In summary, therefore, the ability to facilitate substitution between energy service supply chains with different associated fuel demands suggests the possibility of reducing energy demand by removing market imperfections. Clearly, this analysis has important repercussions for macroeconomic modellers because of their critical reliance on reliable long-term price elasticity parameters. If such models are accurately to identify cost-effective solutions to the problem of greenhouse gas emission reduction, it will be important not to rely solely on the use of parameters which only reflect price-dependent responses. Rather it will be necessary to develop models capable of reflecting structural changes in the market.
A number of such structural changes have been identified in the preceding discussion. These include the introduction of appliance efficiency standards, improvement of energy efficiency standards in buildings, and changes in price regulation formulae to allow the flow of 'low-cost' capital into energy efficiency investments. This chapter has argued that the impact of such changes could be significant in improving the efficiency with which energy is consumed by the final user.
Improved market efficiency therefore offers the possibility of substitution to more efficient energy service supply chains and thereby of reduced fuel consumption, irrespective of fuel price changes. But one of the lessons of this chapter has been that price response and market structure are not unrelated aspects of the economy. Changes in market structure are likely to affect price responses. Equally, over the longer term, price changes are likely to have an impact on market structure. Both structural changes and price incentives are likely to be necessary for a cost-effective emission reduction strategy. In particular, of course, there is a role for price incentives in offsetting the 'rebound' or responding effect of improved energy efficiency (Brookes 1990, 1992; Grubb 1990, 1992). But the associated carbon taxes within such a strategy are likely to be significantly lower than those associated with a strategy solely reliant on price responses, and the associated economic disruption will be considerably less.
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