Overinvesting in energy efficiency, on purpose

Photo by doctorwonder.

This is the fourth post in a mini-series on the rebound effect. Here are posts one, two, and three.

Let’s briefly review what we’ve covered so far in my rebound series:

1. Climate change means we need to reduce greenhouse gas emissions, a lot, beginning immediately.
2. There are two ways to reduce GHG emissions from energy: increase low-carbon energy supply and/or decrease total energy consumption.
3. Ramping up clean energy supply can’t be done fast enough to keep us within our carbon budget, certainly not in the short- to mid-term, if at all. So we’ve got to use less energy.
4. There are two ways to reduce energy demand: reduce the energy intensity of the global economy and/or reduce the growth of the global economy.
5. Substantially reducing global energy intensity turns out to be extremely difficult, thanks in part to the rebound effect.
6. If energy intensity can’t be reduced quickly enough, then the only answer left (other than failing to stabilize global temperature at all) is slowing GDP growth. Yikes.

So where does this leave us? In my mind, two big questions remain, regarding Nos. 5 and 6.

The first: How difficult would it be to increase global energy efficiency faster than global economic growth? Impossible difficult? Or just stretch-goal difficult? In my last post, I cited a paper by scholars Soham Baksi and Chris Green that attributed most historic decline in energy intensity to structural shifts in the economy — not the kinds of things policymakers can engineer. Baksi and Green claim it would be almost impossible to drive the rate of decline in energy intensity (historically around 1 percent) much higher than, say, 1.25 percent through policy interventions.

It’s worth noting that there are other views of the situation. Late last week I talked with University of Toronto professor Danny Harvey, author of a set of comprehensive textbooks on energy demand and clean energy supply. He says Baksi/Green’s conclusion on energy intensity is “complete nonsense.” He’s done some detailed modeling and believes that “between now and 2050, we can average 3 or 4 percent [decline in global energy intensity] a year,” and thereby reducing total energy use. The efforts required would be heroic, but within the realm of possibility.

I’m not qualified to adjudicate between Baksi/Green’s pessimism and Harvey’s optimism. There’s lots more work to be done in this area, and it may be that the academic literature never renders an entirely clear verdict; some things you just have to learn by doing. For now, I’ll just note that even Harvey, when asked whether economic growth can continue as it has, was unequivocal: “Of course not. You can’t have infinite growth on a finite planet. … If we’re serious about climatic change, we have to recognize sufficiency, not just efficiency.”

For a more brutal take on the subject of growth, see this report from the Institute for Integrated Economic Research, which concludes that “while it is possible for emerging economies to improve the well-being of their populations without growing greenhouse gas emissions, it won’t be feasible to industrialize them in the ‘green’ way everybody hopes for.” IER and many others say that, eventually, we’ll end up with some kind of steady-state economy, either because we chose and crafted it or because it was forced on us by necessity. (See also: Richard Heinberg’s The End of Growth.)

Anyway, growth is such a huge subject and I’m so ambivalent about it that for the moment I’m mostly going to focus on something narrower. Let’s just assume for the sake of argument that slowing economic growth at the margins can in some cases be a policy desideratum.

The rebound effect just is economic growth. It’s the boost in economic growth spurred by energy efficiency. So when we talk about how to “counter” the rebound effect, we’re talking about how to suppress that growth. Most discussions I’ve seen (e.g., this E.U. review) focus on prices — they recommend raising taxes on energy services that become more efficient, to prevent energy demand from rebounding back up after efficiency pushes it down.

All else being equal, raising energy prices will suppress GDP growth. But all else is not equal. Energy taxes collected by the government are spent on other things (say, reducing the payroll tax), thus driving economic activity and energy use. There’s rebound even here. Prices would have to be very high to compensate for direct and indirect rebound.

I have been musing about another way to drive efficiency without spurring growth. I can’t say I’ve got it fully worked out, but I ran it by Harvey and he didn’t think it was crazy, so …

For any given opportunity to boost efficiency, there is, in theory, some “cost-effective” level of investment. That level of investment compensates for market failures around efficiency and restores economic equilibrium, thus maximizing economic growth. This is the main selling point of efficiency to individuals and businesses: maximize your growth!

It follows that investing more than the cost-effective level will be cost-ineffective, create economic disequilibrium, and slow economic growth. Right? Above that level, an additional dollar of investment brings less than a dollar of benefit over a given investment horizon.

But remember, we don’t necessarily want to maximize economic growth. In fact, our goal here is to get more energy efficiency without additional growth (that’s what “avoiding rebound” means). To counter the rebound effect we need to substantially overinvest in efficiency — spend 150 percent of what’s economically optimal, or 200 percent — to the point that there are effectively no net savings (over the relevant investment horizon). Doing that would get us twice the efficiency with none of the rebound/growth, roughly speaking.

This opens up intriguing possibilities. Lots of the really big leaps in efficiency — in Harvey’s terms, system efficiency rather than device efficiency — appear too expensive from our current perspective. But if we’re trying to curb the economic growth brought on by efficiency, “too expensive” becomes a virtue! (Chances of that sentence being quoted out of context: 96.8%.) So we can make leaps: not just more efficient furnaces, but passivhaus construction that makes buildings into net energy producers; not just electric cars, but dense, walkable, transit-serviced communities that recycle their water and waste; not just more efficient boilers, but distributed energy sources linked by smart grids into resilient electricity networks. The big stuff. We can spend what’s necessary to help nations with limited access to water and power “leapfrog” over carbon-heavy infrastructure straight to the low-carbon kind.

Obviously, this kind of hyper-efficiency would spur more growth eventually. You can’t make an economy radically more energy efficient without boosting productivity. But by overspending on efficiency in the near term, we would dampen that effect, at least for a while, and in the meantime be shifting investment to economic sectors with lower energy intensity. Eventually, maybe, we could push global energy intensity down fast enough that when growth resumes, it no longer involves increasing GHG emissions. That’s the optimistic story, anyway.