Category Archives: energy efficiency

Making climate change policies fit their own domain

A new framework acts as a sound guide for policy formation.

There is a widely held narrative for climate policy that runs something like this.  The costs of damage due to greenhouse gas emissions are not reflected in economic decisions.  This needs to be corrected by imposing a price on carbon, using the power of markets to incentivise efficient emissions reduction across diverse sources.  Carbon pricing needs to be complemented by measures to address other market failures, such as under-provision of R&D and lack of information.  Correcting such market failures can help carbon markets function more efficiently over time.  However further interventions, especially attempts by governments to pick winners or impose regulations mandating specific solutions, are likely to waste money.  This narrative, even if I have caricatured it a little, grants markets a central role with other policies in a supporting role.  Its application is evident, for example, amongst those in Europe who stress and exclusive or central role for the EUETS.

While this narrative rightly recognises the important role that markets can play in efficient abatement, it is incomplete to the point that it is likely to be misleading as a guide to policy.  A better approach has recently been characterised in a new book by Professor Michael Grubb and co-authors.  He divides policy into three pillars which conform to three different domains of economic behaviour.  Action to address all three domains is essential if efforts to reduce emissions to the extent necessary to avoid dangerous climate change are to succeed.  These domains and the corresponding policy pillars are illustrated in the chart below.

Three domains of economic behaviour correspond to three policy pillars …

Domains and pillars diagram

In the first domain people seek to satisfy their needs, but once this is done they don’t necessarily go further to achieve an optimum.  Although such behaviour is often characterised by economists as potentially optimal subject to implicit transaction costs this is not a very useful framework.  Much better is to design policy drawing on disciplines such as psychology, the study of social interactions, and behavioural economics.  This domain of behaviour relates particularly to individuals’ energy use, and the corresponding policy pillar includes instruments such as energy efficiency standards and information campaigns.

The second domain looks optimising behaviour, where companies and individuals will devote significant effort to seeking the best financial outcome.  This is the domain where market instruments such as emissions trading have the most power.  Policy making here can draw strongly on neoclassical economics.

The third domain is system transformation, and requires a more active role from governments and other agencies to drive non-incremental change.  The policy pillar addressing this domain of behaviour includes instruments for technology development, the provision of networks, energy market design, and design and enforcement of rules to monitor and govern land use changes such as deforestation.  Markets may have a part to play but the role of governments and other bodies is central here.  The diversity of policies addressing this domain means that it draws on a wide range of disciplines, including the study of governance, technology and industrial policy, institutional economics and evolutionary economics.

As one moves from the first to the third domain there is increasing typical scale of action, from individuals through companies to whole societies, and time horizons typically lengthen.

This framework has a number of strengths.  It is both simple in outline and immensely rich is its potential detail.  Each domain has sound theoretical underpinnings from relevant academic disciplines.  It acknowledges the power of markets without giving them an exclusive or predominant role – they become one of three policy pillars.  It implies that the vocabulary of market failures becomes unhelpful, as I’ve previously argued.  Instead policy is framed as a wide ranging endeavour where the use of markets fits together with a range of other approaches.  While this may seem obvious to many, the advocacy of markets as a solution to policy problems has become so pervasive, especially in Anglo-Saxon economies, that this broader approach stands as a very useful corrective to an excessively market-centric approach.

The framework is high level, and specific policy guidance needs to draw on more detailed analysis.  The authors have managed to write 500 pages of not the largest print without exhausting the subject.  However, the essential framework is admirable in its simplicity, compelling in its logic, and helpful even at a high level.  For example it suggest that EU policy is right to include energy efficiency, emissions trading and renewables – broadly first, second and third domain policies respectively – as well as to be active in third domain measures such as improving interconnection, rather than relying exclusively on emissions trading (although as the EUETS covers larger emitters, so first domain effects are less relevant for the covered sector).

The framework in itself does not tell you what needs to be done.  In particular the challenges of the third domain are formidable.  But it provides a perspective which deserves to become a standard structure for high level guidance on policy development.

Adam Whitmore – 31st October 2014

The need for a trend break in the carbon intensity of energy use

Looking at past changes in each driver of total emissions emphasises the necessity of deploying very low carbon technologies. 

There has been some recent discussion about the Kaya identity, which breaks down emissions from energy use into four factors: population, income per capita, energy intensity of the economy (energy used to produce each unit of GDP), and carbon intensity of energy supply (carbon emissions per unit of energy), so:

Carbon emissions from energy use =

population x (GDP/capita) x (energy/GDP) x (carbon/energy)

This applies to energy, the largest source of man-made greenhouse gas emissions, but it’s not a useful tool for looking other sources of emissions such as deforestation, industrial process emissions, and other greenhouse gases.

