When more realistic numbers are applied, the amount of cost-effective efficiency measures dramatically shrinks — by 21 percent with the industry-appropriate discount rate of 20 percent, and by 43 percent with a discount rate consistent with the two- to three-year minimum payback period typically needed to entice household efficiency investments.
Beware Rebound
A third reason to question potential efficiency gains is the rebound effect, which posits that efficiency improvements that lower the cost of energy services trigger an increase in energy demand that can erode much of the expected energy savings and climate benefits.
This is because to the extent that energy efficiency measures lower the effective price of energy services, consumers and firms are likely to demand more of them. And when consumers save money through energy efficiency measures, they will likely spend some of those savings on goods or services that require still more energy. Finally, getting more economic activity out of each unit of energy drives economic growth, which further expands energy demand.
Collectively, these economic mechanisms can erode much — and in some situations all — of the reduction in energy consumption predicted by engineering-level analyses. And indeed, economists have documented myriad examples of the rebound effect. A 2007 review commissioned by the UK Energy Research Centre, drawing from more than 500 studies on the topic, found typical rebound levels ranging from 10 percent to as high as 80 percent, depending on the sector in question.
Surprisingly, most efficiency scenarios disregard the possibility of a significant rebound effect. McKinsey, for instance, completely disregards rebound effects and, in Reinventing Fire, RMI dismisses the possibility of significant economywide rebound, while the IEA’s 2012 World Energy Outlook assumes that rebound effects erode only 9 percent of energy savings.
Perhaps most importantly, in emerging economies where energy demand is growing most rapidly and consumers are just starting to acquire many modern conveniences such as air conditioning, personal transportation or even reliable lighting, rebound effects are much larger and can even lead to “backfire,” or a net increase in energy consumption following energy efficiency improvements.
Fortunately, there is still another big lever left to drive global decarbonization: accelerating the transition to low- and zero-carbon energy sources, including renewables such as wind and solar as well as nuclear energy.
To be clear, rebound effects, particularly in emerging economies, mean consumers and firms are using energy efficiency to enhance their economic welfare, getting more energy services out of the same or less overall energy use. That’s a fundamentally good thing. That said, the developing world is projected to account for virtually all energy demand growth in the coming decades. Accurately estimating how much rebound effects erode lasting energy savings is essential to depict the contribution of efficiency to long-term climate and energy strategies.
A Way Forward
Despite the bullish efficiency strategies promoted by IEA and respected consultants such as McKinsey and RMI, economists and energy analysts provide plenty of reason to be cautious about overestimating the potential contribution of profitable efficiency opportunities to global climate mitigation. After avoiding double counting and taking full account of the hidden costs required to unlock efficiency opportunities, the quantity of “low-hanging efficiency fruit” shrinks dramatically. Meanwhile, what truly profitable efficiency opportunities remain will trigger rebound effects, which further erode the delivered long-term energy savings.
If policy makers cannot count on energy efficiency to deliver the lion’s share of the roughly 4 percent per year global decarbonization rate needed to avoid dangerous climate change, are climate mitigation efforts sunk? Fortunately, there is still another big lever left to drive global decarbonization: accelerating the transition to low- and zero-carbon energy sources, including renewables such as wind and solar as well as nuclear energy.
In fact, history suggests reason for hope: Sweden and France each sustained greater than 4 percent annual improvements to the carbon intensity of their energy supplies for more than a decade (from 1974 to 1991 in Sweden and 1976 to 1988 in France) by deploying large amounts of nuclear power, which at the time, was the only zero-carbon energy source ready for global prime time. Iceland achieved similar rates from 1971 to 1985 by tapping the island’s localized geothermal resources.
Today, the world has an expanded suite of low-carbon power sources at its disposal, from increasingly competitive wind and solar energy technologies to safer new nuclear power plants. A set of challenges must be overcome to ensure that each of these technologies can truly scale to meet the needs of an energy-hungry planet, and new technologies must be readied for market, particularly in the transportation sector. National governments and industry leaders must now invest the necessary resources in advanced energy innovation and deployment.
Global energy consumption will likely more than double by mid-century as the population expands towards 10 billion people and billions more global citizens are lifted out of poverty. If we are to stabilize carbon emissions at or below 450 parts per million, virtually all of that new energy must be clean. If human civilization can reduce energy intensity faster than it has over the last century, then this effort will be made all the easier. But if it turns out that efficiency’s potential has been exaggerated, then we will be glad that strong efforts were made to move rapidly towards cleaner sources of energy. 
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To me, the bottom line here is that large energy efficiency gains are physically possible, and are probably necessary steps to addressing our energy and climate challenges. But, as this essay and partner report show, they are not going to be as easy or as automatic as many have suggested before.
Okay, that's good to know. Hard work is needed here. And we may need to work harder on decarbonizing energy sources in parallel with this effort.
But I would love to understand why certain efficiency efforts have worked better than others, and what we can learn from them? And what policy and market instruments could help accelerate efficiency gains?
I'd really hate to see us give up on possible efficiency gains. What would it take to realize them? To me, that's the big question.
Thanks for the thoughtful article.
