Efficiency should always be the first answer

While the world is becoming more energy efficient, strong global growth is offsetting those gains. As a result, we are consuming more energy and emitting more carbon dioxide.

But greater action on energy efficiency can reverse this trend. The International Energy Agency’s most recent market report on efficiency shows how deploying all cost-effective efficiency measures, relying only on available technologies, would allow the global economy to double by 2040 with only a marginal increase in energy demand. This Efficient World Scenario offers a blueprint for a world where energy efficiency measures keep a lid on energy demand growth and carbon emissions while economies expand. 

But would greater efficiency actually prompt more energy use? If consumers have access to more efficient air conditioners or cars, for example, will they simply use them more, increasing overall energy consumption? Or if households save on energy at home, will they spend the income elsewhere, on services that rely on energy? This theory is most commonly referred to as the “rebound effect,” and some economists have suggested that efficiency improvements can lead to greater energy consumption.

A recent article in The Economist cited recent work by researchers from the Swiss Federal Institute of Technology who have developed a general equilibrium model to predict the economy-wide impact of more energy efficient technologies. The model suggests that the rebound effect essentially negated all the efficiency gains obtained in the United States during the second half of the last Century, according to the article.

In reality, energy efficiency has been critical in decoupling economic growth from rising energy consumption and greenhouse gas emissions. In the United States, energy consumption and GDP rose at almost an identical rate between 1949 and 1975. Following the oil crisis of the early 1970s and the implementation of vehicle fuel economy standards and many other efficiency measures, the US economy underwent a fundamental shift: Between 1976 and 2009, GDP nearly tripled, while energy consumption increased by less than 25%.

Japan has had similar successes with efficiency measures, achieving a 2.6 fold increase in real GDP while final energy consumption remained relatively constant. Denmark provides a further example of how efficiency measures can deliver meaningful economic outcomes. The 1973 Oil Crisis had a severe impact on the Nordic country, which was heavily reliant on fossil fuel imports to meet its energy needs. As a result of comprehensive efficiency measures (combined with world-leading promotion of renewable energies) implemented in the mid-1970s, Denmark reduced its energy intensity by over 50% and GHG emissions by 30% while more than doubling GDP growth by 2015.

All this is not to say that the rebound effect does not exist. In some sectors, like transport or home heating and cooling, a direct rebound has been measured in some studies. Mitigating such rebound effects is possible through measures such as: introducing road pricing to curb rebound within transport and by introducing green energy levies or taxes to raise energy prices lowered as a result of efficiency. This is required to maximise expected energy savings from efficiency measures. However, some rebound may actually be intentional and even desirable, especially where demands for essential services – such as heating and cooling – are lacking. In developed economies, access to energy may not be an issue, but access to affordable energy is a major concern for many low-income households. In such cases, policy makers must consider whether expanding energy services constitutes a rebound effect, or rather a desired social outcome, such as families being able to afford warm and comfortable homes.

In emerging economies, the provision of more energy services is a fundamental part of economic growth and social development. Energy efficiency can help ensure that any increase in the availability of energy services brings real benefits rather than creating additional problems, such as increased air pollution.

In India, for example, the Ujala initiative has distributed 330 million energy-efficient LED lamps since 2015. In addition to providing an important energy service for millions of low income households, the initiative freed up enough energy to power at least 1 million additional households. A similar initiative, though on a smaller scale, led by the Energy Commission in Ghana was able to increase energy access by over 7% in a single year through the deployment of efficient refrigeration and lighting technologies.

In such cases, energy efficiency contributed to social and economic development, rather than simply a reduction in energy use. Some might consider this a rebound effect; alternatively, these examples illustrate how energy efficiency can ensure that more people benefit from essential energy services in an equitable way.

Ultimately, developed and emerging economies will continue to strive for economic growth and increased use of quality energy services. Precisely for this reason, energy efficiency will be absolutely indispensable for ensuring that these objectives are met while increases in global energy consumption are kept to a minimum.