Energy efficiency fallacies revisited

Abstract A number of governments including that of the UK subscribe to the belief that a national program devoted to raising energy efficiency throughout the economy provides a costless — indeed profitable — route to meeting international environmental obligations. This is a seductive policy. It constitutes the proverbial “free lunch”— not only avoiding politically unpopular measures like outlawing, taxing or rationing offending fuels or expanding non-carboniferous sources of energy like nuclear power but doing so with economic benefit. The author of this contribution came to doubt the validity of this solution when it was offered as a way of mitigating the effect of the OPEC price hikes of the 1970, maintaining that economically justified improvement in energy efficiency led to higher levels of energy consumption at the economy-wide level than in the absence of any efficiency response. More fundamentally, he argues that there is no case for preferentially singling out energy, from among all the resources available to us, for efficiency maximization. The least damaging policy is to determine targets, enact the restrictive measures needed to curb consumption, and then leave it to consumers — intermediate and final — to reallocate all the resources available to them to best effect subject to the new enacted constraints and any others they might be experiencing. There is no reason to suppose that it is right for all the economic adjustment following a new resource constraint to take the form of improvements in the productivity of that resource alone. As many others have argued, any action to impose resource constraint entails an inevitable economic cost in the shape of a reduction in production and consumption possibilities: there would be no “free lunch”. In the last few years debate about the validity of these contentions has blossomed, especially under the influence of writers on the Western side of the Atlantic. In this contribution the author outlines the original arguments for questioning whether raised efficiency leads to lower consumption, reports more recent developments and offers some insights as food for further thought.