Where energy efficiency increases energy consumption: a caution
A new study warns policymakers to watch for unintended consequences of energy efficiency strategies. As energy efficiency leads to reduced usage, the price of energy falls. However, this could in fact lead to a subsequent rise in consumption of energy, if industry seeks to make the most of the low prices.
Improving the efficiency of how energy is used in production, often defined as 'doing more with less', attracts a great deal of attention from both industry and policy as an important aspect of climate change policy and to encourage more sustainable economies. However, this study sounds an alarm to policy makers.
Using Scotland in the UK as a case study, the authors of this study modelled the system-wide effects of improving energy efficiency in a regional economy. Scotland is also a net exporter of energy to the rest of the UK and any reduction in emissions as a result of reducing energy production would also benefit the UK as a whole.
The results suggest that by improving energy efficiency at the production level we can expect to see a less than proportionate fall, or even a rise, in the level of energy use throughout the economy. This effect, termed the 'rebound' effect, happens because the effective price of energy (the cost of energy to produce one unit of output) becomes lower when the efficiency is improved. This leads producers to use more, rather than less, energy.
Also, under energy efficiency measures, as the costs of production fall, particularly in energy-intensive sectors, the products or services of these industries become more competitively priced and thus consumer demand grows. This in turn leads to greater production and an increase in energy consumption. As the economy grows, incomes also increase, further encouraging rebound effects. In extreme cases, the consequent increase in energy demand actually exceeds the reduction in energy use due to the initial efficiency improvement. These extreme rebound effects are termed 'backfire'.
The results from this particular study reveal that when energy efficiency is improved by 5 per cent in the production sectors of the Scottish economy, rebound effects are seen in most cases, but these grow to become backfire effects in cases where energy efficiency improves in the Scottish energy supply sectors.
This study also demonstrates the impact from an energy efficiency improvement on key sustainability indicators which are commonly used by governments. Such indicators include the ratio of GDP to energy use and to CO2 emissions. The researchers find that these indicators may be positive, even when rebound effects occur, but will begin to move in the wrong direction when backfire takes place.
Although energy efficiency is commonly considered an effective way to deal with climate change and sustainability issues, the authors emphasise that the results do not suggest that energy efficiency improvements are ill-advised. Rather, the research demonstrates that policymakers need to be aware of the economic response to changes in prices and incomes as a result of improved efficiency and consider how to avoid or counteract rebound effects. For example, carefully implemented taxes on energy to offset falling prices could help avoid backfire.
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