The Energy Efficiency Debate

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There has been a long running debate between energy economists and energy analysts about various aspects of energy efficiency. One aspect is the rebound effect. Although definitions vary, this effect describes the following linkage: the efficient use of energy leads to an increase in the use of energy. This may offset the savings in energy use achieved by the EE improvement partly.6 The theory of the rebound effect is rooted in the neoclassical

6 Compare with Schipper 2000. This effect is also known as Khazzoom-Brookes postulate. Brookes advanced the argument (Laitner 2000, 471). For a recent history of the rebound effect see Schipper 2000.

economic theory. The extent of the rebound effect depends on the price elasticity of demand. Therefore, the assumption of rational decision making is the precondition for an explanation of this effect.7

It is suggested that in practice the rebound effect is not high enough to subtract the potential contributions of EE to the reduction of carbon emissions or the justification of EE policies.8 Nonetheless, some implications for policy follow from this. Energy-efficient technologies (EETs) may need to be reinforced by market instruments. A continued measurement and explaining effort should be put on to the rebound effect as economies are complex and changing.9 Henry Saunders argues that '(...) energy efficiency gains can increase energy consumption by two means: by making energy appear effectively cheaper than other inputs; and by increasing economic growth, which pulls up energy use'.10 The debate grew more intense in the 21st century, spurred by concerns about global warming. The argument for EE, however, is independent of environmental concerns. The market failure that distorts energy use is the under-pricing of energy by regulators. Deregulation, therefore, is preferable with regard to EE as utilities are forced to reduce energy prices.

Another aspect to which contributions to the EE debate can be associated is what one describes as a matter of governmental intervention. Gunn who investigated the paradigms of EE stated that it is important to recognize that the primary debate is over the optimal level of governmental intervention in energy markets rather than over the optimal level of EE.11 There are many forms of government intervention, such as subsidies and taxes, special purpose loans, and facilitation like information systems, well-structured markets or approved suppliers. Further, there are guarantees for specific risks, or offering insurance, and the arrangement of objective non-partisan product information, like energy labelling. The justification and degree of governmental intervention is a matter of debate in the international literature. Barriers which are attributed to market failures make governmental intervention necessary and justifiable and a large body of

7 Berkhout et al. 2000.

8 Berkhout et al. 2000; Greening et al. 2000; Laitner 2000; Schipper 2000. According to Schipper micro rebound effects for the energy end use might depending on initial costs, income and energy price range from 10—40 per cent (Schipper 2000).

10 Saunders 1992.

11 Gunn 1997.

international literature relates barriers to market failures.12 However, others claim that only few market failures can be defined as such.13 Haugland, Bergesen and Roland argue that most barriers merely reflect '(...) unaccounted (transaction) costs or simply result from the consumer's liberty to choose freely his/her convenience and service levels and willingness to accept a higher energy bill for their personal taste or lifestyle'.14 Therefore, governmental intervention might be questionable.15

A large body of international literature puts effort into an empirical approach to this question with different objects of investigations and findings. Governmental stimulation of the implementation of new technology by promoting associated research and development was found to be counterproductive. Although it leads to technological progress, it may hinder corporate investments in new technology. Firms may favour to wait for the next generation of technological developments.16 In the case of restructuring electricity market, pro-interventionists ask whether the market alone is able to overcome EE barriers. It is argued that governmental support in promoting EE and load management can be advantageous.17 Further, an evaluation of US energy labelling programmes led Banerjee and Solomon to the conclusion that, '(...) government support is the most critical factor for the success of a labelling program'.18 Altogether, the challenge of reconciling government and free market contributions with regard to the energy market and EE remains.

With regard to EE potential, a distinction has to be made between: (a) the economists' potential: achievable by removing market failures, (b) the technologists' potential: achievable by the additional removal of non-market/ market barriers and (c) the hypothetical potential: achievable through the

12 Helm 2002. In general, the definition of market failures depends partly on the societal goals which are seen as important within a society (for example, equity). The free market system may fail to achieve these goals. Economists have identified a number of market failures which partly explain this: externalities, lack of information, uncertainty, the existence of public goods or the time which is needed to response to a changing environment (Sloman and Sutcliffe 2000).

13 Gunn 1997.

14 Haugland et al. 1998, 47.

15 For a general discussion on benefits and drawbacks of free markets and government intervention see Sloman and Sutcliffe 2000.

16 Van Soest and Bulte 2001.

17 Vine et al. 2003.

18 Banerjee and Solomon 2003, 121.

additional elimination of market failures in fuel and electricity markets.19 This framework is summarized in Figure 4.1.

Figure 4.1 Characterization of Energy Efficiency Potential

Increasing EE

Figure 4.1 Characterization of Energy Efficiency Potential

Increasing EE

Source: Jaffe Stavins 1994.

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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.

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