- return, and there is much evidence general point: the critical distinction
ductivity improved, it did not do so that some important end-uses of ener- between 'natural' and policy-driven
nearly as fast as labour and capital gy are approaching saturation, 3 whilst efficiency improvements invalidates
productivity, so that efficiency im- the pattern of economic development many recent attempts to use past mac-
provements were more than offset by is shifting towards less material- and roeconomic data to draw policy con-
the new uses for energy. energy-intensive goods. 4 General clusions about the cost and impact of
From this Brookes concludes that statements about the energy founda- trying to constrain energy demand.
increasing energy efficiency has and tion of future economic growth, large- Furthermore, such rebound as does
will simply increase the attractiveness ly based on pre-1973 data, are there- occur tends to reflect direct social
of energy for new uses: if it is more fore questionable. and/or economic benefits, because it
efficient, it is cheaper, so people do A much more serious flaw is to comes from uses where energy price is
more with it. Consequently energy confuse the role of naturally-occurring a serious constraint on activity - for
demand cannot be reduced by impro- efficiency improvements with the example, increased comfort when very
ving efficiency when it is not a con- effects of deliberate attempts to mini- draughty buildings are insulated. But
straint on activity. It would be harder mize energy consumption when price in many areas there is little such re-
to find a sharper divide between this and availablility are not constraints. In bound because energy price is a re-
and the claim made by others for the all the period to 1973, improved ener- latively minor factor in determining
scale of savings available from impro- gy efficiency was primarily a consequ- activity levels.
ving energy efficiency. ence of other pursuits - the drive to This is not inconsistent with the
However, while the historical analy- colonize new markets, by producing observation that energy price is an
sis is fine the final step in this argu- automated processes in which the important determinant of demand, be-

ENERGY POLICY October 1990 783


Communication
cause there is a critical distinction criticized by Lovins 7 and by Henly et with their attempt to make appliance
between activity responses and tech- al. s A reply by Khazzoom 9 strongly efficiency standards illegal in the U S A
nical responses. Price increases may criticized Lovins's economic theoriz- (by setting a Federal 'zero standards
stimulate the takeup of more efficient ing and consistency, but did not rebut standard'), nevertheless indicated that
technology without affecting the activ- many of his basic arguments, and it the overall macroeconomic effects of
ity level, particularly in the long term ignored the more careful and equally efficiency standards would be
as technologies respond. Promoting devastating critique by Henly et al. beneficial. 11
the more efficient technologies direct- Khazzoom did not, in this author's As many economists seem to have
ly will similarly lead to genuine de- view, seriously dispute the evidence difficulty in understanding how such a
mand reductions. When the price re- that the rebound effect is usually state of affairs can exist, it is worth
sponse is based primarily on technolo- small, reducing the 'engineering esti- reciting at least seven reasons for it: 12
gy improvement, the implicit energy mate' of savings by perhaps 5-15%
price fall from promoting more effi- overall in most cases. • Lack of knowledge, knowhow
cient technology is not equivalent to a Insofar as larger rebounds occur, and technical skills. Private
real fall in energy prices. And there is this often reflects substitution rather households, car drivers, small and
a second asymmetry between tech- than absolute increases (as medium-sized companies and
nological and activity responses: tech- Greenhalgh emphasizes with respect small public administrations
nical improvements may stagnate, but to electricity displacing other fuels): generally know little about the
they tend not to reverse when the the overall energy impact is then possibilities for energy saving, or
price falls. ambiguous, and indeed such rebound lack the skills to implement them.
Thus whilst accusing efficiency may amplify the gross savings. Architects, consulting engineers
advocates of a 'fallacy of composi- Brookes himself seems to acknow- and installers, similarly often
tion', Brookes himself is making a ledge some of these points indirectly, have little knowledge of or in-
'fallacy of aggregation' by neglecting when he accuses the efficiency enthu- terest in energy conservation
large swathes of demand areas where siasts of 'wanting to jog A d a m Smith's opportunities.
improving efficiency can very effec- elbow to introduce damaging reduc- • Separation of expenditure and be-
tively save energy, and by neglecting tions in energy intensity of production nefit. The person or group owning
the critical distinctions between the - since it seems that these are likely to a building or energy-consuming
activity and technological determi- be the only ones associated with re- equipment may not be the user.
nants of energy demand. ductions in total energy consumption'. Hence the owner may not receive
There are other components to the A t the risk of repetition it therefore the benefits of conservation, and/
rebound effect. Brookes cites a re- seems to necessary to emphasize again or the user may not be allowed to
spending effect: 'purchasing power re- that the case for extensive interven- make capital investments to im-
leased by lower expenditure on ex- tion rests squarely on the evidence prove the building or equipment.
isting uses finds an outlet somewhere that A d a m Smith's elbow is suffering • Limited capital, often arising from
. . . in the purchase of goods and from crippling arthritis in this area, external restrictions on capital
services that require energy . . /.5 and jogging it to move his hand is budgets. Poor householders often
Total energy costs are generally a few likely to be highly beneficial. For ex- have more pressing uses for their
per cent of G D P and this re-spending ample, a U K Parliamentary enquiry money than making investments
effect will, even if one assumes a took evidence from a wide range of to reduce running costs. In many
linear e n e r g y - G D P relationship, be of industry and environmental groups small businesses, the capital
this order. Another component is the and concluded: 10 budget is often quite constrained
supply rebound: if demand is lowered, and devoted to business-related
The most striking feature of our enquiry
the pressure on energy supply will be has been the extent to which improvements investments such as computeriza-
lowered and prices may fall, stimulat- in energy efficiency - across all sectors of tion. Also, non-labour running
ing more general demand. However, the economy - are almost universally seen costs are often treated as un-
this can never reverse the sign of as the most obvious and most effective avoidable peripherals. There is
savings and, since supply curves are response to the greenhouse e f f e c t . . , the thus little opportunity or incen-
evidence received overwhelmingly en-
often much flatter than demand curves dorses the view that, for a variety of tive to invest in energy conserva-
(and for some supply industries may reasons, serious market imperfections per- tion to reduce overheads.
be negative) this effect too is usually s i s t . . , widespread opportunities to invest • Rapid payback requirements.
negligible. profitably in cost-effective measures . . . Even when those making the in-
are being ignored.
In fact, many of these points have vestment have the relevant in-
been made in the reclusive publication These failures result in an inefficent formation and expertise and re-
of the I A E E which Brookes himself use of resources and higher than ceive the full benefits, they still
cites most often, the Energy Journal. needed costs to society, the consumer, tend to demand a much higher
A n article by Khazzoom, 6 which ad- and the environment. It is striking that rate of return than that used for
vanced arguments related to those of even the analysis performed by the US supply investments. 13
Brookes and Greenhalgh, was heavily Department of Energy, connected • Impact of electricity and gas tariff

