The European Council has set three targets in Brussels for 2020 ( itself two times twenty), all based on the magical number of 20. The three targets to be reached within fifteen years are: to cut greenhouse emissions by 20% with respect to 1990; to increase the role of renewables to 20% of total energy consumption; act so that energy consumption would be 20% lower than business-as-usual forecasts. All three are hard to attain, although only the second one is considered a binding target. The third objective is somewhat vaguely defined, since there are no references to specific forecasts. Nevertheless, the hard question that emerges is: will it be possible to reduce total energy consumption? History and theory say that it will be very hard to do so. Let's see why.
In spite of the giant strides made in technical progress, industrialized countries have never been able to reduce energy consumption, except for limited time periods and/or due to extraordinary circumstances. If we look at consumption in G7 countries over the last 40 years (see graph), we find there is no country consuming less energy today than it did in 1965. In five out of seven countries, growth in energy consumption has ranged from 80% (the US) to 250% (Japan). Only the UK has seen very slow energy growth (+15%), but the country has de-industrialized to a degree unseen elsewhere in the world. In unified Germany there has been a 10% decrease since 1989. The main reason for this has been the shift from energy-wasting state socialism to cost-conscious capitalism in Eastern Germany. Thus a 14% absolute decrease in consumption does not seem attainable in 13 years, unless there is a severe economic depression or massive offshoring of industrial plants out of Europe.
But there are also theoretical, as opposed to historical, reasons to be doubtful about the fact that higher energy efficiency in appliances and power plants will lead to a decrease in consumption. The great economist William Stanley Jevons was the first to point out that higher energy efficiency does not necessarily lead to absolute energy savings. In his famous book The Coal Question, published in 1865, Jevons highlighted the fact that cheaper coal was leading to an expansion, not to a decrease, in consumption, contrary to what was and is commonly believed. This is the so-called Jevons Paradox. It is almost as if technology and economy ran in opposite directions.
From the engineer's point of view, higher efficiency simply means getting the same amount of output will less energy input. So, the reasoning goes, increasing technical efficiency would be the way to reduce consumption. But from an economist's point of view, things are more complex. Increasing efficiency in energy use is equivalent to decreasing the price of energy, and a price decrease, for the most ancient of economic laws, leads to an increase in demand. This is the so-called rebound effect. It works by compounding two effects. Firstly, there is a direct effect due to the fact that the consumer sees the price of a good such as energy decrease and thus she consumes more of it, to a degree dependent on the elasticity of the demand curve. Secondly, there is an indirect effect. The money saved due to higher energy efficiency can be spent on other energy-consuming goods. Lastly, there is a dynamic rebound effect involving the whole economy, which takes time to become manifest. Increases in energy efficiency determine changes in production techniques, as well as in prices of energy-intensive goods. This in turn triggers technology and demand adjustments. Increases in energy efficiency also drive productivity, and thus GDP, growth. If GDP increases, the demand for energy is bound to increase. This is the second-order rebound effect.
For all the above reasons, one cannot expect that consumption will decrease in response to an increase in energy efficiency. In some cases, as Jevons wrote almost a century and a half ago, consumption could actually go up. This does not mean that EU policies to promote energy efficiency (via the so-called white certificates) are useless, since they can correct market failures in energy development, but they are not very likely to cause a reduction in the absolute amount of energy consumed.
by Luigi De Paoli,
Full Professor of Corporate Management and Economics and Director of the Master in Environmental Economics and Management, Università Bocconi