Energy efficiency--rebound, backfire and other problems with efficiency-only policies

Some economists are saying that, by themselves, efforts to be more efficient may lead to increased energy consumption  

If you read the 'green-oriented' press these days, you will run into any number of statements like this one: 

Renewable energy sources like wind and solar are getting a lot of attention these days as a way to reduce the impact of energy use on the environment. But even enthusiastic supporters of alternative energy agree that the easiest way to cut carbon emissions and air pollution is to focus more on efficiency, less on pollution-free generation.

It's hard to argue against efficiency. Policies that encourage efficiency don't have to tax or cap the consumption of energy, so they are politically more palatable.  Unfortunately, it appears they don't work very well either, if the goal is reducing carbon emissions. Here's a small bit from a piece by John Tierney that ran recently in the New York Times:

Is this bulb backfiring?

But a growing number of economists say that the environmental benefits of energy efficiency have been oversold. Paradoxically, there could even be more emissions as a result of some improvements in energy efficiency, these economists say.

The problem is known as the energy rebound effect. While there’s no doubt that fuel-efficient cars burn less gasoline per mile, the lower cost at the pump tends to encourage extra driving. There’s also an indirect rebound effect as drivers use the money they save on gasoline to buy other things that produce greenhouse emissions, like new electronic gadgets or vacation trips on fuel-burning planes. 

Some of the biggest rebound effects occur when new economic activity results from energy-efficient technologies that reduce the cost of making products like steel or generating electricity. In some cases, the overall result can be what’s called “backfire”: more energy use than would have occurred without the improved efficiency.

Cap and dividend: read all about it!

It's an interesting article, and you should read it. The lesson seems to be that if you want people to use less energy and energy-intensive products, you've got to make energy consumption more expensive. Some people argue for a carbon tax; others argue for a complicated system called 'cap and trade'.  I think both are flawed. The best proposal I've seen is called 'cap and dividend'.  You can read what we had to say about it last year in 'Cap and Dividend, the romantic solution?'