784 ENERGY POLICY October 1990


Communication
structures. D o m e s t i c electricity t h e m , a n d c a n n o t be b o t h e r e d to in e n d - u s e efficiency. Policies a i m e d at
a n d gas tariffs are usually de- take steps to save m o n e y in this r e m o v i n g or c i r c u m v e n t i n g these mar-
signed in two p a r t s - a fixed area. Cost-effectiveness is not the ket obstacles, a n d installing efficient,
charge, reflecting capital repay- only criterion; 'cost r e l e v a n c e ' is cost-effective technologies, will save
m e n t a n d fixed r u n n i n g costs, a n d also r e q u i r e d . T h e a t t i t u d e m a y energy and bring both environmental
a v a r i a b l e part reflecting v a r i a b l e b e crudely s u m m a r i z e d as o n e of a n d e c o n o m i c benefits. This is n o t
o p e r a t i n g costs. M o s t e n e r g y con- 'don't know and don't care'. This wishful t h i n k i n g b u t the almost univer-
s e r v a t i o n m e a s u r e s will save the of course c o n t r a s t s sharply with sal conclusion from those w h o h a v e
user only the v a r i a b l e p a r t of the e n e r g y industries. studied t h e realities of the e c o n o m i c
tariff, o f t e n well u n d e r half t h e Legal and administrative obsta- i m b a l a n c e b e t w e e n supply a n d de-
total charge. Yet m o s t c o n s e r v a - cles. Finally, t h e r e can b e a n u m - m a n d . Surely it is time t h a t the d e b a t e
tion m e a s u r e s do r e d u c e utility b e r of legal a n d a d m i n i s t r a t i v e m o v e d on to c o n s i d e r i n g the relative
fixed c h a r g e s in t h e long r u n since obstacles in t h e p a t h of e n d - u s e merits a n d impacts of different policy
they o f t e n r e d u c e the p e a k efficiency, including discrimina- o p t i o n s for trying to achieve t h e s e
loads. 14 tory tax regimes, r e n t controls, savings?
Lack o f interest in peripheral capital b u d g e t restrictions, etc.
operating costs. E n e r g y costs are M. J. Grubb
often a small p a r t of p e r s o n a l or T h e result of all t h e s e factors is to Energy and Environmental
business e x p e n d i t u r e s . People create a pervasive imbalance between Programme
m a y simply not b e i n t e r e s t e d in i n v e s t m e n t s in supply a n d i n v e s t m e n t s London, UK

