Why Energy Efficiency May Not Decrease Energy Consumption

Growing empirical evidence that energy efficient technologies may drive greater energy consumption, not less, demands a new look at the role of energy efficiency in efforts to mitigate climate change.

September 28, 2010 | Michael Shellenberger, Harry Saunders,

One of the most curious facts about energy is that economies continue to use more of it even as they use it more efficiently. This strikes us as strange because it has become an article of faith that making cars, buildings, and factories more energy efficient is the key to cheaply and quickly reducing energy consumption, and thus pollution.

But energy experts have never seen this as particularly mysterious. As energy historian Vaclav Smil notes, "Historical evidence shows unequivocally that secular advances in energy efficiency have not led to any declines of aggregate energy consumption." A group of economists beginning in the 1980s went further, suggesting that increasing the productivity of energy would increase economic growth and energy consumption. Efficiency advocates dismiss the evidence of rebound in energy use pointing to direct behavioral changes at the household or business level that are easiest to measure. But the most significant energy rebounds are indirect -- in the production of energy, raw materials, and consumer goods -- not in the "end use" of consumer products.

Below, a leading energy economist, Harry Saunders, explains why energy efficiency does not decrease energy consumption in the way we conventionally understand it. In the process, Saunders clarifies the controversy over his recent co-authored study for the Journal of Physics, which reviews 300 years of lighting history to predict the impact of new solid-state lighting technologies (e.g. LEDs). Against the widespread belief that new lighting technology will reduce energy consumption, Saunders and his colleagues found that they will likely increase it -- greatly expanding the global use of lighting in the process, especially in developing countries. Saunders clarifies some important questions, and explains the basics of "the rebound effect."

With the new study, rebound has firmly moved from the theoretical to the empirical, and the implications of it must now be dealt with by all of us who were counting on efficiency to be an easy way to reduce greenhouse gas emissions.

-Michael Shellenberger, President, Breakthrough Institute

Why Energy Efficiency May Not Decrease Energy Consumption

By Harry Saunders

I recently co-authored an article for the Journal of Physics ("Solid-state lighting: an energy-economics perspective" by Jeff Tsao, Harry Saunders, Randy Creighton, Mike Coltrin, Jerry Simmon, August 19, 2010) analyzing the increase in energy consumption that will likely result from new (and more efficient) solid-state lighting (SSL) technologies. The article triggered a round of commentaries and responses that have confused the debate over energy efficiency. What follows is my attempt to clarify the issue, and does not necessarily represent the views of my co-authors.

More Efficient Lighting Will Increase, Not Decrease, Energy Consumption

Our Journal of Physics article drew on 300 years of evidence to shows that, as lighting becomes more energy efficient, and thus cheaper, we use ever-more of it. The result, we note, is that "over the last three centuries, and even now, the world spends about 0.72% of its GDP on light. This was the case in the UK in 1700 (UK 1700), is the case in the undeveloped world not on grid electricity in modern times, and is the case for the developed world in modern times using the most advanced lighting technologies."

The implications of this research are important for those who care about global warming. In recent years, more efficient light bulbs have been widely viewed as an important step to reducing energy consumption and thus greenhouse gas (GHG) emissions. Moreover, the Intergovernmental Panel on Climate Change (IPCC) of the United Nations and the International Energy Agency (IEA) have produced analyses that assume energy efficiency technologies will provide a substantial part of the remedy for climate change by reducing global energy consumption approximately 30 percent -- a reduction nearly sufficient to offset projected economic growth-driven energy consumption increases.

Many have come to believe that new, highly-efficient, solid-state lighting -- generally LED technology, like that used on the displays of stereo consoles, microwaves, and digital clocks -- will result in reduced energy consumption. We find the opposite is true, concluding "that there is a massive potential for growth in the consumption of light if new lighting technologies are developed with higher luminous efficacies and lower cost of light."

The good news is that increased light consumption has historically been tied to higher productivity and quality of life. The bad news is that energy efficient lighting should not be relied upon as means of reducing aggregate energy consumption, and therefore emissions. We thus write: "These conclusions suggest a subtle but important shift in how one views the baseline consequence of the increased energy efficiency associated with SSL. The consequence is not a simple 'engineering' decrease in energy consumption with consumption of light fixed, but rather an increase in human productivity and quality of life due to an increase in consumption of light." This phenomenon has come to be known as the energy "rebound" effect.

