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. View Ensia homepage

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