Energy Efficiency ImageEnergy efficiency has been a lightning rod in the debate about the cost of addressing climate change, because it is generally seen as a least-cost approach to mitigating greenhouse gas emissions. But the mere mention of possible “negative costs” associated with energy efficiency is enough to send shock waves across the profession of neoclassical economics. Experts continue to disagree about the magnitude, cost and possibility of managing demand.

Some say that the future potential for energy efficiency is limited because markets have already exploited all cost-effective opportunities, and there are insurmountable obstacles to further expansion. Demand-side resources may have played a role in the past, but they are now “tapped out.” Policies to promote more energy efficiency have failed, and any future efforts run the risk of expanding – not shrinking – energy consumption because demand “rebounds” with more energy-efficient products. In any event, savings from policies are too difficult to measure and monetize; as a result, energy efficiency is unreliable, unpredictable and unenforceable.

Others argue that market failures abound, producing a large reservoir of energy efficiency opportunities waiting to be exploited. Policies have, and can in the future successfully address these obstacles, producing a vast improvement in the efficiency of energy use. The rebound of demand in response to energy efficiency may occur, but it is small and does not negate the value of efficiency investments. Measurement and verification practices are mature and have documented that energy efficiency is reliable, predictable and enforceable, and it minimizes the risks of supply-side investments.

When energy efficiency skeptics prevail, expanding supply becomes the only way to meet increasing energy demand. Capital is diverted to large-scale projects, and unsustainable energy practices are amplified. When energy efficiency advocates prevail, new jobs in labor-intensive industries are created, but jobs at energy suppliers may erode.

Do the benefits of energy efficiency programs outweigh the costs?