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Home Archive May 2011 Issue Issue Content Separating Myth from Reality: A Closer Look at the Energy Efficiency Panacea

Separating Myth from Reality: A Closer Look at the Energy Efficiency Panacea

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Enthusiasts repeatedly refer to energy efficiency as the “low-hanging fruit” to decrease fossil fuel consumption, reduce greenhouse gas (GHG) emissions, and reduce oil imports. For years now, Amory Lovins, Joseph Romm, Dan Reicher, and other industrial heavyweights have touted the value of “negawatts” – the belief that rising energy needs can be met by increased efficiency in lieu of expanded energy production.

These advocates are leading the charge in declaring energy efficiency as a virtual panacea to reduce America’s “carbon footprint” and to avoid the intensifying global competition for the world’s diminishing supply of fossil fuels. In fact, the unyielding assumption that improving the efficiency in which a particular resource (e.g., fuel) is utilized will lower its consumption rate, curtail related GHG emissions, and promote economic growth is being pushed as a foregone conclusion:

•  “This starts by improving energy efficiency, which can be one of the cheapest, cleanest means of reducing GHG emissions,” Peter Orszag, former Director of the Office of Management and Budget

•  “Investing cap and trade proceeds in energy efficiency lowers energy consumption, which reduces GHG emissions,” Alliance to Save Energy

•  The US must “invest in all cost-effective energy efficiency opportunities, which are the cheapest, fastest, and cleanest way to reduce carbon emissions,” Frances Beinecke, President of the Natural Resources Defense Council

•  “The bill [Waxman-Markey] recognizes that energy efficiency is the fastest, most effective way to spark economic growth and achieve pollution reductions,” Greenpeace

In stark contrast, energy efficiency is an intricate field of economics that is routinely oversimplified by those too easily swayed by the popular appeal of quick and easy energy solutions. Clearly, historical evidence invalidating the claim that gains in efficiency surely decrease energy consumption has not found its way from obscure energy economic journals to the mass media and general public. Energy efficiency achievements have actually tended to increase energy consumption because they:

1.  Make the use of energy relatively cheaper, thereby encouraging greater usage

2.  Lead to economic growth for both the overall economy and the individual, causing total energy consumption to increase (“the rebound effect”)

3.  Multiply the use of the resource’s “companion” technologies, products, and services that were previously restrained

The counter-intuitive phenomenon that greater energy efficiency leads to greater consumption is known as “The Jevons Paradox,” named after the British economist who first articulated the peculiarity almost 150 years ago. “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption,” William Stanley Jevons stated in his 1865 book, The Coal Question; “The very contrary is the truth.” Jevons observed that England’s demand for coal at the time soared after Watt introduced his efficiency improvements to Newcomen’s coal-fired steam engine.

In the 1980s, energy economists Daniel Khazzoom and Leonard Brookes independently put forth their own conclusions that the energy efficiency paradox, under a wide range of assumptions, is verifiable under neoclassical growth theory – where technical progress and population increase are the primary sources of economic growth. The Khazzoom-Brookes Postulate would come to state “energy efficiency improvements that, on the broadest considerations, are economically justified at the micro-level, lead to higher levels of energy consumption at the macro-level” (see Energy Journal, Volume 13, No. 4, pp. 130-148, 1992). Robert Stavins, Director of the Harvard Environmental Economics Program, agrees that energy efficiency is certainly no “free lunch” because consumers invariably make individually rational choices. New, more efficient technologies are not automatically adopted by the public. Stavins goes on to state that energy efficiency requirements raise the prices of products and impose “significant costs on the less affluent.”

The present analysis outlines the key evidence indicating that efficiency gains for the US 1) economy, 2) vehicle fleet, and 3) electricity sector will nevertheless result in an increase in energy consumption. Our energy challenge remains a continuous cycle: the need to boost domestic production of all energy sources is a non-negotiable pillar of energy security.
 
Economy
“Thus taking advantage of efficiency opportunities can go a long way towards meeting greenhouse gas emissions reduction targets and can do so at net savings to the economy,” American Council for an Energy-Efficient Economy, 2008
 
The energy efficiency mantra adheres to the conviction that extending greater efficiency throughout the US economy is a surefire and basically costless way to reduce energy consumption. This position, however, ignores a historically proven condition in which total energy consumption has continued to surge despite solid gains (and funding) in efficiency. From 1978 to 2007, the Congressional Research Service reports cumulative investment by the US Department of Energy (DOE) in the development of energy efficient technologies was a substantial $14.2 billion. Instead of lowering, or even capping, energy demand, efficiency improvements are leading to greater and greater energy consumption.

