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Energy efficiency should fund a low carbon economy

For Horace Herring, energy efficiency is a very convenient policy, but it has been completely ineffective in reducing carbon dioxide emissions. Drawing on the economic principle known as the ‘rebound effect’, the British academic believes that the monetary savings that arise from energy efficiency should be diverted into low carbon sources of energy, and not into increased consumption.

For Horace Herring, energy efficiency is a very convenient policy, but it has been completely ineffective in reducing carbon dioxide emissions. Drawing on the economic principle known as the ‘rebound effect’, the British academic believes that the monetary savings that arise from energy efficiency should be diverted into low carbon sources of energy, and not into increased consumption.

Interview: Elana Caro, Zürich

You spoke at the LISDAR Congress about the ‘rebound effect’. What does it mean?
Horace Herring: When the cost of a commodity or service goes down because of technological innovation, demand for it goes up and the consumer tends to consume more of it. For example, if you have a more efficient heating system in your home thanks to a better boiler, your heating costs are lower and you have more money in your pocket. You can choose either to use more heat (the direct rebound effect) or you can decide that your heating standards are sufficient and you instead buy goods and services outside of your home (the indirect rebound effect), which then stimulates the economy.
It is a very well-known, fundamentally accepted economic principle and we see it with all innovations: you have more fuel-efficient cars so the cost of driving per kilometres falls. People can therefore decide to drive further or more often. It also reduces the costs of running a car, which increases car ownership among people. Or you improve the efficiency of airlines, which lowers the prices and then more people obviously choose to fly low-cost airlines. But we don’t seem to hold this principle for energy, which I find very strange and this is basically what I was talking about.

Why is it not held for energy?
It does hold for energy, but the people who promote energy efficiency, such as the engineers and scientists, are maybe not aware of the economic principles behind the rebound. But it is simply a fundamental fact of economic history and is accepted by all economists. We need to draw people’s attention to the rebound effect and show that promoting energy efficiency won’t automatically lead to a reduction in national energy use.

Energy efficiency is also promoted by the energy industry and governments, not just scientists…
That’s right, because even though energy efficiency is completely ineffective in reducing energy use, it’s a very convenient policy that is popular with everyone. It satisfies the environmentalists, it satisfies industry because they know that in the long run improved energy efficiency will be good business for them, and you could maybe even say cynically that it satisfies governments because they will get a better economy out of it and get voted back into power.

How can we pursue energy efficiency without increasing consumption?
There are two ways, but they both have to do with what you do with the monetary savings that arise from energy efficiency. Either you can increase the cost of energy so the cost of energy services remains the same; for instance, if you have a 10 per cent improvement in efficiency, you put the cost of fuel up by ten per cent so therefore everybody is no worse or better off. Or you could do that through some sort of carbon tax.
For the moment, we have chosen the policy of keeping energy services cheap, which then results in increased consumption and therefore economic growth, and this obviously increases energy use. If the point is cutting carbon emissions, we should be diverting money from energy efficiency into low carbon energy sources such as rooftop photovoltaic panels, wind power and so on. By taxing away the gains, energy efficiency becomes a means to fund low carbon economy.

But taxation is unpopular…
Very, and industries that are very energy intensive will complain about it, which is why energy taxes are generally avoided by politicians. But our primary goal has to be reducing carbon consumption, not energy consumption. This means subsidising low carbon energy sources through energy taxation and using energy efficiency to offset the pain of that. It’s a revenue-neutral operation.

Who should take the lead or who will most likely take the lead: governments or innovative businesses that see a way to make a profit out of this?
Governments have to set a long-term goal and strategy backed by legislation. Only then will innovative businesses that are stimulated by the money come along with solutions. But you cannot expect businesses to start doing things unless there is a clear incentive for them.

Are governments starting to change their policies?
Yes, governments are slowly adjusting to the idea of rebound and factoring it into their policy. In England we have a “pay-as-you-go” scheme in which renewables are subsidised by the money saved from domestic insulation. And the EU had a report out last year, as did the American government. But the main problem is perhaps the greens. Energy efficiency is sort of an article of faith for them. Until they can change their ideas about this, governments might lose their support if they start to question energy efficiency.

Except you said that energy efficiency is not the problem, it’s what we do with those gains…
Exactly. Energy efficiency is a very valuable thing. It’s a very essential part of modern life, of innovation and creativity. But most of the green energy policy has come from physicists or engineers, rather than from economists. We will not see a change until there is a more integrated approach that embraces economic principles.

Are all the gains we make here lost if newly or rapidly industrialising countries don’t pursue the same policy?
Yes, because they are going to be the most important carbon emitters. Energy efficiency obviously has role to play, but we should stop focusing on the problem of energy and start focusing on the problem of carbon. I don’t think there is anything that we can or should do about the rapidly increasing consumption in newly industrialised countries, but we could maybe solve the carbon problem if have more low carbon energy sources in developing countries.

Do you think anything can be accomplished at the upcoming Rio+20 conference?
No, because the carbon problem is incredibly difficult to solve or reach agreement on at an international level. All we can do is try to promote low carbon energy sources in our own countries and hope it gets taken up elsewhere. I suppose it’s better to keep on talking, but unless there is a dramatic change or a reason to change, not much will happen.

What might that dramatic cause be?
I suppose a dramatic hike in energy prices, such as if oil went up to USD 200 a barrel or if there was an oil embargo. The last dramatic event was the earthquake in Japan and that shut down the nuclear industry. But until we have dramatic events like we did in the 1970s, there will not be much of a policy change.

Are you optimistic that we will eventually change our ways?
I am optimistic in a very pessimistic way. It’s better to do something than nothing. But I don’t see any dramatic transformation in the next decade, and by then it may be too late.

Horace Herring is a visiting research fellow in the Energy & Environment Research Unit at the Open University, UK. After completing his BSc degree from Sussex University in Engineering and Social Studies, he embarked on a 30-year career in energy efficiency studies, working in the UK, USA and Fiji for government, academic, NGO and private organisations.
His current interests are on the feasibility of sustainable consumption and low-carbon communities and his latest book is entitled ‘Living in a Low Carbon Society’.