Monday, 24 August 2009

Rebound to Utopia?

Making our homes more energy-efficient should reduce the amount of energy we use, right? That seems obvious... but it may not be as simple as it first appears.

In the late 18th Century, James Watt‘s new high-pressure steam engine delivered much more usable work from each ton of coal burned than had previously been possible—in others words it was more efficient.

In 1865, an economist named William Jevons noticed that Watt’s efficiency improvements, far from reducing the use of coal, had actually increased it dramatically. This seems counter-intuitive, but is largely due to economies of scale: as coal became a more efficient source of energy, its usefulness increased, so it was used more, so costs fell, in a loop which led to a massive increase in its use. In fact, Watt’s engines were so efficient that they were used not just to replace older coal-powered engines, but also clean sources of power such as water and wind.

This so-called rebound effect is a well-understood phenomenon in economics. If a resource becomes cheaper, its use increases. If the use increases sufficiently, it can cancel out any gains from the increase in efficiency.

Fast-forward now a hundred years or so, and three more economists, Harry Saunders, Leonard Brookes and Daniel Khazzoom, separately applied Jevons’ finding to the idea of increasing energy efficiency in order to reduce overall consumption. This culminated in 1992 with Saunders proposing what he called the Khazzoom-Brookes postulate: as the efficiency of the equipment used in industry and in the home increased, the overall consumption of energy would increase, rather than decrease, as energy became cheaper and more accessible.

This was observed in the 1970s when the oil crisis caused the automtive industry to find ways to make their vehicles more efficient. In spite of this increase in efficiency, overall consumption of oil by cars increased.

However, from the perspective of an individual household, real savings are possible. If you insulate your loft, you’ll reduce the amount of energy you use for heating. You’ll probably then spend the money you've saved on other goods and services which have an energy impact, but not as energy-intensive as burning fuel directly. So by improving efficiency in your home, you can reduce your own overall consumption and improve your quality of life at the same time. AlertMe is about making consumption more intelligent, and because households consume so much, a small amount of intelligence invested in control of this energy monster can reap large benefits.

The rebound effect is hard to predict. So what if our efforts to improve energy efficiency do backfire?

Bob Metcalfe, the creator of the Ethernet standard which connects all our computers to the internet, recently claimed that increased consumption won’t matter once energy becomes "cheap and clean".

He suggests an analogy with the early days of the internet when much attention was focused on making communication efficient, because bandwidth was so limited. But this didn’t prevent us increasing the amount of bandwidth we use: "We made bandwidth cheap and clean. And now we use a million times more." His argument is that once we’ve made our energy supplies cheap and clean, we can increase our use of it too. But is Metcalfe’s utopian vision of cheap, clean energy realistic? And how do we get there from here?

One way that governments could avoid the danger of a rebound effect is to impose a green tax, to counteract the gains from energy efficiency increases. So even though you consume less energy, you still end up paying the same, meaning that you don’t have money "left over" to spend on more energy consumption. This may well be inevitable: if there’s one thing that Governments are good at, it’s raising taxes.

Green taxes work in two ways. First, they make energy more expensive (which could be seen as just making the cost a truer reflection of the true cost to society of generating it, given the carbon production) and consumers will then react to this rise in cost by reducing their consumption, simply out of self-interest. Second, the money raised can then be ploughed into renewable energy production, taking us a little closer to Bob Metcalfe’s vision.

So where does this leave us? Should we bother to make our homes more efficient? Or will this end up increasing the amount of energy we consume? It seems clear that in the short-term, we consumers can improve our quality of life by spending less on energy, leaving us with more money to spend on other things. The rebound effect from this is likely to be small and the overall effect will almost certainly be a reduction in consumption overall. Then it’s up to governments to find ways to make sure that this reduction in consumption is used as a driver to increase the use of renewable energy sources. Perhaps Bob Metcalfe’s vision isn’t so unrealistic after all!