Why Having A Realistic View of Energy Efficiency Matters to Climate Change

In response to our New York Times op-ed about the limits of energy efficiency and the furious reaction to it from some quarters, Andy Revkin asks whether we can find room for agreement on the rebound effect.

To some degree we already have.

Just over three years ago, when Breakthrough Institute published an extensive review of the economic literature on rebound effects, there was little discussion about how serious rebound effects are, or what the implication might be for climate and energy policy. The conventional wisdom at the time, as Andy can attest, having been party to some of the private exchanges among efficiency experts and advocates, was that rebound effects were so small as to be inconsequential.

While some in energy policy circles still cling to this view, today there is broad recognition that rebound effects are likely substantially greater than has previously been acknowledged. This consensus extends from large academic reviews of the literature such as Steve Sorrell’s groundbreaking 2007 review for the UK government to more recent reviews conducted by the European Commission, the Intergovernmental Panel on Climate Change (IPCC), and the International Energy Agency (IEA). All cite studies finding rebounds in various contexts approaching and in some cases exceeding 50%. This stands in contrast, for instance, with the IEA’s estimate from as recently as 2012, which, despite recognizing the existence of rebound, estimated rebound effects globally at a rather precise 9%.

Even Azevedo and her colleagues, who offer a series of criticisms of our argument [link], acknowledge the likelihood of significant rebounds. So it would appear that we can all agree that estimations of the energy savings from energy efficient technologies based upon engineering-level estimates likely overstate significantly the energy savings that will actually be realized. This recognition constitutes progress, given that most climate mitigation scenarios still fail to account for significant levels of — or in many cases, any — rebound.

One precondition for finding agreement, however, is accurate representation of the positions taken by those with whom you are trying to find agreement. Over the last two weeks, a number of commentators and efficiency advocates have taken issue with positions we have never taken. Azevedo and her colleagues, for instance, altered a quote from our Op-Ed to suggest that we had argued that energy efficiency measures would universally and in the aggregate result in higher global energy demand. We have not made this claim.

What we wrote was this:

“Recent estimates and case studies have suggested that in many energy-intensive sectors of developing economies, energy-saving technologies may backfire, meaning that increased energy consumption associated with lower energy costs because of higher efficiency may in fact result in higher energy consumption than there would have been without those technologies.” Azevedo et al. inexplicably removed the italicized part of the sentence in order to characterize our claim as more sweeping than it was, and contrast it to what is cited by IPCC and IEA.

We do agree with Azevedo and co. that there are lots of uncertainties with regard to the magnitude of rebound effects associated with energy efficiency improvements. The difficulties in establishing baselines against which rebound should be judged, establishing causation, distinguishing between rebound effects and income effects, and the broader impacts of income growth are all well established. These problems, as Steve Sorrell notes in his post, “are hardly unique to rebound effects – a host of other physical and economic phenomena present equally difficult challenges.”

In service of exploring where there may be other areas of agreement, we will offer some further thoughts on these questions.

The first regards baselines. To estimate rebound, one first must establish a baseline estimate of energy consumption against which it will be measured. Perhaps, as Azevedo and co. suggest, the planet, when viewed from space, might instead be illuminated with candlelight had incandescent light bulbs not come along. If that is your view, then first incandescent light bulbs and then LEDs have resulted in enormous energy savings. Or, to take another example, if you think that without the development of LCD screens, we would all have 50-inch cathode ray television sets on our walls and cathode ray iPhones in our pockets, then the development of vastly more efficient LCD technology has also been a huge energy saver.

But the reality is that the energy efficiency of new technologies is frequently inseparable from other performance characteristics that result in us using those technologies in different ways for different purposes. This speaks to the question of causation. Did the development of the LCD screen cause us to invent the iPhone? Of course not, it was one of a series of enabling technologies that made smartphones possible. But how one answers that question is actually irrelevant to the question of estimating the likely energy savings associated with efficient technologies. Whether or not LCD’s caused smartphone use, smartphone use erodes the energy savings that an engineering estimate of the energy savings associated with replacing 19” cathode ray televisions with LCD’s in, say, the year 2000 would have arrived at.

Wealth effects are another issue that confound efforts to accurately estimate rebound. Did we all buy enormous flat screen televisions because we got richer, because efficiency made them cheaper to operate or because the cost per inch of owning and operating pixels came down dramatically due to LCD’s? Again, how much we attribute to the fact that we are richer and how much to the fact that a new technology changed both the efficiency of television screens and their performance characteristics doesn’t matter. Even were we far richer than we are today, it is hardly any more likely that we would all have 50” cathode tubes in our homes than that the planet viewed from outer space would be awash in candlelight.