Emissions from energy use have continued to grow to date because the growth in the first two factors in the identity has been greater than reduction in the last two.  The chart below shows the breakdown into the four factors of the change each decade in total global CO2 emissions  from fossil fuel combustion. Changes are measured in absolute terms – gigatonnes (Gt) of CO2 emissions per decade – rather than percentages.  The bar segments show the changes associated with each factor alone, holding the other factors constant.  Total changes, the net effect of the four factors, are marked by a triangle.  In each decade population has grown, as has income per capita.  This has been partially offset by a reduction in energy intensity.  The smallest effect to date has been the change in the carbon intensity of energy use.  There was a slight reduction in the emissions intensity of energy supply for three decades, reflecting in large part the growth of gas use, which has lower emissions per unit of energy than other fossil fuels, and, for part of the period, growth in electricity generation from nuclear.  However this trend reversed in the first decade of this century, mainly due to the growth of coal use in China.  This reversal, together with the larger effect of very strong per capita GDP growth and continuing population growth, resulted in an acceleration of the growth of emissions after the turn of the century.

Chart

Source: IPCC (see notes [1])

Globally, population will continue to grow in the coming decades, as will income per head, with the world economy likely to roughly triple in size by 2050 [2].  If historic trends continue then falls in energy intensity energy will balance some of this growth of GDP, resulting in total energy use growing by about 70% over the period to 2050.  There is doubtless more that can be done to reduce energy intensity, but even doubling this rate from its past level, which would be an extraordinary achievement, would only approximately stabilise energy use, and thus emissions if there is no change in carbon intensity.

This leads a huge amount needing to be done by reductions in carbon intensity to achieve emissions reduction targets.  Emissions need to more than halve globally by 2050 if the agreed target of limiting temperature rise to two degrees centigrade is to be reached, and emissions will need to continue reducing thereafter.  Global average carbon intensity needs to fall by a corresponding amount, even if huge gains in energy efficiency are sufficient to keep total energy use constant, which seems unlikely.  Less ambitious emissions reductions targets still in practice will require large reductions in carbon intensity,  especially if progress on reducing energy intensity is slower.  Such reductions are made all the more challenging by the huge inertia in the energy system due to the scale and long lifetimes of existing infrastructure, with high emission existing energy sources often lasting decades.  This in turn implies that increasingly most new infrastructure will need to be very low carbon if the required changes to carbon intensity are to be made in only a few decades

However carbon intensity of energy use is currently almost unchanged from its level a quarter of a century ago.  Of the four factors driving emissions this has had by far the least effect – the net effect of the red bars in the above chart is much smaller than the other three factors.  If emissions are to be reduced, this factor needs to become as large as, or larger than, the other three factors.  A transformation of the energy system towards much lower carbon intensity really is necessary.  In this respect the falling cost of renewables, especially solar, and progress in delivering batteries with improved technology and lower costs represent some of the most encouraging developments in securing a low carbon economy that we have yet seen.

Those who point out the urgency of the transformation to low carbon energy systems are right.  Those who point out the difficulty of achieving the huge required trend break in carbon intensity are also right.  The combination of urgency and scale of required reductions in carbon intensity, along with the need for faster improvements in the efficiency of energy use, is, at its simplest, what makes the problem of reducing emissions from the energy sector so challenging.

Adam Whitmore – 27th June 2014

Notes and references

[1] The chart is from IPCC, Fifth Assessment Report Working Group 3, and can be found here:

http://mitigation2014.org/report/summary-for-policy-makers

Income is converted into common units using purchasing power parity (PPP) exchange rates.

[2] The extrapolation of the formula to 2050 is indicatively as follows.   World GDP is expected grow at roughly 3% p.a., roughly tripling by 2050.  This comprises a 30% growth in population to just over 9 billion over the period, with GDP per capita growing at around 2.3% p.a. to more than double by 2050.  Data is from OECD modelling see http://www.oecd-ilibrary.org/environment/an-economic-projection-to-2050-the-oecd-env-linkages-model36-baseline_5kg0ndkjvfhf-en

With no change in energy intensity, energy use would also triple.  However, energy intensity has historically reduced at about 1.5% p.a. (based on World Bank data – other sources give broadly similar figures).  This would reduce growth in energy demand to around 70%.  Doubling the rate of energy intensity reduction to 3.0%, a huge increase, would only succeed in reducing the growth rate of emissions to around zero, thus stabilising emissions at their current level.  Any reductions in emissions would still need to come from changes in carbon intensity.

The curious incidence of the light in the night-time

Some now classic research from 2007 showed that the amount of artificial light has increased more than 100,000 fold in the last three centuries in the UK as successive advances in technology have revolutionised the availability and price of illumination.  Recent research extending this work provides estimates of price and income elasticities that suggest continuing unmet demand, and interior lighting levels remain a long way below daylight.  The amount of electricity required for lighting is likely to increase in the next few decades, despite continuing efficiency gains.  This makes the deployment of low carbon electricity generation all the more urgent.

The December 1892 issue of the Strand magazine contained the first appearance of the Sherlock Holmes story “The Adventure of Silver Blaze”.  The same issue also contained the following advertisement for gas lamps, which were then facing competition from a new technology – the electric light bulb.

Strand ad small

The advertisers had a point.  Even by 1900, eight years after this advertisement was placed, electricity was still 25 times more expensive per unit of energy than gas, but only 7 times more efficient, so electric lighting remained the preserve of luxury homes and commercial premises.  But by 1930 electricity was only 5 times more expensive than gas and 10 times more efficient.  A huge switch to electric lighting was underway, which would displace gas almost completely by the middle years of the twentieth century.