The Empirical Evidence for Rebound

The findings of our SSL research inspired The Economist magazine to write a commentary about the study that was mostly correct but made a couple of errors, which we responded to in a letter. In our response, we clarified that energy prices would need to increase 12 percent, not three-fold, in order to reduce the consumption of electricity for lighting; to its credit, The Economist posted are response on its web site and published it in its letters section.

Evans Mills of the Lawrence Berkeley National Laboratory wrote on the Climate Progress blog that The Economist had "inverted" our findings. However, The Economist did not "invert" our findings, it had simply overstated an implication of them.

Efficiency advocates sometimes dismiss rebound by only looking at "direct" energy consumption -- that is, consumption by households and for private transportation. Examples of rebound in this part of the energy economy would be driving your Prius more because gasoline costs you very little, or turning up the thermostat in your efficient home. But these "direct-use" rebounds are small in comparison to "indirect-use" rebounds in energy consumption. Globally, some two-thirds of all energy is consumed indirectly-- in the energy used to produce goods and services. A residential washing machine may be energy efficient in terms of function, but in terms of production, the metal body alone requires energy to mine, smelt, stamp, coat, assemble and transport it to a dealer showroom and eventually a residential home. The energy embedded in your washing machine, or just about any product or service you consume, is very large. And remember that any money you save on your energy bills through efficient appliances or the like is re-spent on other goods and services, which each take energy to produce, all while more productive use of our money (e.g. in spending, savings and production) spurs a more robust economy, demanding even more energy.

As our recent SSL research suggests, there is strong empirical evidence that even in the "direct" part of the economy, the rebound effect can sometimes be so substantial as to eliminate essentially all energy reduction gains. But in my new research (which relies on a detailed, theoretically rigorous econometric analysis of real data), the rebound effect found in the larger "indirect" part of the economy is even more significant -- and more worrisome.

Varying degrees of rebound occur because the phenomenon works in several ways. Increasingly efficient technologies effectively lower the cost of energy, as well as the products and services in which it is embedded. This results in firms consuming more energy relative to other production inputs and producing more output profitably. Firms and individuals benefit from cheaper and more abundant products and services, causing them to find many more uses for these (and the energy they contain). A more efficient steel plant, for example, produces cheaper steel that, in turn, allows firms and individuals to afford to find more uses for the same material.

While some find the notion that increased energy efficiency increases energy consumption to be counter-intuitive, the economic theory is remarkably commonsensical. Mills claims that the idea that the rebound effect "has been postulated in theory but never shown empirically to be significant" is not the case. After many years, rebound theory has advanced to the point that it is now a reliable foundation for empirical study and the empirical evidence firmly suggests rebound exists. And remember that the "rebound effect" for other factors of production is expected, even welcomed; economists have long expected labor productivity improvements to drive even greater economic activity, for example, thus increasing demand for labor and creating new employment opportunities in the economy as a whole, even as efficient production may eliminate a handful of jobs at one factory.

The Implications of Rebound

There are significant potential implications of high levels of rebound. One is that greater energy efficiency may be a net positive in increasing economic productivity and growth but should not be relied upon as a way to reduce energy consumption and thus greenhouse gas emissions. Particularly in a world where many billions lack sufficient access to modern energy services, efficient technologies such as solid-state lighting may be central to uplifting human dignity and improving quality of life through much of the world. One might even argue that energy efficiency is still important from a climate perspective, because when efficiency leads to greater economic growth, societies will be better able and more willing to invest in more expensive but cleaner energy sources. But in this way energy efficiency is no different from other strategies for increasing economic growth. What should be reconsidered is the assumption that energy efficiency results in a direct, net decrease in aggregate energy consumption when there is a growing body of research suggesting the opposite.

Dr. Harry Saunders has a B.S. in Physics from the University of Alberta, an M.S. in Resources Planning from the University of Calgary, and a Ph.D. in Engineering-Economic Systems from Stanford University. Saunders coined the "Khazzoom-Brookes Postulate" in 1992 to describe macro-economic theories of energy rebound, and has published widely on energy economics, evolutionary biology, and legal theory. He can be reached at: hsaunders@decisionprocessesinc.com.

Update, 9/30/10: In a related story, it turns out that decades of energy efficient lightbulbs and Energy Star appliances haven't led to reductions in energy consumption in the average U.S. household, but they have given the average American relatively more disposable income to devote to new (energy-guzzling) gadgetry. Read more here.