One has to wonder how often and how long a consultant can be wrong before people stop paying attention and stop granting the "energy guru" status.
There have been only a few times in the past 150 years when energy use actually declined, and each of those times was associated with terribly economic consequences. Recessions effectively reduce energy demand growth, but that is a strategy that only a misanthrope can love.
We know how to produce safe nuclear power plants; we've been doing it since before Lovins published his "anything but nuclear" article.
I often remind people of a quote from a Lovins appearance on Democracy Now! in July 2008:
"You know, I’ve worked for major oil companies for about thirty-five years, and they understand how expensive it is to drill for oil."
I am pretty sure that Lovins is clever enough to know that energy efficiency will never work as well as he claims. I am also quite confident that his clients in the oil and gas industry are happy as long as his exaggerated efficiency predictions discourage people from taking the nuclear-energy-enabled decarbonization path that the French and the Swedes proved works fine and lasts a long time.
After all, countries that have built a lot of nuclear power stations have seen a permanent drop in their fossil fuel demand.
I want to pick up on one key point in particular:
"To be clear, rebound effects, particularly in emerging economies, mean consumers and firms are using energy efficiency to enhance their economic welfare, getting more energy services out of the same or less overall energy use. That’s a fundamentally good thing. That said, the developing world is projected to account for virtually all energy demand growth in the coming decades. ..."
Reducing poverty is an intrinsically good thing. Regarding the concerns with carbon emissions, it also yields some collateral benefits, even if there is some rebound effect from one form of energy consumption to others.
Economists and demographers have long recognized that increasing prosperity is associated with a "demographic transition" to significantly lower fertility rates. So even as per-capita consumption grows, there also will be, over time, fewer 'capita' and thus a damping effect on gross demand.
Indeed, fertility rates in most industrialized nations now are below replacement level -- pointing toward declining populations in the absence of increased immigration. Slower or negative population growth tends too to have a parallel effect on GDP growth as a result of fewer workers to produce output. Less economic product implies relatively less carbon emissions, even with technology constant.
Moreover, greater prosperity makes investment in and acquisition of alternatives to fossil fuels -- whether via efficiency or alternative energy sources -- more affordable.
I agree with Carol that we need to do 'all of the above'.
In reply to Jon's question, I'm afraid the answer might be higher energy costs. Because we can't seem to change peoples behavior regarding electricity consumption, we have embarked on an experiment called real time pricing. When the demand for electricity is the highest, your local utility charges the most for it, thereby avoiding (hopefully) the cost of building a new power plant.
First, I think this is a very regressive policy, and will harm the lower income people the most, and second, in the complicated world we live in, who has the time to watch a consumption meter when they get home from work-and sit in the dark when demand gets high. Not sure that will get us where we need to go either.
The ~500 billion tons of unnaturally emitted carbon now in air & seas will require extraordinary measures worldwide -- measures requiring energy, but which must combat changed world chemistry. We have years, not decades, to do this.
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1) Certainly efficiency installed does not historically deliver promised value if it is not maintained. Installing a measure and performing proper M&V checks to verify maintained performance, is a waste of money. At the corporate level, the operational mentality may not include the proper maintenance measures in the financial model, following installation efficiency improvement countermeasures.
2) The negative effects of climate change on the economics of doing business as usual are not accounted for. That is assuming the EUI growth rate difference of both scenarios have a certain level of negative feedback on economic models. These are not well understood.....especially as we achieve higher levels of GHG concentrations. Uncertainty bands widen as we see exponential compounding effects. So there is a non-linear relationship that many bean counters cannot begin to comprehend.
3) The economics of externalized costs appear neglected in the computations. This accounting is difficult for many to fully model, as the extent of damage is deep and wide. These obviously have negative feedback effects on economies both locally and globally....and cannot be discounted or the computations are based on non-reality.
4) Article does not express the dynamics in terms of complex energy usage mathematical models and only considers first (or maybe second) level effects.....and in fact the equation likely involves levels of variables of many more degrees of complexity.
5) Decarbonization is trivialized, as only a reduction of our current feedstocks seem considered. The surface of the problem is scratched, and traditional RE sources of wind/solar/nuke solutions are mentioned. The analysis does not mention the embodied energy "costs" of each, compared to other less intensive technologies capable of delivering energy on a constant basis...with less embodied energy.
6) Migration away from combustion of fossils is not considered.....and it is the key element holding us back, in a stuck in the stone age mindset. This is an implementation/transition long term scenario.
7) Harnessing of Hydrogen as a new fuel feedstock....involving no carbon, is not even mentioned and is key to getting us OUT of the stone age mindset. I am speaking about reacting the hydrogen and not combusting it. This is our best long term sustainable bridge to until nuclear fusion, which will not poison our atmosphere further. The key to Hydrogen is that is enables RE integration and scalable storage for long term baseload energy delivery.
8) Energy efficiency measures implementation relying on government support for the "economics" of a project are a fallacious position, in which we cannot do anything well without incentives. This is a truly limited mentality, which keeps us stuck because we could not possibly know enough to do any bold improvements without their backing. I like the "build it and they will come" perspective.