When Efficiency Fails Us (And It Will)

CFL_Lamp_night_viewEnergy efficiency is one of the few environmental policies on which basically everyone can agree. In any discussion, much debate surrounds carbon taxes, cap and trade, or energy subsidies, but it is difficult to find anyone that is against efficiency—defined as getting more output per unit of energy, or reducing the amount of energy per unit of output. Unfortunately, the reality is that the incremental changes offered by energy efficiency will not tip the currently massive imbalance of supply and demand fast enough to make a significant impact on carbon emissions, energy prices, or energy supplies.

According to the EIA, world energy consumption will increase by approximately 53%, from 505 quadrillion BTU in 2008 to 770 quadrillion BTUs by 2035, a global increase of 23% in per capita energy use. While energy efficiency technology begins to slow this runaway growth, time is running out. We don’t need to just drastically reduce demand; we need a new source of energy. Unfortunately, while the search for and development of renewable resources drags on, the focus on “inoffensive” energy efficiency has had a perverse side effect. Rather than large investments in disruptive innovation which could change the energy conversation entirely, business and government continue to extend current technology with small, risk-free investments in efficient technology – crowding out investment in these potential game-changers.

Many researchers suggest that efficiency measures are ultimately ineffective, thanks to an observed phenomenon known as the rebound effect. The idea behind the rebound effect is fairly straightforward—as consumers become more efficient at using energy, they save money, which then allows them to use more of that energy than before. The energy usage can be either direct– turning the heat up a few extra degrees or driving a few extra miles – or indirect– using the energy savings on that cross-country flight you always wanted to take. Breakthrough Institute, an American think tank, recently conducted one of the largest literature reviews on the topic to date, concluding that at the economy-wide level, the rebound effect could have serious consequences.

The unfortunate fact is that the efficiency conversation takes time, attention, and research funds away from the crucial search for alternative, sustainable energy sources. It does not make good business sense for an individual company to invest in development of a new technology that may take years and billions of dollars in R&D to reach market, and therefore cannot provide the immediate low-risk ROI offered by energy efficiency measures. Currently, each company selects and implements its energy-saving, carbon-reducing measures to either save money or comply with regulations, based on the quickest return on investment for that individual business. The result is a collective action problem: if each company is looking out solely for their own short-term bottom line, who then will lead the search for critical new energy resources?

It is when we are faced with these collective action issues that we often look to our respective governments to display the foresight and prescience to address the problem before any crisis arises. The scope of the problem surpasses the capacity of traditional R&D of individual private enterprises.  In the traditional model, the government should work to fund and direct basic research, coordinating the required actors to perform the early work before the private sector, with its profit motive and competitive drive, undertakes the commercialization of the resulting technology. However, in the current fiscal climate, it is easier for the government to support short-term efficiency solutions, which funds today’s energy reductions by selling tomorrow’s potential. This is not only counter-productive to the task at hand, but an inversion of the job to which government is best suited. By taking the long view, free of quarterly reports, the government can pursue the kinds of basic science that, while not immediately profitable, provides for future economic activity and benefit. In this process, the government is providing a public good (basic scientific research) while laying the groundwork for its own future efforts. Michael Faraday explained this process more than 150 years ago when he was asked by the British Parliament to explain the practical worth of electricity:  “One day sir, you [the government] may tax it.” Obviously the benefits of electricity have gone well beyond the government’s tax bill – but Parliament reaped dividends far beyond the price it paid for the research. Parliament’s original investment was repaid many times over, and electricity powered Britain into the 20th century.