Energy intensity is a measure of the efficiency of a nation’s economy. It is calculated as units of total energy consumed per unit of Gross Domestic Product (GDP) produced. Higher intensities illustrate a greater cost of converting energy into GDP (lower efficiency); lower intensities indicate a lesser cost of converting energy into GDP (higher efficiency). According to the US Energy Information Administration (EIA), in 1980, the US was using about 15,000 British Thermal Units (BTUs) to generate $1 of GDP (an intensity of 15). By 2006, the efficiency of the US economy had evolved to the point where only 8,800 BTUs were required to produce $1 of GDP (an intensity of 8.8). By 2030, the EIA (2009) projects the energy intensity of the US economy will progress to an impressive low of 5.6. Yet, as demonstrated in Figure 1, energy consumption will maintain its relentless ascent.

 Figure 1:Energy Intensity of the U.S. Economy, 1950-2030

Source: developed from US Energy Information Administration, 2010

The sheer amount of intense, decades-long economic research aimed at better understanding the relationship between energy efficiency and energy consumption emphasizes just how complex the issue really is. With numerous uncertainties involved, the only settled truth is that growing economies sustain themselves with increasingly greater amounts of energy.

After analyzing the energy intensities of the post-World War II economies of France, Germany, Japan, and England, Kaufman (1992) concluded that the “link between economic activity and energy use is stronger than believed by most neoclassical economists”. Kaufman argues the importance of the Khazzoom-Brookes Postulate, confirming that which cannot be overemphasized: that energy saved at the micro-level from efficiency gains does not directly translate into energy saved at the macro-level.
 
Additionally, Brookes (1998) suggests “The Jevons Paradox” results from the intricate interactive process of “rising energy efficiency contributing to rising productivity of other factors of production – labor and capital – and rising output contributing to rising energy efficiency by way of embodied technical progress” (see Herring 1998). Greening and Greene (1998) note that “….gains in the efficiency of energy consumption will result in the effective reduction in the per unit price of energy consumption for both firms and consumers. As a result, consumption of energy should increase, partially offsetting the impact of the efficiency gains on fuel use.”

A 2006 report by Marbek Resource Consultants and MK Jaccard Associates found that Canada’s improved energy efficiency is also not producing its expected ends. The country’s total energy consumption grew by 22% from 1990 to 2003 despite a marked drop in energy intensity. The group found that the “effects of economic activity, namely the growth of the housing and commercial building stock, larger homes, the market penetration of more energy-using devices, and industrial production growth together offset the effects of energy efficiency improvements.” This is a prime example of the aforementioned “rebound effect,” where energy savings from efficiency are simply being taken back by consumers having extra money to spend.

Vehicle Fleet
“Increasing fuel economy standards….would dramatically reduce pollution and reduce pressure to drill for oil....Emissions of heat-trapping carbon dioxide would be reduced by more than one billion tons per year….Oil savings would amount to more than 50 billion barrels,” Natural Resources Defense Council, 2001

At the time of the 1973-1974 Arab oil embargo, the US imported about a third of the 17 million barrels of oil it consumed each day, 15% of which came from the Persian Gulf. With the security, political, and economic vulnerabilities of this dependence abruptly exposed, the federal government enacted the Corporate Average Fuel Economy (CAFE) standards in 1975. Automakers were required to meet certain miles per gallon (mpg) efficiency targets for new vehicles starting in model year 1978. By 1983, this mandated standard had been elevated for passenger vehicles, from 18 miles per gallon (mpg) to 26 mpg, and for light-duty trucks, from 16.5 mpg to 19 mpg. And from 1983 to 2007, the standard was increased respectively to 27.5 mpg and 22.2 mpg. New standards announced in 2010 will require both vehicle types to reach an average of 35.5 mpg by 2016. Figure 2, however, illustrates CAFE increases have not had their desired and anticipated results. Americans continue to drive more and use more fuel.

Figure 2: More U.S. Vehicle Use and More Fuel Consumption, 1983-2007

Source: developed from National Highway Traffic Safety Administration 2004 and US Energy Information Administration 2010

Indeed, the common assumption that higher fuel efficiency standards for vehicles will assuredly cut into America’s oil use highlights the ongoing triumph of wishful thinking over rational, evidence-based understanding. For more than three decades, gains in efficiency for the US vehicle sector have netted the opposite effect on fuel consumption than what CAFE advocates claim. CAFE has been “one really bad mistake. It didn’t meet any of the goals,” states Jim Johnston, former President of General Motors (see Rutledge, Addicted to Oil: America’s Relentless Drive for Energy Security, 2006). The US now imports nearly 60% of the 20 to 21 million barrels of oil it consumes every day.

