Lecture 14 Energy Efficiency

Gang He

October 24, 2023

Sample analytic questions

• If energy efficiency is a good thing, why is not everybody doing it?
  
• How to design incentive programs to change people’s behavior?
  
• How big is rebound, and what to do with rebound?
  
• What policies to push for sustainable energy consumption?
  

Energy efficiency

• Energy efficiency
  
• Energy conservation (saving)
  
• Energy efficiency and economic efficiency

Energy intensity

Recall the abatement cost curve

Energy efficiency gap

Information

Standards

• Response to Information Failure
  • Might be good policy if information is too costly/ineffective
    • Eliminates cost of acquiring/understanding information
    • Eliminates consumer/producer choice
  • Focuses the market on producing high-quality products
    • Economies of scale
    • Might be captured by technology (regular review of technology progress)
• Response to externalities
  • Disallow products that would not often be sold if external costs were internalized
  • Inefficient if some consumers would purchase at the full social cost including externality
  • Difficult in some cases to write standards that still permit optimal innovation and adaptation

Behavior change in NZE

Key behavior change for NZE

Complexity of human behavior

Maslow’s hierarchy of needs

Stage of change theory

Nudge

• Incentives
• Understand mapping
• Defaults
• Give feedback
• Expect error
• Structure complex choices

Rebound

Category	Description	Example
Direct rebound	Homeowners use more of the more efficient service	Consumer drives more with a more fuel efficient car
Indirect rebound	Homeowners re-spending on other goods and services	Savings from efficient lighting spend on 2nd refrigerator
Economy-wide rebound	More efficient production and shifts in demand alter economic structure and growth	A more efficient steam engine increases production changes structural relationships and leads to economic growth

Economics of rebound

• Energy efficiency lowers the marginal cost of usage so increases usage
  • Amount of increase depends on price elasticity
    
  • Likely to be small effect if energy is small part of marginal cost of use
    
• Energy efficiency may lower energy price, further increases rebound effect
  • Likely to be small effect unless long-run supply is very inelastic
    
• But energy efficiency also raises the up-front cost of products, reducing total sales

Rebound might be overplayed

Focus on welfare

• Is rebound a “failure”? Depends on the goal
  • Reduce energy consumption?
  • Improve social welfare?
    
• Rebound could be good

Sustainable energy consumption

• Absolute reductions in the material goods and energy we consume;
  
• From material wealth and consumerism toward new measures of progress and well-being;
  
• Technological innovation and efficiency gains that help us to refine production processes;
  
• Recognition that consumption will need to increase for those individuals and communities whose needs are not being met, and
  
• A transformation of our economy from continuous growth to within the limits of a finite planet.

Summary

• There are barriers for energy efficiency and inforamtion and standards can help address the energy efficiency gap
  
• Human behavior is complicated, and understanding it will help us to design policy
  
• Rebound is real but might be overplayed, rebound could be good if improve welfare
  
• Sustainable consumption and production within the limit

References

Gillingham, Kenneth, Richard G Newell, and Karen Palmer. 2009. “Energy Efficiency Economics and Policy.” Annu. Rev. Resour. Econ. 1 (1): 597–620. https://doi.org/10.1146/annurev.resource.102308.124234.

IEA. 2021. “Net Zero by 2050.” International Energy Agency.

Kenneth, Gillingham, Wagner Gernot, et al. 2013. “Energy Policy: The Rebound Effect Is Overplayed.” Nature 493: 475–76. https://doi.org/10.1038/493475a.