energy costs were lower than the

Communication labour costs, for example. It is not

surprising that this led to demand
Energy efficiency and economic fallacies growth. But if energy efficiency is the
goal, rather than the means, then the
driving force is entirely different - and
so are the macroeconomic implica-
The sharpening energy efficiency debate has revived claims that the apparent tions.
savings from using more efficient technologies would be largely offset by the Consider for example a sector
macroeconomic response - the tendency to use more energy services because they where the energy-using activity is re-
are made cheaper. When energy price or availability constrains demand this is latively unresponsive to price. In the
correct. In more normal circumstances, it may be true for efficiency changes course of natural developments there
which occur as part of general economic trends, but not for policy-driven may be little incentive for efficiency to
measures aimed at bringing more efficient technologies into imperfect markets. In improve, irrespective of the technical
such cases there will usually be real net energy savings only slightly smaller than potential. Yet these are precisely the
those suggested by a simple engineering analysis, and clear economic benefits. sectors which are likely to offer the
greatest energy savings. Conservation
policy can choose to focus upon such
Recent communications in Energy ment contains at least two major areas, including those dominated by
Policy by Brookes 1 and Greenhalgh 2 flaws. The first, and lesser, flaw is to market failures, where the implicit
have disputed the claims of those who assume that future economic reactions price falls from increased efficiency
believe that improving energy efficien- will parallel those of the past. There have little impact on activity levels.
cy can provide large energy savings. It are several reasons why this is not so. Macroeconomic data aggregates the
is argued that the macroeconomic re- The bulk of historic data (up to 1973 - behaviour of end-uses which span a
sponse to improving efficiency, and the period since then has been partly wide range of elasticities and other
the associated fall in energy costs, will energy-constrained and this is not the market responses. In many respects
offset any apparent savings. This is not main data Brookes uses) is gathered the focus and implications of efficien-
a new argument, and is known as the from an era of declining real energy cy improvements which result from
'rebound effect'. prices, very rapid electrification, and policies aimed at saving energy will be
Brookes offers the most cogent h~s- economic development based on the opposite of those occurring natur-
torical macroeconomic analysis and heavy industry, with domestic demand ally, which tend to focus on the areas
arguments. He rightly points out that growth based on satisfying fairly basic where activity levels are most respon-
when energy supply or price is a con- desires such as adequate warm homes. sive to implicit price falls. Conse-
straint on economic activity, impro- The last two decades have shown great quently, little or nothing can be
ving efficiency will not help to reduce changes in the pattern of energy and learned from general historic trends
demand. In the much more usual economic development. Few people about the energy or economic implica-
situation, where energy is not a con- believe that a long era of steadily tions of policies directed explicitly at
straint, historical trends at least up to declining fossil fuel prices will ever saving energy. This is an important
1973 show that although energy pro- return, and there is much evidence general point: the critical distinction
ductivity improved, it did not do so that some important end-uses of ener- between 'natural' and policy-driven
nearly as fast as labour and capital gy are approaching saturation, 3 whilst efficiency improvements invalidates
productivity, so that efficiency im- the pattern of economic development many recent attempts to use past mac-
provements were more than offset by is shifting towards less material- and roeconomic data to draw policy con-
the new uses for energy. energy-intensive goods. 4 General clusions about the cost and impact of
From this Brookes concludes that statements about the energy founda- trying to constrain energy demand.
increasing energy efficiency has and tion of future economic growth, large- Furthermore, such rebound as does
will simply increase the attractiveness ly based on pre-1973 data, are there- occur tends to reflect direct social
of energy for new uses: if it is more fore questionable. and/or economic benefits, because it
efficient, it is cheaper, so people do A much more serious flaw is to comes from uses where energy price is
more with it. Consequently energy confuse the role of naturally-occurring a serious constraint on activity - for
demand cannot be reduced by impro- efficiency improvements with the example, increased comfort when very
ving efficiency when it is not a con- effects of deliberate attempts to mini- draughty buildings are insulated. But
straint on activity. It would be harder mize energy consumption when price in many areas there is little such re-
to find a sharper divide between this and availablility are not constraints. In bound because energy price is a re-
and the claim made by others for the all the period to 1973, improved ener- latively minor factor in determining
scale of savings available from impro- gy efficiency was primarily a consequ- activity levels.
