03/18/2010 05:12 am ET Updated May 25, 2011

The Real Paradox of Energy Efficiency

We have some tough decisions to make about energy supply and about energy demand. And every analysis of these decisions that I have seen indicates that the most cost effective thing we can do is to improve energy efficiency. This applies across the board -- transport, heating/cooling, electricity use. It applies to commercial properties and vehicles as well as to households and private transport. In the now well known McKinsey/Wattenfall study on reducing greenhouse gas emissions almost all the most cost effective measures were efficiency, and virtually all efficiency measures had a negative cost.

Now when we have measures with a negative cost available to us, and there is a compelling reason to do them anyway, we have to ask why we don't do them, why the market doesn't drive these measures right through society, or why Government policy, faced with many tough decisions, doesn't demand that we capture this prize?

The answer to this lies in some confused thinking that goes back 150 years but is still around. It goes by the name of Jevons Paradox, and although it should have been put to its final resting place a long time ago, it is still alive and quoted regularly. Worse than that, many in government demonstrate, by their behavior, that they believe this is true.

In 1856 William Stanley Jevons published a book entitled The Coal Question. What he observed was that after James Watt introduced his new, more efficient coal fired steam engine, greatly improving on the earlier design of Newcomen, coal consumption went up dramatically. Watt's engine made coal a more efficient power source, so that even though the amount of coal required for any particular application went down, the total number of applications went up.

We can easily understand this in terms of price. Increasing efficiency decreases the price in terms of what work a fuel can achieve. Decrease price and you should increase demand, and this increase in demand might actually outstrip the savings from the efficiency increase. Sometimes this is called a rebound effect, and Jevons paradox is when the rebound is greater than 100%, so exceeding the efficiency gains.

Now the question is, do we actually observe this in practice, and I will tell you right away that the answer is generally no, we do not. And when there is a danger of it happening, there are well established government policy measures that can stop it.

So let's look at a few examples. In the early 1970's, in response to the increase in the cost of energy, the US started to mandate improvement in the efficiency of domestic refrigerators. Refrigeration at that time was using 15% of total household energy. Over 30 years, the energy use per unit fell to less than a quarter of what it was. True, there was a modest increase in refrigerator size, but then that leveled off. There is a limit to how big a refrigerator you can put in your house. Even over the last seven years there has been significant improvement and that after 25 years of continuous reductions. We also know that just labeling of appliances in the big stores results in an overall increase in efficiency of those sold, and it applies to all big home appliances. There is absolutely no evidence of any rebound in use.

But something else could happen, you might argue. While households use less electricity for their refrigerator, clothes washer, and dishwasher, they have more income to spend on other energy consuming appliances, i.e. their energy budget stays the same, but it is just allocated differently. Again, this has been studied, and again there is no evidence that households behave this way at all. In fact, we have the opposite problem. Far from being conscious of how much electricity they are using, most households have no idea of their consumption. When they are made more aware of consumption, all the evidence, from trials of smart meters, indicates that they are motivated to conserve rather than use more.

We will see the same thing with lighting, as we now move into the era of LED lighting, with much smarter controls. Yes, people want their homes and offices to be well lit, but we are going to reduce the energy used by lighting by more than 90% in the coming years. Does anyone believe that offices will decide to leave lights on all night as a result? Far from it, with new lighting will come even better controls to minimize use.

And one more example, recently reported. We now have sufficient numbers of hybrid cars in use, where they have displaced cars that had much worse fuel economy, to be able to study how hybrids have affected driving habits. This was studied in the US for the first time in 2008. The result: absolutely no evidence that hybrid vehicles increased the amount of driving done. Indeed, as with home electricity use, the fact that the hybrid gives the driver a lot of information about fuel consumption has led motorists to challenge themselves to drive even more economically. Studies from MIT have shown that it is time not energy use that determines how far motorists are willing to commute.

So why do governments continue to behave as if energy efficiency is not going to be an effective tool? What I hear from government officials is that sad refrain, 'we tried this in the 1980s and it didn't work, so why will it work now? ' And I would answer in several parts. First, our consciousness of energy efficiency, of energy use, is much greater today. Second, more of our basic needs for energy, or what we have come to regard as basic needs, have been met. Our houses are much better equipped than they were. Third, we know, from experiments that have been done, how to lock in the gains of energy efficiency. I believe that the most effective of these is what we are calling in the UK supplier obligation, that is, it is the supplier of the electricity who is obliged to convince consumers to reduce their demand. These suppliers are operating in the marketplace, competing in that marketplace for the business of these customers, while regulation and civil society constrain what they can build. By putting an obligation on them to reduce demand, and giving them financial incentives to do so (effectively taxing away part of the economic efficiency savings) we can ensure that these savings are delivered.
Energy efficiency is too great a prize, it is the biggest prize in the entire fight against climate change, for us to approach it in a lazy or cynical way. It demands the utmost effort.