Moreover, in 2004, the National Commission on Energy Policy reported that even if the US Congress mandated the vehicle fleet raise its average fuel economy for passenger vehicles from 27.5 to 44 mpg – a historic 60% increase – domestic motor fuel consumption would still rise by 3.7 million barrels per day by 2025. Higher CAFE standards tend to diminish the need for gasoline, thereby reducing its costs and increasing its demand. Jim Kliesch, a vehicle efficiency expert with the Union of Concerned Scientists, calculates that the doubling of current efficiency standards would increase driving for the average person by more than 7%. “CAFE standards are regressive,” adds Stephen DeCanio, an economics professor at the University of California at Santa Barbara, “CAFE is not the way to go.”
 
One of the main reasons higher vehicle efficiency standards have not led to reduced fuel consumption is the fact that new, more efficient models penetrate the world-leading US fleet exceedingly slowly. The Hirsh Report, a peak oil mitigation study commissioned by the DOE in 2005, noted half of all vehicles bought in a given year are still on the road 17 years later. Americans are keeping their vehicles longer (and using them more) than in times past due to their higher quality. The US now has about 265 million vehicles, or 850 vehicles per every 1,000 people.

Consumers usually lack a real incentive to buy a new vehicle. CAFE standards make new vehicles more expensive because manufacturing costs are higher. They also force automakers to build dangerously lighter and smaller vehicles that can burn less fuel; the National Academy of Sciences has linked mileage standards to an average of 2,000 deaths per year. Walter McManus, Director of the Office for the Study of Automotive Transportation at the University of Michigan, has documented the failure of consumers to respond to higher gasoline prices by shifting to more fuel-efficient vehicles. For example, from 2001 to 2004, when the (inflation adjusted) price of gasoline increased 18%, there was no observable impact on new vehicle purchases (see Rutledge, 2006). In fact, large pick-ups and luxury Sport Utility Vehicles, which have the lowest fuel economy, actually gained market share during the period.

Americans have consistently chosen to forgo efficiency improvements by driving safer, larger, and more powerful vehicles. Many insist this discretion is a consumer’s fundamental right: the higher profit margins of these gas-guzzlers allow retailers to sell them at a discounted price. Indeed, financial considerations determine most driving decisions, as the EIA (2005) notes “Since 1983…….the growth in vehicle-miles traveled has basically mirrored the increases in real disposable income.” In addition to crawling penetration rates, excessive costs and a precarious reliance on the price of gasoline make trade-in programs, such as the now notorious “Cash for Clunkers” (CFC), largely inadequate. FBR Capital Markets reports less than 5% of all US vehicles were eligible to participate in CFC.

Electricity Sector
“The next president must challenge the public service commission in every state to allow utilities to receive the same return on energy efficiency as they are allowed to receive on generation. That single step could lead the country the furthest in solving our ever-worsening climate and energy problems,” Joseph Romm, Senior Fellow at the Center for American Progress, 2008

In the 2009 report, Assessment of Achievable Potential from Energy Efficiency and Demand Response Programs in the US (2010–2030), the Electric Power Research Institute (EPRI) concluded that even if “ideal” (and costly) energy efficiency and demand response programs are implemented in the US, electricity consumption will increase 16% to 20% by 2030. Figure 3 illustrates the inevitable rise in electricity demand confirmed under EPRI’s three different energy saving conditions. EPRI’s study, along with other supporting evidence, makes the requirement in the American Clean Energy and Security Act of 2009 (Waxman-Markey Bill) that utilities demonstrate 5% or more annual declines in electricity demand from efficiency by 2020, seem impractical. Increases in electricity demand will remain a steady drumbeat.

Figure 3: Constant U.S. Electricity Demand Increase, 2008-2030
 
 
Source: developed from Electric Power Research Institute 2009
 
The constant increase in US electricity demand affirmed by EPRI is hardly a surprise. Electricity consumption in the European Union (EU) has continued to increase despite a number of efficiency programs at the EU and national levels. The EU, a chief supporter of the Kyoto Protocol of 1997, adopted various measures to curb electricity consumption and associated GHG emissions, including labeling, minimum efficiency requirements, voluntary agreements, incentives, and saving obligations. From 1999 to 2004, however, residential electricity usage in the then 25 EU member states grew by 11%, and consumption in the service and industrial sectors grew by 16% and 10% respectively. The EIA’s International Energy Outlook (IEO) 2010 projects total electricity consumption in the EU will increase by over 35% from 2007 to 2035.