This transition from gas to electricity marked one stage in the increasing availability of artificial light over the last few hundred years which has transformed the way we live.  Some now classic research by Fouquet and Pearson first published in 2007 showed how changes in technologies have always been accompanied by increasing use of light (measured in lumen-hours), with consumption of lighting increasing by a factor of over 100,000 in the past 300 years.

Chart:  The consumption of light in the United Kingdom increased over 100,000 fold between 1700 and 2000 …

long run lighting graph edited

Fouquet and Pearson 2007

However, there appears to have been a plateau towards the last quarter of the 20th century, with a tick up at the end.  This raises the important question of whether demand for lighting is saturating, or whether there is still room for growth in the demand for lighting services.    If demand for lighting services is saturating then producing the same service with much less electricity may lead to substantial savings in emissions from electricity generation.  However if demand has not yet saturated, increases in efficiency through the wider deployment of new technologies, especially LEDs, could lead to lower than expected savings, as  increased efficiency reduces price per lumen and so increases demand, a rebound effect.

As a first step in looking at this, I’ve taken the data from the analysis and plotted it on a log scale.  This shows clearly how consumption has increased as population and incomes (measured by per capita GDP) have risen and prices have fallen.   The central role played by efficiency is indicated by the dashed line, which shows the number of kWh needed to produce a unit of light (1/efficiency).  Comparing this with the solid blue price line showing price indicates that the 100 fold fall in price per unit of light in the 20th century was due to increased efficiency, mainly as electricity replaced gas.  Yet demand rose strongly over the period, increasing more than 100 fold.  This challenges the view that increases in efficiency translate into reductions in demand, and thus emissions.

Chart:  Per capita consumption rose as incomes rose and prices fell, with efficiency increases being the major contributor to price falls …

excel chart

Source: Data is taken from Fouquet and Pearson 2007 and Fouquet 2013

There seem to be at least three good reasons for suggesting that demand for lighting services will continue to grow strongly in the coming decades.  First, interior light levels are still well below the intensity of daylight, by as much as one or two orders of magnitude.  There is no immediately apparent reason why people should have an intrinsic preference for lower light levels than found naturally, at least for much of the time, and especially in winter.

Second, every major technological shift has caused an increase in the consumption of lighting services in the past.  LED lighting now appears, together with other technologies, to be introducing such a major technological shift.  There will surely be significant progress in the coming decades, with costs falling and the quality of the light improving.  If the historical pattern is followed this will lead to an increase in demand.

Third, incomes will continue to rise, which is also likely to lead to an increase in demand.

In their more recent research Fouquet and Pearson have estimated both price and income elasticity of lighting demand over time.  They have found that both income and price elasticities have fallen below the very high levels found in the late nineteenth and early twentieth centuries.  But they are still materially different from zero.  Demand for lighting services can be expected to grow even in a mature market such as the United Kingdom over the next half century, given expected increases in income and reductions in the price of lighting services.  Estimates  indicate that despite increases in average efficiency of lighting of 2% p.a. electricity use for lighting could still increase by more than a third in the coming decades.  Even if elasticities do fall somewhat over time, with greater demand saturation than yet evident, and other cost increases somewhat offset price falls due to efficiency there will be major limitations to the ability of lighting efficiency to produce very marked percentage reductions in emissions relative to current levels.

Chart:  Both income and price elasticities for lighting demand have varied greatly over time, and remain significantly different from zero…

elasticites chart edited

Source:  Fouquet and Pearson 2012.  One of the authors has since refined these estimates (Fouquet 2013) but this does not greatly affect the general pattern or current values.

This analysis does not necessarily generalise to other services.  Lighting remains a minority of total electricity demand even in the residential sector, and there may be greater saturation effects in other applications, for example in some domestic appliances.   For example, energy use by refrigerators sold in the US has declined enormoursly since the mid-1970s.  However other sectors, such as passenger transport and domestic heating, also show continuing growth in demand for energy services over the very long term, confirming that the type of trend found for lighting is not unique.

Increased lighting efficiency, however desirable, thus seems unlikely to do much to avoid the need for very large amounts of low carbon electricity generation.  Efficiency will help but it will be nowhere near enough on its own.

Adam Whitmore – 18th April 2013

References:

Roger Fouquet and Peter J.G. Pearson (2007) Seven Centuries of Energy Services: The Price and Use of Light in the United Kingdom (1300-2000) (Energy Journal)

Roger Fouquet (2011), Long Run Perspectives on Energy and Climate Change, Basque Centre for Climate Change (BC3)

Fouquet, R. and Peter J.G. Pearson (2012)  The long run demand for lighting: elasticities and rebound effects in different phases of economic development.‘ Economics of Energy and Environmental Policy 1(1) 83-100.

Roger Fouquet  (2013), Long Run Demand for Energy Services: the Role of Economic and Technological Development, Basque Centre for Climate Change (BC3)