Energy Efficiency on the Rebound

A debate rages in the energy community about rebound — it has nothing to do with March Madness.

Addressing climate change requires moving to a low-carbon economy, one that emits far less carbon dioxide (CO2) than we do today. It’s generally agreed that no single bullet can get us there, no single technology (like nuclear or wind). Instead, it’ll be a matter of silver buckshot, a combination of lots of technologies.

Among the buckshot choices are the “low-hanging fruit” — technologies that are available now and easily implemented. These are the ones, it’s often argued, that we should push the hardest first.

The No-Brainer of Energy Efficiency: Save, Save, Save

To many, the first of the low-hanging fruit to pick is energy efficiency — a no-brainer, no-regrets step. Become more energy efficient, use less energy and therefore emit less, and in the process save money. On paper the benefits look huge. The International Energy Agency (IEA) estimates that energy efficiency could net us the bulk of global emissions reductions needed by 2030 to stabilize CO2 at 450 parts per million. (More on this here [pdf].) What’s more, according to a McKinsey report from 2009, such measures could lead to savings of hundreds of billion of dollars in energy costs. What’s not to like?

Or Is It Spend, Spend, Spend?

Turns out there’s a group of economists who don’t like. Why? Their argument is grounded in the writings of a 19th century economist, William Stanley Jevons, who posited in his 1865 book The Coal Question that as Great Britain’s industries used coal more and more efficiently, the nation’s use of coal actually increased rather than decreased. Here’s Jevons as quoted in a New Yorker article on rebound by David Owen (subscription required): “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The contrary is the truth.”

So what’s going on? The effect is described in some detail in a recent Breakthrough Institute report. In simple terms, authors Jesse Jenkins, Ted Nordhaus and Michael Shellenberger argue that the amount of CO2 emissions can be thought of as a product of three quantities:

CO2 = GDP x E/GDP X C/E,

where CO2 = total carbon dioxide emissions; GDP = aggregate economic output; E/GDP = energy consumption per unit of GDP; and C/E = carbon emissions per unit of energy consumption.

An improvement in efficiency means less energy is needed for a given unit of GDP and therefore a decrease in E/GDP. All things being equal, a decrease in E/GDP means a proportionate decrease in CO2 and we’ve got our silver buckshot.

Efficiency, Rebound and Backfire

But are all things equal? No, say the report’s authors. There is a rebound. When E/GDP decreases, they argue, as did Jevons way back when, the resulting economic benefit leads to an increase in GDP and an erosion in the initial decrease in energy use and CO2 emissions.

If the net efficiency gain is only 75 percent of the initial increase in efficiency, it’s said that there’s a rebound of 25 percent. If the savings are completely wiped out such that there’s no change in energy usage, the rebound is 100 percent — a full round of blanks instead of buckshot. In some cases efficiency improvements, at least in theory, can lead to a net increase in energy use and CO2 emissions. Economists call this a “backfire.”

Why is there rebound? Simple. The energy saved through greater efficiency saves money as well as energy. This makes it possible to purchase and/or produce more goods and services, which in turn require energy.

That there is a rebound effect is clear. How large of one is the question, and for the climate-change issue a huge factor. If we place big bets on energy efficiency to meet emission reduction goals (like the example of the IEA noted above) and those reductions turn out to be illusory, we will be in climate-change trouble.

How Big a Bounce Is That Rebound?

It depends on whether you belong to the big rebound club or the small rebound club.

The Breakthrough Institute folks argue that the rebound may be quite large, as large as 50 percent, when considered from a marcoeconomic or global perspective. But huge uncertainty looms in their numbers. It’s not uncommon to find estimates of one type of rebound effect or another with ranges from 0 to 40 percent. I’m not exactly sure what to make of such estimates.

Others, like energy efficiency guru Amory Lovins, argue that rebounds in today’s economy can be no more than a few percent. The essential argument of the small-rebound camp is that in today’s economy, energy is a small percentage of the cost of production (~ 5 percent) and so a decrease in energy costs can have only a small marcoeconomic impact and a small rebound.

The debate between the small and large rebound clubs, as a perusal of this Climateprogress post by Joe Romm will amply show, is not for the thin-skinned. There is, however, one refreshing note of agreement, and that is to push ahead on energy efficiency. In the words of Shellenberger and Nordhaus: “below-cost energy efficiency is critical for economic growth and should thus be aggressively pursued by governments and firms,” if for no other reason than to provide the resources to fund development of the other silver buckshot technologies we need to get to that elusive low-cost carbon economy we can only dream about today. Swish.

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