Friday, February 15, 2008

Does Energy Efficiency Save Energy?

Back on November 27th, Jeff Rubin and Benjamin Tal (two respected CIBC economists) released a report that tries to answer the question: "Does Energy Efficiency Save Energy?" The release can be found on the CIBC website here .

The Question: "Much is being banked on the notion that improvements in energy efficiency will be the answer to both oil depletion and greenhouse gas emissions. But is it a realistic economic premise that technological change can reduce energy usage, and by implication, its carbon trail?"

The Answer: "The road to hell is paved with good intentions."

The Economic Logic: "As improvements in energy efficiency lower the effective cost of energy relative to what otherwise would have prevailed, the resulting substitution and income effects that flow from any price change result in more of the good being consumed." Take an(over simplified) example: a switch energy efficient cars (such as hybrids) provide an initial drop in the amount of gasoline beginning consumed. Now, we can drive more for less. The energy efficient cars could result in higher consumption of gasoline. This has been referred to the Jevons Paradox .

Their bottom line: "In the past, the efficiency paradox has been used as an argument against efforts to promote greater energy efficiency and conservation. That is not our intention here. On the contrary, for a world facing the twin challenges of oil depletion and global climate change, there has never been a more urgent need for both. But in order for total efficiency to actually curb total energy usage, as opposed to energy intensity, consumers must be kept from reaping the benefits of those initiatives in ever-greater energy consumption. Otherwise, energy usage will be the beneficiary of our best efforts towards greater energy efficiency."

My two cents: Yes! We are all concerned that any savings in energy costs will lead to more energy consumption. In general, savings in one area of the budget is not going to lead to less aggregate consumption but more. What can we do? To start, we need to increase the price of gasoline to reflect the social cost by taxing it and by setting a price floor on gasoline prices. Flow the tax revenue into helping lower income individuals and into research and development. (as I said before) .

Economic History
The article also given a wonderful throw-back to Jevons! "Jevons observed that after the huge efficiency gains following the advent of James Watt’s steam engine, coal consumption, after dropping initially, rose by tenfold between 1830 and 1860."


Matthew said...

Stop trying to raise my Gas prices! I love my car. Quit trying to take away all the fun things you pinko!

Canadian Economist said...

Sorry Matthew, you've had it too good (we all have). The price you currently pay does not factor in the social cost of driving (i.e. the cost to the environment). Come-on Matthew: join the Pigou Club!

Matthew said...

I will when you sell your car

Canadian Economist said...

Owning a vehicle does not create pollution, drive one does. No one is asking you to sell your "truck", just for all of us to pay the social (environmental+private) cost of driving.

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