Energy Efficiency: What Has It Delivered in the Last 40 Years?

I'm one of nineteen authors of a new review of energy efficiency economics. It was commissioned for the Annual Review of Environment and Resources, where it is still in (second-round) review. The team was put together and led by Harry Saunders and Joyashree Roy.

Over the past four decades different disciplinary approaches independently adopted different definitions of energy efficiency to answer specific problems. Even within economics there are at least three different ideas of energy efficiency. Technical efficiency in economics compares the quantity of inputs used to produce given outputs (or vice versa) to the best practice or frontier level. This is a relative measure of energy efficiency. But economists often talk about energy efficiency in absolute terms too,  measured as either simply an increase in energy services per unit input or using the concept of energy augmenting technological change where the amounts of other inputs and the technology associated with them are held constant. Energy augmenting technological change is usually used when modeling economy-wide rebound, whereas the energy services per unit input might be used when investigating the energy efficiency gap.

The energy intensity of economies (a metric measuring energy consumption per unit of GDP), which is often interpreted as a proxy for energy efficiency, has trended downwards (increasing efficiency) globally and in many major economies over the last century. But as panel (a) below shows, in many regions of the world, especially poorer or hotter regions, energy intensity instead increased. Today, energy intensity is more similar around the world than in the past.

Innovation in energy-saving technologies is an important driver in improving aggregate energy efficiency deployment by lowering costs and inducing adoption. The productivity of numerous energy-using products has improved dramatically. (e.g., lighting had a 10,000-fold improvement in lumens/Watt since the start of the industrial revolution). 

Energy efficiency improvements, in themselves, generally increase economic welfare. But when we consider negative externalities, such as pollution emissions, welfare effects are more ambiguous. Interventions such as improperly calibrated subsidies to improve energy efficiency or mandates to use costly technologies can lead to a reduction in household welfare.

There is still uncertainty and difficulty in measuring economy-wide rebound effects. Rebound may limit the ability to reduce or constrain overall energy use. In general, it makes more sense to address the environmental impacts of energy use with specific environmental policies rather than trying to reduce energy use with energy efficiency policies.

The contribution of different factors to the persistent “energy efficiency gap”, i.e., the difference between the energy consumption observed and the potential energy consumption levels that would result from the adoption of cost-efficient energy efficient technologies and strategies, is still not well understood. Market and regulatory failures, departure of consumer behavior from rational choice theory, lack of information, the principal-agent problem, among other issues may all contribute to the energy efficiency gap.

Policy interventions aimed at overcoming or reducing barriers to energy efficiency deployment target behavioral anomalies and perceived market failures. They include provision of feedback to energy users, the use of social norms, commitment devices, rewards and regulatory mechanisms such as taxes, subsidies, building codes, etc. The literature and evidence are mixed on the effectiveness of each of these, but all seem to show promise to some degree. 

Methodological advances for examining energy efficiency effects on energy use have been substantial. Primary advances include randomized control trials coupled with appropriate econometric methods, developments in econometric methods and lab/field experiments, agent-based modeling formulations, general equilibrium methods, and behavioral science. 

The following diagram summarizes the state of knowledge across different scales and the needed scope of future research:

Future research should bring together researchers from different fields to shed new light onto energy efficiency questions. Examples of such endeavors include: (i) at the micro-level, a better understanding of consumer choice and behavior by combining insights from engineering and the advanced metering and sensing infrastructure, with those from micro-economic theory as well as the theory of choice and with behavioral economists’ models; (ii) at the program evaluation level, there is a need to continue to develop methods to understand causal inferences using econometrics as well as machine learning to better understand program outcomes; (iii) at the macro-level, developing flexible and credible general equilibrium models that also capture environmental and climate externalities outcomes, and that have good input data to enable us to understand the dynamics of energy efficiency improvements across the economy, the environment, and society, are needed.