Or consider automobiles. Over the last several decades, cars have become much more efficient. But 75% of the technical efficiency gains achieved in US automobiles went to produce more power, not save fuel. Was that because we got richer, because gas prices were low, or because the real cost of powering a ton of steel at 60 miles an hour dropped due to higher engine efficiency? For the purposes of estimating the energy savings it doesn’t matter. Whatever the respective contributions of these factors, 75% of the technical efficiency gains were not taken as energy savings.

The question of wealth effects is most important when it comes to the developing world. People in the developing world are becoming more affluent. As they do, they are consuming more energy. But which is the chicken and which is the egg? Do people consume more energy because they get richer or do they get richer because they consume more energy? In practice, these mechanisms are interdependent, with changes in technology and wealth reinforcing each other within positive feedback loops.

Teasing these factors apart has confounded the economics profession for several generations but there is broad agreement that most long-term economic growth is a product of multifactor productivity growth. And there is growing recognition that energy productivity growth is a key driver of multifactor productivity growth.

Some economists go even further. Using a different production function and measure of energy productivity than standard neo-classical growth theory, for instance, the heterodox economist Robert Ayres has estimated that energy productivity growth has been the primary driver of economic growth in several OECD economies during the 20th century.

In any event, the relationship between energy productivity and economic growth remains a subject of significant dispute within the economics profession and well beyond. But one thing we do know is that energy consumption in the developing world will grow significantly over the next century. And what the last three hundreds years of rising energy demand and declining energy intensity suggests is that so long as energy demand is far from saturated, energy efficient technologies are likely to contribute to rising energy demand.

Indeed, energy demand growth and high levels of unsaturated demand in the developing world basically describe the same phenomena. Growth in demand for energy will overwhelmingly come from the developing world for most of this century for the rather obvious reason that energy demand among most of the world’s population is far from saturated. Indeed more than 1.3 billion of them are so far from saturation that they have no access to modern energy sources at all.

In this sense, rebound and backfire represent not two distinct concepts but two distinct contexts. While the terms can be distinguished by the magnitude of rebound they describe, both terms describe precisely the same processes. Where demand is far from saturated, technical efficiency improvements will both accelerate energy demand growth AND the onset of peak energy consumption. When and if demand saturates and peaks, technical efficiency will drive declining energy consumption.

Obviously, rebound and backfire effects associated with the use of better and more efficient energy technologies in the developing world will bring enormous improvements in human well-being with them and some have suggested that for this reason, discussing the energy and climate implications of rebound effects in these contexts is somehow out of bounds.

But the question at hand is not whether efficient technologies are good or bad, or whether they will help lift poor people out of poverty. It is what effect their broad diffusion around the world will have on energy demand and carbon emissions. It seems to have been completely forgotten that the target of our op-ed was not LED lights or their inventors. Nor was it poor countries that will use LEDs to raise living standards. Rather, it was the claim made in the announcement of the Nobel Physics Prize that widespread diffusion of LED’s could reduce global energy use associated with lighting from 20% of total global energy demand to 4%.

This claim might be dismissed as harmless hyperbole were it not for the fact that the same basic error in calculating the likely energy savings associated with energy efficient technologies is baked into just about every climate mitigation scenario that has been produced over the last decade, including not only those produced by environmental NGO’s that have long exaggerated the mitigation potential of energy efficiency but mainstream modeling by institutions such as the International Energy Agency, McKinsey’s management consultancy, and the United Nations IPCC.

Efficiency has been viewed almost universally as, in the words of Amory Lovins, “a lunch you get paid to eat.” And while efficiency brings many benefits, the evolving literature on not only rebound but also the real opportunity costs associated with efficiency measures, the likely double counting of efficiency savings in both BAU estimations of future energy demand and climate mitigation scenarios, and the underestimation of future energy consumption among the global poor suggest that widespread efficiency measures are unlikely to represent the cheap and easy path to emissions reductions that many assume.

As a result, as Steve Sorrell concludes his post, “we may be systematically underestimating the already formidable challenge of reducing global carbon emissions.” This represents uncomfortable knowledge for many in the environmental community, as well as within the IEA. Revising climate mitigation scenarios to account for rebound and to offer more realistic projections of future energy demand will have substantial implications for policy-makers and serious climate advocates, who have been told for years that 40% or more of the mitigation challenge could be solved through greater energy efficiency.

While we applaud Azevedo et al. for acknowledging that rebounds are likely to be substantially higher than IEA, IPCC and environmental NGO’s have historically recognized, it is unfortunate that they seem more interested in upbraiding us for bringing the issue to the New York Times opinion page than on pushing these large and well resourced institutions to take rebound seriously. Perhaps now we can all work together to assure that groups like the IEA and IPCC offer more realistic assessments of the potential of energy efficiency for climate mitigation.

This post is reprinted from the New York Times' DotEarth blog.