Energy Efficiency, Part 1: What’s the Point?

, Kendall Science Fellow | October 23, 2015, 10:50 am EDT
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Can energy efficiency actually increase energy use?  In some circumstances, it can. But is that a problem?  It might be, if “using less energy” was our end goal—but it shouldn’t be.

The coal question

In his fascinating 1865 book The Coal Question, economist William Stanley Jevons searched for what sort of a future the United Kingdom might have when its coal was depleted. In what has become known as “Jevons’ Paradox,” he observed, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” Increasing efficiency of steam engines had led to much more widespread use, accelerating depletion of British coal.

Considering alternatives, Jevons envisioned a society relying on hydraulic and pneumatic power with pumped storage filled by wind and tides; a hydrogen economy; or a geothermal-based system. These Jules Verne futures were, to his mind, second-rate alternatives to an energy system dominated by British coal.

He found a downside to even his most hopeful scenario:

“Among the residual possibilities of unforeseen events, it is just possible that some day the sunbeams may be collected, or that some source of force now unknown may be detected. But such a discovery would simply destroy our peculiar industrial supremacy.” 

(There’s a reason why economics is called “the dismal science.”)

UK Coal Production, 1853-2014 (decadal data through 1912)
Source: UK Department of Energy & Climate Change

Well, the sunbeams are now collected, forces unknown to Jevons are harnessed, and UK coal production is well below what it was in 1865.

It’s also true that the UK is no longer the world’s foremost industrial superpower. But it is far more prosperous today, in part because it no longer has 15-20% of its GDP consumed by coal-related sickness and death as it did in the late 1800s (as discussed here).

Jevons was correct that efficiency could not do what he wanted it to do, slowing the UK’s coal depletion. What efficiency did was to produce vast economic gains, some of which were reinvested in developing alternative energy technologies. These produced dramatic improvements in his country’s wealth and well-being. What do we want energy efficiency to do?

Energy efficiency in the Clean Power Plan

An important starting point when considering energy efficiency is to understand that utility rates and utility bills are two different things. The EPA’s analysis of the new Clean Power Plan suggests that it will increase electricity rates by 0.01-0.8% by 2030, but decrease electricity bills by 7-7.7% due to improved efficiency. That means that we could receive the services we actually want from electricity, such as lighting and cooling our homes, or powering our iPhones and Androids, at less cost than today and with less environmental impact.

What enables the decrease in bills is end-use efficiency, the conversion of electricity into energy services. The EPA also counts on improving conversion efficiency, in turning coal or gas into electricity. This helps keeps the electric rate increases so low. Although it is a useful metric, conversion efficiency cannot be easily compared across technologies that use different inputs.

What’s the Point?

Efficiency alone does not guarantee that total emissions will decline. The EPA’s suggestion of coupling cleaner energy and energy efficiency is, in fact, the best way to ensure that energy efficiency reduces pollution.

Reducing total energy use is not the point of energy efficiency. We aren’t running out of energy. And energy use in and of itself isn’t a bad thing to be avoided; the end uses of heating, cooling, lighting, motive power, and information processing can all improve our quality of life.

Rather, energy efficiency is a means to an end.  It lets us increase the economic output per unit of energy consumed. That is, do more with less. Or more. And do more with cleaner energy.

Some of the economic savings from energy efficiency get spent on other goods and services, which in turn require some energy use. This effect is “indirect rebound,” and it is the greatest argument for energy efficiency. Indirect rebound accounts for a large part, perhaps a majority, of all economic growth since the Industrial Revolution (see this book). Coupling energy efficiency with clean energy means redirecting some of those economic gains to reduce environmental impacts.

This connection is made implicitly in the Clean Power Plan. It is done explicitly when directly using the savings from energy efficiency improvements to allow installation of solar panels (as detailed here).

The cost of cleaner energy

Why do we need to spend these gains on cleaner energy? Does cleaner energy cost more?  Well, it often looks like it costs more on the balance sheet, but that is due to costs that somebody else pays—externalities.

In fact, due to externalities, the coal-fueled steam engine was a net detriment to the United Kingdom for many decades. While factory owners profited from steam power, and saw these gains on their books, they did not have to pay for coal-related illness and death among the public. These impacts resulted in the true cost per unit of steam power—with damages included—being greater than that of horse power until about 1890 (as discussed in this book).

The adverse impacts of coal are not a new discovery; John Percy discussed them at length in his 1866 review of Jevons’ paper in Quarterly Review, and well before the steam engine John Evelyn addressed the topic in his 1661 essay Fumifugium.

Whether installing smoke controls on Victorian-era factories, removing sulfur from diesel fuel, properly cementing oil and gas wells to prevent blowouts, or even doing things with clean energy technologies, like idling wind turbines at times to protect bats, the steps to reduce the impacts of a given energy resource generally carry some “on the balance sheet” financial cost.

In sound policy, we consider externalities, and seek to deploy cleaner energy that carries a lower economic cost for society as a whole.

Learn more:

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  • The general principle is to always consider the ‘social’ aspect of society.

    • I agree, and ideally these impacts would be included in the prices of goods or services (such as electricity). Since they aren’t included, we are left with using a number of less-optimal policies to try to compensate for this market failure.

    • Pete O’Connor

      I agree, and ideally these impacts would be included in the prices of goods or services (such as electricity). Since they aren’t included, we are left with using a number of less-optimal policies to try to compensate for this market failure.

      • The ‘market failure’ is actually a policy failure. Markets don’t exist in a vacuum, they are a creation of man.

  • We try and try to put the misguided “paradox” to rest, but old Jevons keeps bouncing back. Energy intensity has declined since the US started serious energy efficiency efforts. No rebound. Case closed.

    • Thanks for your comment. A decline of energy intensity means an increase in GDP output per unit of energy, which is a good thing. If the “indirect rebound” GDP gains are then spent on new goods and services at your new intensity, we’ll still see overall intensity decline from what it was before. I agree that the “Paradox” is misguided, because Jevons had the wrong goal in mind for efficiency and missed the benefit of the economic gains. The US has basically kept energy consumption per capita flat since about 1970, while doubling GDP per capita. Absolute energy use is up, and that is what critics of efficiency measures point to as a failure; it isn’t, and they are missing the point.

    • Pete O’Connor

      Thanks for your comment. A decline of energy intensity means an increase in GDP output per unit of energy, which is a good thing. If the “indirect rebound” GDP gains are then spent on new goods and services at your new intensity, we’ll still see overall intensity decline from what it was before. I agree that the “Paradox” is misguided, because Jevons had the wrong goal in mind for efficiency and missed the benefit of the economic gains. The US has basically kept energy consumption per capita flat since about 1970, while doubling GDP per capita. Absolute energy use is up, and that is what critics of efficiency measures point to as a failure; it isn’t, and they are missing the point.

  • Richard Solomon

    The key is to look at the so called big picture: when considering the costs include the externalities that the fossil fuel industry and its proponents try to ignore and foist off onto the taxpayer/consumer.

    • Thanks Richard! I agree, and often refer to Epstein (2011) or Koomey and Krause (1997). Unpriced externalities are a massive implicit subsidy.

    • Pete O’Connor

      Thanks Richard! I agree, and often refer to Epstein (2011) or Koomey and Krause (1997). Unpriced externalities are a massive implicit subsidy.