ving energy efficiency. ence of other pursuits - the drive to This is not inconsistent with the
However, while the historical analy- colonize new markets, by producing observation that energy price is an
sis is fine the final step in this argu- automated processes in which the important determinant of demand, be-

ENERGY POLICY October 1990 783

Communication
cause there is a critical distinction
between activity responses and tech-
nical responses. Price increases may
stimulate the takeup of more efficient
technology without affecting the activ-
ity level, particularly in the long term
as technologies respond. Promoting
the more efficient technologies direct-
ly will similarly lead to genuine de-
mand reductions. When the price re-
sponse is based primarily on technolo-
gy improvement, the implicit energy
price fall from promoting more effi-
cient technology is not equivalent to a
real fall in energy prices. And there is
a second asymmetry between tech-
nological and activity responses: tech-
nical improvements may stagnate, but
they tend not to reverse when the
price falls.
Thus whilst accusing efficiency
advocates of a 'fallacy of composi-
tion', Brookes himself is making a
'fallacy of aggregation' by neglecting
large swathes of demand areas where
improving efficiency can very effec-
tively save energy, and by neglecting
the critical distinctions between the
activity and technological determi-
nants of energy demand.
There are other components to the
rebound effect. Brookes cites a re-
spending effect: 'purchasing power re-
leased by lower expenditure on ex-
isting uses finds an outlet somewhere
. . . in the purchase of goods and
services that require energy . . /.5
Total energy costs are generally a few
per cent of G D P and this re-spending
effect will, even if one assumes a
linear e n e r g y - G D P relationship, be of
this order. Another component is the
supply rebound: if demand is lowered,
the pressure on energy supply will be
lowered and prices may fall, stimulat-
ing more general demand. However,
this can never reverse the sign of
savings and, since supply curves are
often much flatter than demand curves
(and for some supply industries may
be negative) this effect too is usually
negligible.
In fact, many of these points have
been made in the reclusive publication
of the I A E E which Brookes himself
cites most often, the Energy Journal.
A n article by Khazzoom, 6 which ad-
vanced arguments related to those of
Brookes and Greenhalgh, was heavily
784
criticized by Lovins 7 and by Henly et
al. s A reply by Khazzoom 9 strongly
criticized Lovins's economic theoriz-
ing and consistency, but did not rebut
many of his basic arguments, and it
ignored the more careful and equally
devastating critique by Henly et al.
Khazzoom did not, in this author's
view, seriously dispute the evidence
that the rebound effect is usually
small, reducing the 'engineering esti-
mate' of savings by perhaps 5-15%
overall in most cases.
Insofar as larger rebounds occur,
this often reflects substitution rather
than absolute increases (as
Greenhalgh emphasizes with respect
to electricity displacing other fuels):
the overall energy impact is then
ambiguous, and indeed such rebound
may amplify the gross savings.
Brookes himself seems to acknow-
ledge some of these points indirectly,
when he accuses the efficiency enthu-
siasts of 'wanting to jog A d a m Smith's
elbow to introduce damaging reduc-
tions in energy intensity of production
- since it seems that these are likely to
be the only ones associated with re-
ductions in total energy consumption'.
A t the risk of repetition it therefore
seems to necessary to emphasize again
that the case for extensive interven-
tion rests squarely on the evidence
that A d a m Smith's elbow is suffering
from crippling arthritis in this area,
and jogging it to move his hand is
likely to be highly beneficial. For ex-
ample, a U K Parliamentary enquiry
took evidence from a wide range of
industry and environmental groups
and concluded: 10
The most striking feature of our enquiry
has been the extent to which improvements
in energy efficiency - across all sectors of
the economy - are almost universally seen
as the most obvious and most effective
response to the greenhouse e f f e c t . . , the
evidence received overwhelmingly en-
dorses the view that, for a variety of
reasons, serious market imperfections per-
s i s t . . , widespread opportunities to invest
profitably in cost-effective measures . . .
are being ignored.
These failures result in an inefficent
use of resources and higher than
needed costs to society, the consumer,
and the environment. It is striking that
even the analysis performed by the US
Department of Energy, connected
with their attempt to make appliance
efficiency standards illegal in the U S A
(by setting a Federal 'zero standards
standard'), nevertheless indicated that
the overall macroeconomic effects of
efficiency standards would be
beneficial. 11
As many economists seem to have
difficulty in understanding how such a
state of affairs can exist, it is worth
reciting at least seven reasons for it: 12
• Lack of knowledge, knowhow
and technical skills. Private
households, car drivers, small and
medium-sized companies and
small public administrations
generally know little about the
possibilities for energy saving, or
lack the skills to implement them.
