Energy-Efficient Technologies and Climate Change Policies: Issues and Evidence

Enhanced energy efficiency occupies a central role in evaluating the efficacy and cost of climate change policies. Ultimately, total greenhouse gas (GHG) emissions are the product of population, economic activity per capita, energy use per unit of economic activity, and the carbon intensity of energy used. Although greenhouse gas emissions can be limited by reducing economic activity, this option obviously has little appeal even to rich countries, let alone poor ones. Much attention has therefore been placed on the role that technological improvements can play in reducing carbon emissions and in lowering the cost of those reductions. In addition, the influence of technological changes on the emission, concentration, and cost of reducing GHGs will tend to overwhelm other factors, especially in the longer term. Understanding the process of technological change is therefore of utmost importance. Nonetheless, the task of measuring, modeling, and ultimately influencing the path of technological development is fraught with complexity and uncertainty - as are the technologies themselves.

Although there is little debate over the importance of energy efficiency in limiting GHG emissions, there is intense debate about its cost-effectiveness and about the government policies that should be pursued to enhance energy efficiency. At the risk of excessive simplification, we can characterize "technologists" as believing that there are plentiful opportunities for low-cost, or even "negative-cost" improvements in energy efficiency, and that realizing these opportunities will require active intervention in markets for energy-using equipment to help overcome barriers to the use of more efficient technologies. These interventions would guide choices that purchasers would presumably welcome after the fact, although they have difficulty identifying these choices on their own. This view implies that with the appropriate technology and market creation policies, significant GHG reduction can be achieved at very low cost.

Most economists, on the other hand, acknowledge that there are "market barriers" to the penetration of various technologies that enhance energy efficiency, but that only some of these barriers represent real "market failures" that reduce economic efficiency. This view emphasizes that there are tradeoffs between economic efficiency and energy efficiency - it is possible to get more of the latter, but typically only at the cost of less of the former. The economic perspective suggests that GHG reduction is more costly than the technologists argue, and it puts relatively more emphasis on market-based GHG control policies like carbon taxes or tradable carbon permit systems to encourage the least costly means of carbon efficiency (not necessarily energy efficiency) enhancement available to individual energy users.

In this essay, we first examine what lies behind this dichotomy in perspectives. Ultimately, however, the veracity of different perspectives is an empirical question and reliable empirical evidence on the issues identified above is surprisingly limited. We review the evidence that is available, finding that although energy and technology markets certainly are not perfect (no markets are), the balance of evidence supports the view that there is not as much "free lunch" in energy efficiency as some would suggest. On the other hand, a case can be made for the existence of certain inefficiencies in energy technology markets, thus raising the possibility of some inexpensive GHG control through energy-efficiency enhancement. We conclude with some reflections on the role of appropriate energy efficiency policy in climate change mitigation.