In the 2000s, total electricity consumption in Japan, a nation where a lack domestic resources instills energy efficiency as an act of patriotism, increased 18% – from about 900 to 1,060 billion kilowatt hours (see EIA IEO 2004 and 2010). “The problem we are facing is over how much we induce consumers to trade in their appliances for more energy-efficient ones,” said Hajimi Sasaki, chair of NEC Corp. Despite a significant 9% decline in population, the EIA (2010) reports Japan’s electricity consumption will increase by 16% from 2007 to 2035. Yet, Japan, host nation for the Kyoto Protocol of 1997, is continually cited as a model of efficiency equaling lowered energy consumption.

If other US states only adopted energy efficiency and demand response programs like those in California, the efficiency mantra insists, the need for incremental electricity capacity and energy production would simply fade away. Since the 1970s, California’s electricity use per capita has remained relatively flat, while steadily rising for the US overall. Today, the state consumes 40% less electricity per capita than the national average and has still maintained solid economic growth. The California Energy Commission and the California Public Utilities Commission hail the state as an example of capable efficiency programs and standards reliably decreasing electricity use without hindering economic progress.

Other factors, however, are decidedly at play. At less than 20%, Mitchell et al. (2009) applied linear regression models to determine that there is not a high association between California’s efficiency policies and its lower per capita electricity use (see Public Utilities Fortnightly, March 2009). The group reports that there are at least six special characteristics that work to greatly suppress the state’s need for electricity: 1) residential electricity price, 2) climate, 3) household size, 4) household mix, 5) conservation ethic, and 6) the economy’s structure.

Research by Sudarshan and Sweeney (2008) further argues that California’s energy efficiency policies are responsible for just 23% of the total difference between California’s per capita electricity usage and that of the rest of the country. The Stanford researchers concluded that, in addition to the unique factors put forth by Mitchell’s group, urbanization, housing unit floor space, and household fuel mix all make the “California model” inapplicable to other states.

The main reason, of course, Californians have used less electricity than other Americans in recent decades is obvious: prices in the state are normally far above the national average. From 1970 to 2005, Mitchell’s group reports, the price of residential electricity in California jumped by 37%, while increasing only 4% for the rest of the country. These rising prices have inspired the “conservation ethic” that has helped stabilize the state’s per capita rate. Californians are much more likely to practice energy saving habits than other Americans.

In fact, Tanton (2008) warns California’s electricity policies actually serve more as a “cautionary tale” than an exemplar of the benefits of efficiency – the state’s total electricity consumption is now 65% higher than it was in 1980. In the early 2000s, a lack of generating capacity in California ignited an electricity crisis that added $40 billion in extra energy costs from 2001 to 2003, or roughly 4% of the state’s yearly economic output. Imported power was forced in at the expense of other fast growing Western states and Canada.

“California is not an electrical island,” Colorado Governor Bill Owens said at the time. “California needs to share the responsibility of building more generation plans, electrical transmission facilities and gas pipelines, and deal with the inherent environmental challenges that presents” (see Denver Post, “Owens rips Calif. Power plan,” January 13, 2001). Owens resented comments made by Governor Gray Davis that ignored the fact that misguided polices were driving California to import a quarter of its electricity.

Conclusion
A more open and realistic discussion on the advantages of energy efficiency is integral to enhancing US energy security and meeting GHG reduction goals. Energy efficiency is a much more complex subject than what many Americans are being led to believe. Improvements in efficiency can help conserve capital and lessen the impact of price volatility. And high levels of efficiency are a critical part of a modern economy and a high quality of life. Energy efficiency, however, will not reduce consumption in the absolute sense commonly being asserted. Importantly, even unintentional misrepresentations of the outcomes from efficiency gains could lead to a public backlash against sustainable energy policies (see Apt et al.)
 
Historical evidence has regularly indicated that the US will need to produce more energy far into the future. Over the next 20 years, the EIA (2010) expects the US to add more than two Japans to its GDP ($8.7 trillion) and expand its population by the size of France (65 million people). In a post-September 11th world, where increasingly tight supplies ensure the proliferation of global energy geopolitics, the idea that we should be looking to somehow move away from domestic production of conventional sources is antithetical to energy security. These resources are, in fact, the only supplies between us and a complete and disastrous reliance on a global supply chain where erratic players hold the highest cards.

Contributor Jude Clemente is an energy security analyst and technical writer in the Homeland Security Department at San Diego State University. He can be contacted at judeclemente21@msn.com
 

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