Architects, consulting engineers
and installers, similarly often
have little knowledge of or in-
terest in energy conservation
opportunities.
• Separation of expenditure and be-
nefit. The person or group owning
a building or energy-consuming
equipment may not be the user.
Hence the owner may not receive
the benefits of conservation, and/
or the user may not be allowed to
make capital investments to im-
prove the building or equipment.
• Limited capital, often arising from
external restrictions on capital
budgets. Poor householders often
have more pressing uses for their
money than making investments
to reduce running costs. In many
small businesses, the capital
budget is often quite constrained
and devoted to business-related
investments such as computeriza-
tion. Also, non-labour running
costs are often treated as un-
avoidable peripherals. There is
thus little opportunity or incen-
tive to invest in energy conserva-
tion to reduce overheads.
• Rapid payback requirements.
Even when those making the in-
vestment have the relevant in-
formation and expertise and re-
ceive the full benefits, they still
tend to demand a much higher
rate of return than that used for
supply investments. 13
• Impact of electricity and gas tariff
ENERGY POLICY October 1990

structures. D o m e s t i c electricity
a n d gas tariffs are usually de-
signed in two p a r t s - a fixed
charge, reflecting capital repay-
m e n t a n d fixed r u n n i n g costs, a n d
a v a r i a b l e part reflecting v a r i a b l e
o p e r a t i n g costs. M o s t e n e r g y con-
s e r v a t i o n m e a s u r e s will save the
user only the v a r i a b l e p a r t of the
tariff, o f t e n well u n d e r half t h e
total charge. Yet m o s t c o n s e r v a -
tion m e a s u r e s do r e d u c e utility
fixed c h a r g e s in t h e long r u n since
they o f t e n r e d u c e the p e a k
loads. 14
Lack o f interest in peripheral
operating costs. E n e r g y costs are
often a small p a r t of p e r s o n a l or
business e x p e n d i t u r e s . People
m a y simply not b e i n t e r e s t e d in
This communication is an edited extract
from M.J. Grubb, ed, Energy Policies and
the Greenhouse Effect, Gower, Aldershot,
UK, for the Energy and Environmental
Programme, Royal Institute of Interna-
tional Affairs, London, UK, forthcoming
1990.
L. Brookes, 'The greenhouse effect: the
fallacies in the energy efficiency solution',
Energy Policy, Vol 18, No 2, March 1990,
~p 199--201.
G. Greenhalgh, 'Energy conservation
policies', Energy Policy, Vol 18, No 3,
April 1990, pp 293-299.
3 Home heating, and the domestic sector
more generally, is an important potential
case of saturation. Brookes, op cit, Ref 1,
claims that 'unpublished research . . .
shows that domestic consumers tend to
spend a constant proportion of income on
fuel and electrical energy'. The UK Family
Expenditure survey shows that average
household expenditure on direct energy is
actually greater in the poorest homes than
in middle incomes homes even in absolute
terms, let alone relative to income, presum-
ably because poorer people live in worse
accommodation and are less likely to invest
in insulation and more efficient equipment.
The statistics make it hard to separate the
energy component of other expenditures
such as transport, but it is still hard to see
how any of the FES data squares with
Brookes's statement.
4 R.H. Williams and E.D. Larson, 'Mate-
rials, affluence, and industrial energy use',
Annual Review of Energy, No 12, pp 99-
144, 1987. The authors amass substantial
data to suggest that value added in goods
occurs increasingly from fabrication and
finishing, rather than from increasing bulk,
and that 'while many believe this to be a
temporary phenomenon . . . our analysis
indicates this trend marks the passing of
ENERGY POLICY October 1990
t h e m , a n d c a n n o t be b o t h e r e d to
take steps to save m o n e y in this
area. Cost-effectiveness is not the
only criterion; 'cost r e l e v a n c e ' is
also r e q u i r e d . T h e a t t i t u d e m a y
b e crudely s u m m a r i z e d as o n e of
'don't know and don't care'. This
of course c o n t r a s t s sharply with
e n e r g y industries.
