EFFICIENCY: The Energy Question

Now 25 years since my Econometrics Study of Energy Demand for Mauritius joined a new scientific lineage of UK Energy Economics research that broke ground in highlighting Developing economies emphasis on an Energy economy rooted in efficiency of energy use and energy intensities, and financial burden minimisation of hefty energy imports bills and its incidence both on balance of payments parameters and environmental considerations.
Energy efficiency
Efficient and renewable energy are the twin pillars of a sustainable energy policy. Both strategies must be engineered concurrently in order to stabilize and reduce carbon dioxide emissions. Efficient energy use is essential to slowing the energy demand growth so that the energy mix is tilted away from fossil fuels use to clean energy. A sustainable energy economy thus requires major commitments to both efficient energy use and renewable energy weight in the input-output energy balance grid.
Rebound effect
If the demand for energy services remains constant, improving energy efficiency will reduce energy consumption and carbon emissions. However, many efficiency improvements do not reduce energy consumption by the quantum predicted by simple engineering models, because efficiency lead to affordability gains, and boost energy intensity.
In economics, the Jevons paradox (Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource.
Since more efficient (cheaper) energy will also lead to faster economic growth, improvements in energy efficiency eventually lead to higher energy depletion rates and usage. Energy economists have suggested that any cost savings from efficiency gains be taxed away by the government in order to avoid this outcome.
In conservation mathematics and energy economics, the rebound effect (or take-back effect) refers to the behavioural or other systemic responses to the introduction of new technologies that increase the efficiency of resource use. These responses tend to offset the beneficial effects of the new technology or other measures taken. The Jevons paradox has been used to argue that energy conservation is futile, as increased efficiency may actually increase fuel use.
The rebound effect is generally expressed as a ratio of the lost benefit compared to the expected environmental benefit when holding consumption constant.
Three possible Rebound Scenarios:
 1. The actual resource savings are higher than expected – the rebound effect is negative. This will normally occur if the government mandates the use of more resource efficient technologies that are also more costly to use, but not if the increase in efficiency reduces costs
2. The actual savings are less than expected savings – the rebound effect is between 0% and 100%. This is sometimes known as ‘take-back’, and is the most common empirical study conclusion on individual markets.
3. The actual resource savings are negative – the rebound effect is higher than 100%. This situation is commonly known as the Jevons paradox.
The fallacy in the energy-efficiency solution to greenhouse gas emissions suggest that any economically justified improvements in energy efficiency would in fact stimulate economic growth and increase total energy use. For improvements in energy efficiency to contribute to a reduction in economy-wide energy consumption, the improvement must come at a greater economic cost.
Energy efficiency gains paradoxically result in increases in energy use (the modern day equivalent of the Jevons paradox). In the absence of efficiency gains, energy use will grow by the same quantum as economic growth ratios (energy intensity remains constant) when energy prices are fixed. 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 boosts energy use.
Two Energy Policy stances:
Technological improvements in energy efficiency enable economic growth that is otherwise unattainable, and thus, energy efficiency improvements will rebound in the long term.
Technological improvements in energy efficiency may result in a small take-back. However, even in the long term, energy efficiency improvements usually result in large overall energy savings.
Economists tend to the first stance, but most governments, businesses, and environmental groups adhere to the second. Governments and environmental groups often advocate further research into fuel efficiency and radical increases in the efficient use of energy as the primary means for reducing energy use and reducing greenhouse gas emissions (to alleviate the impacts of climate change). However, if the first position more accurately reflects economic reality, current efforts to invent fuel-efficient technologies may not much reduce energy use, and may in fact paradoxically increase oil and coal consumption, and greenhouse gas emissions, over the long run.
Three-fold Rebound effect:
1. Direct rebound effect: Increased fuel efficiency lowers the cost of consumption, and hence increases the consumption of that good because of the substitution effect.
2. Indirect rebound effect: Through the income effect, decreased cost of the good enables increased household consumption of other goods and services, increasing the consumption of the resource embodied in those goods and services.
3. Economy wide effects: New technology creates new production possibilities and increases economic growth.
The rebound effect can increase the difficulty of projecting the reduction in greenhouse emissions from an improvement in energy efficiency. Estimation of the scale of direct effects on residential electricity, heating and motor fuel consumption drives research on rebound effects.
Economy Wide effects
Even if the direct and indirect rebound effects add up to less than 100%, technological improvements that increase efficiency may still result in economy wide effects that results in increased resource use for the economy as a whole. In particular, this would happen if resource efficiency enables an expansion of production in the economy, and an increase in the rate of economic growth. Changes in energy costs have a large impact on economic growth rates. In the 1970s sharp increases in petroleum prices led to stagflation (recession and inflation) in the developed countries, whereas in the 1990s lower petroleum prices contributed to higher economic growth. Economists generally believe that especially for the case of energy use, more efficient technologies will lead to increased use, due to this growth effect.
Indirect effects from Conservation
For conservation measures, indirect effects closely approximate the total economy wide effect. Many recent studies based on life-cycle analysis show the energy consumed indirectly by households is often higher than consumed directly through electricity, gas, and motor fuel, with growing proportions.
Income level variation
Research has shown that the direct rebound effects for energy services is lower at high income levels, due to less price sensitivity. Studies have also observed higher rebounds in low-income houses for improvements in heating technology; the size of the rebound effect is likely to be different in developing countries.
Time impact Rebounds
The individual opportunity cost of time should be considered to econometrically ascertain the rebound effect with respect to savings in time.
Mauritius Energy Scenario
Energy supply-side engineering economics considerations are not the worst policy thorn; the economics of energy demand is the crux of energy planning strategy. Energy Economists rather the engineers should prevail in the integrated energy planning policy formulation and strategy implementation…