This communication is an edited extract the era of materials-intensive production number of other discussions, notably: lEA,
from M.J. Grubb, ed, Energy Policies and and the beginning of a new era in which Energy conservation in lEA countries,
the Greenhouse Effect, Gower, Aldershot, economic growth is dominated by high- OECD, Paris, 1987; various publications
UK, for the Energy and Environmental technology products having low materials from the American Council for an Energy
Programme, Royal Institute of Interna- content'. This should not be confused with Efficient Economy, Washington, DC; and
tional Affairs, London, UK, forthcoming the shift towards services on which an overview by E. Jochem and M. Brand,
1990. Brookes comments. 'Strategic policies for improving energy
5 Brookes, op cit, Ref 1. efficiency and reducing greenhouse gas
6 J.D. Khazzoom, 'Energy savings result- emissions', Fraunhogfer-Institute fur Sys-
L. Brookes, 'The greenhouse effect: the ing from the adoption of more efficient temtechnik, Karlsruhe, FR Germany.
fallacies in the energy efficiency solution', appliances', The Energy Journal, Vol 8, No 13 One study of the choices made by well-
Energy Policy, Vol 18, No 2, March 1990, 4, October, 1987, pp, 85-89. informed consumers in buying fridges
~p 199--201. 7 A.B. Lovins, 'Energy savings . . . which differed only in cost and efficiency
G. Greenhalgh, 'Energy conservation another view', The Energy Journal, Vol 9, concluded that only 2/5 of them bought the
policies', Energy Policy, Vol 18, No 3, No 2, April 1988, pp 155-162. more efficient variety if it took more than 3
April 1990, pp 293-299. 8 j . Henly, H. Ruderman and M.D. years to pay back (35% discount rate).
3 Home heating, and the domestic sector Levine, 'Energy s a v i n g s . . . A follow-up', Another 2/5 seemed to apply a discount
more generally, is an important potential The Energy Journal, Vol 9, No 2, April rate above 60% (ie requiring payback in
case of saturation. Brookes, op cit, Ref 1, 1988, pp 163-170. under 2 years). This contrasts with produc-
claims that 'unpublished research . . . 9 J.D. Khazzoom, 'Energy savings . . . a er criteria on the order of 10% return, or
shows that domestic consumers tend to rejoinder', The Energy Journal, Vol 10, No 10 year payback; see A.K. Meier and J.
spend a constant proportion of income on 1, January 1989, pp 157-165. Whittier, 'Consumer discount rates implied
fuel and electrical energy'. The UK Family ~0 House of Commons Energy Committee, by consumer purchases of energy efficient
Expenditure survey shows that average Energy Policy Implications of the Green- refrigerators', Energy, The International
household expenditure on direct energy is house Effect, Vol 1, July 1989, HMSO, Journal, Vol 8, No 12, pp 957-962, 1983.
actually greater in the poorest homes than London, UK. 14 Part of the fixed charge reflects connec-
in middle incomes homes even in absolute 11 According to P. Rollin and Jan Beyea, tion costs, which conservation would usual-
terms, let alone relative to income, presum- 'US appliance efficiency standards', Ener- ly not affect. The importance of the capac-
ably because poorer people live in worse gy Policy, Vol 13, No 5, October 1985, pp ity element will vary greatly according to
accommodation and are less likely to invest 425--436 the results suggested that with the system and load conditions. The fun-
in insulation and more efficient equipment. standards examined, 'GNP would increase damental reason why it is so difficult for
The statistics make it hard to separate the by billions of dollars, the net foreign trade conservation to receive its 'capacity credit'
energy component of other expenditures balance would increase by a billion dollars, is the impracticability of dynamic marginal-
such as transport, but it is still hard to see and around 100 000 new jobs would be cost pricing, in which very high rates at
how any of the FES data squares with generated'. The US Court of Appeals later times of peak load on the system would
Brookes's statement. ruled that the DoE moves to ban standards raise the revenues for capital construction.
4 R.H. Williams and E.D. Larson, 'Mate- 'openly violated Congressional intent', and Separation of fixed charges is really a
rials, affluence, and industrial energy use', declared the zero-standards standard as surrogate for this. Declining block tariffs
Annual Review of Energy, No 12, pp 99- illegal. for industrial consumers can have similar
144, 1987. The authors amass substantial 12 The list given here is synthesized from a implications.
data to suggest that value added in goods
occurs increasingly from fabrication and Communications
finishing, rather than from increasing bulk, The editor welcomes debate on articles published in Energy Policy. Letters and
and that 'while many believe this to be a communications should be sent to the Editor at the address on the inside front cover.
temporary phenomenon . . . our analysis
indicates this trend marks the passing of

ENERGY POLICY October 1990 785