Legal and administrative obsta-
cles. Finally, t h e r e can b e a n u m -
b e r of legal a n d a d m i n i s t r a t i v e
obstacles in t h e p a t h of e n d - u s e
efficiency, including discrimina-
tory tax regimes, r e n t controls,
capital b u d g e t restrictions, etc.
T h e result of all t h e s e factors is to
create a pervasive imbalance between
i n v e s t m e n t s in supply a n d i n v e s t m e n t s
the era of materials-intensive production
and the beginning of a new era in which
economic growth is dominated by high-
technology products having low materials
content'. This should not be confused with
the shift towards services on which
Brookes comments.
5 Brookes, op cit, Ref 1.
6 J.D. Khazzoom, 'Energy savings result-
ing from the adoption of more efficient
appliances', The Energy Journal, Vol 8, No
4, October, 1987, pp, 85-89.
7 A.B. Lovins, 'Energy savings . . .
another view', The Energy Journal, Vol 9,
No 2, April 1988, pp 155-162.
8 j . Henly, H. Ruderman and M.D.
Levine, 'Energy s a v i n g s . . . A follow-up',
The Energy Journal, Vol 9, No 2, April
1988, pp 163-170.
9 J.D. Khazzoom, 'Energy savings . . . a
rejoinder', The Energy Journal, Vol 10, No
1, January 1989, pp 157-165.
~0 House of Commons Energy Committee,
Energy Policy Implications of the Green-
house Effect, Vol 1, July 1989, HMSO,
London, UK.
11 According to P. Rollin and Jan Beyea,
'US appliance efficiency standards', Ener-
gy Policy, Vol 13, No 5, October 1985, pp
425--436 the results suggested that with the
standards examined, 'GNP would increase
by billions of dollars, the net foreign trade
balance would increase by a billion dollars,
and around 100 000 new jobs would be
generated'. The US Court of Appeals later
ruled that the DoE moves to ban standards
'openly violated Congressional intent', and
declared the zero-standards standard as
illegal.
12 The list given here is synthesized from a
Communications
The editor welcomes debate on articles published in Energy Policy. Letters and
communications should be sent to the Editor at the address on the inside front cover.
Communication
in e n d - u s e efficiency. Policies a i m e d at
r e m o v i n g or c i r c u m v e n t i n g these mar-
ket obstacles, a n d installing efficient,
cost-effective technologies, will save
energy and bring both environmental
a n d e c o n o m i c benefits. This is n o t
wishful t h i n k i n g b u t the almost univer-
sal conclusion from those w h o h a v e
studied t h e realities of the e c o n o m i c
i m b a l a n c e b e t w e e n supply a n d de-
m a n d . Surely it is time t h a t the d e b a t e
m o v e d on to c o n s i d e r i n g the relative
merits a n d impacts of different policy
o p t i o n s for trying to achieve t h e s e
savings?
M. J. Grubb
Energy and Environmental
Programme
London, UK
number of other discussions, notably: lEA,
Energy conservation in lEA countries,
OECD, Paris, 1987; various publications
from the American Council for an Energy
Efficient Economy, Washington, DC; and
an overview by E. Jochem and M. Brand,
'Strategic policies for improving energy
efficiency and reducing greenhouse gas
emissions', Fraunhogfer-Institute fur Sys-
temtechnik, Karlsruhe, FR Germany.
13 One study of the choices made by well-
informed consumers in buying fridges
which differed only in cost and efficiency
concluded that only 2/5 of them bought the
more efficient variety if it took more than 3
years to pay back (35% discount rate).
Another 2/5 seemed to apply a discount
rate above 60% (ie requiring payback in
under 2 years). This contrasts with produc-
er criteria on the order of 10% return, or
10 year payback; see A.K. Meier and J.
Whittier, 'Consumer discount rates implied
by consumer purchases of energy efficient
refrigerators', Energy, The International
Journal, Vol 8, No 12, pp 957-962, 1983.
14 Part of the fixed charge reflects connec-
tion costs, which conservation would usual-
ly not affect. The importance of the capac-
ity element will vary greatly according to
system and load conditions. The fun-
damental reason why it is so difficult for
conservation to receive its 'capacity credit'
is the impracticability of dynamic marginal-
cost pricing, in which very high rates at
times of peak load on the system would
raise the revenues for capital construction.
Separation of fixed charges is really a
surrogate for this. Declining block tariffs
for industrial consumers can have similar
implications.
785