A 2007 study of energy intensity by Soham Baksi and Christopher Green reinforces that finding. After accounting for ongoing changes in the share of global economic activity derived from manufacturing, agriculture and services, the two economists found that simply increasing the global rate of energy intensity decline from the historic rate of 1 percent to 1.25 percent would require increasing efficiency within the residential and commercial sectors sevenfold and efficiency in the transportation and industrial sectors fivefold between 1990 and 2100.

So not only are such efficiency gains unprecedented, given that a substantial share of historical energy intensity declines are due to factors outside the domain of energy efficiency policy, they also appear highly unrealistic.

Double Counting

In order to claim that energy efficiency can dramatically reduce emissions, both IEA and IPCC assume that energy intensity will decline faster in the future than it has in the past. In the 2012 World Energy Outlook, IEA assumes in its core reference scenario that energy intensity gains will spontaneously — that is, without any additional policy intervention — increase to 1.9 percent annually through 2035, meaning that some of the fastest national rates observed over the last 40 years will all of a sudden happen globally. This allows IEA to assume away about two-thirds of its projected increase in energy intensity relative to the long-term global trend and focus its detailed plans only on that final 0.5 percentage point increase.

IPCC has made similarly heroic assumptions about energy efficiency, provoking a reaction from leading energy and climate scientists. In a 2008 article for Nature, Roger Pielke Jr., Tom Wigley and Christopher Green faulted IPCC for assuming in its business-as-usual scenarios that two-thirds or more of the overall decarbonization rate required to stabilize greenhouse gases this century will occur automatically, with energy intensity improvements constituting the largest portion of these projected gains.

Making matters worse, even after IPCC and IEA assume higher-than-normal energy intensity declines in their scenarios, their modelers went on to assume there are substantial additional efficiency opportunities left waiting to be unlocked — at a profit — by the right policy actions.

According to RMI, McKinsey, IEA and others, trillions of dollars in untapped efficiency gains await the savvy businessman or policy maker. In practice, private actors have been perfectly happy to leave these trillion-dollar-bills sitting on the sidewalk.

Unfortunately, few models rigorously account for what part of the finite pool of cost-effective efficiency opportunities accounts for the big gains baked into baseline scenarios — such as swapping old incandescent bulbs for efficient new fluorescents or LEDs, an efficiency opportunity likely to be taken up under business-as-usual scenarios — and which are left over to be captured by policy, raising the risk of substantial double counting.

Hidden Costs

According to RMI, McKinsey, IEA and others, trillions of dollars in untapped efficiency gains await the savvy businessman or policy maker. In practice, private actors have been perfectly happy to leave these trillion-dollar-bills sitting on the sidewalk.

Obstacles to greater energy efficiency include split incentives (the people paying for efficiency are often not the same people who receive the benefits) and imperfect information (people often do not know that greater efficiency can pay for itself). And economists warn that there are often hidden challenges associated with overcoming these obstacles.

First are transaction and implementation costs, such as rebates, policy implementation and hired consultants, which can raise the cost of efficiency upgrades 40 percent or more, and which are ignored by the efficiency strategies published by IEA, McKinsey and RMI. In a recent paper, economists Hunt Allcott and Michael Greenstone found that the literature “on the magnitude of profitable unexploited energy efficiency investments … frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured.”

Another challenge is the assumed rate at which consumers and firms discount future earnings relative to current wealth — what economists call the “discount rate.” McKinsey assumes an across-the-board discount rate of 7 percent per year when determining which investments are profitable. RMI applies a range of rate-of-return hurdles necessary to overcome discount rates in various sectors, ranging from 5 to 33 percent.

But due to opportunity costs, corporate executives are often looking for returns on investments in the range of 20 percent, and individual consumers even higher still. Likewise, efficiency investment today means less money available to invest in other opportunities tomorrow, which can increase the hurdle rate by 10 percentage points.