In this contribution, we have illustrated the concept of second law efficiency with a stylized example. We have highlighted that technological efficiency potentials are, by far, not exhausted. This result contradicts common impressions of high technological efficiencies that are based on the concept of first law efficiency. The discrepancy is a consequence of the major distinction between both concepts. While first law efficiencies solely refer to the single technology actually applied for a special task, the concept of second law efficiency takes into account the purpose for which energy is required and relates two technologies to each other: the technology actually employed and the optimal technology for the same purpose.
Space heating, for example, can be achieved more efficiently—in terms of second law efficiencies—and perhaps less expensively—in terms of marginal cost—on the basis of gas such as for instance, rather than by high-quality energy in the form of electricity. The concept of second law efficiency particularly emphasizes the mismatch of applying high-quality energy for low-quality energy services, such as space heating.
In sum, with respect to both a sustainable economic development and an economically more efficient use of energy, it would be desirable in many situations if agents were better informed and took account of the purposes for which energy is required. However, although the potential for efficiency improvements seems to be substantial when technological efficiency is measured by the concept of second law efficiency, technological progress is only a necessary, yet not sufficient, condition for reducing pollutant emissions. The question is whether the rates of efficiency improvements will be higher than the world's increasing rates of energy requirements.
It is the level of real energy prices—which is partially affected by energy taxes— that will determine the answer to this question. Increasing energy prices may induce income and substitution effects that possibly dampen the future world-wide rise of energy demand. Moreover, a rise in energy prices may stimulate R&D, environmental innovation and demand-side management. Finally, higher prices might enhance the efficiency level of, specifically, consumption technologies.
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Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.