While climate change appears to be a significant factor in the recent change of federal government in Australia, emissions trading and nuclear power have dominated 'debate'. Energy efficiency has seldom made it on to the political agenda. Is the lack of political focus afforded to energy efficiency justified?

The Khazzoom-Brookes Postulate, first put forward by the US economist Harry Saunders in 1992, is the premise that economically effective efficiency gains, while reducing energy consumption in the short-term, actually lead to an increase in energy consumption in the economy as a whole¹. Numerous economists (including environmental and ecological economists) put forward two arguments, which support the premise that energy efficiency programs don't save energy in the long term. These are known as the income and price effects.

Short-term decreases in energy demand, created by an energy efficiency programs, lead to reduced energy prices (in a competitive market). Cheaper energy results in higher energy consumption over time (the price effect). Reduced energy prices also increase consumer income, which tends to be spent on increasing consumption and hence energy² (income effect). Improved energy efficiency also assists producers to reduce costs, which (all else constant) leads to lower prices and increased consumption. The end result is called the rebound effect. Some economists support the view that the longterm rebound effect is greater than 100%. This view is disputed by some proponents of efficiency, such as Amory Lovins.

Does this mean that politicians in Australia are justified in their lack of substantial policies to encourage energy efficiency? Not really. In either case, government policies to improve energy efficiency could potentially reduce the price of energy. Rather than passing the savings on to consumers, they could be redistributed³ by governments, and used to subsidize⁴ renewable energy development. This would avoid the rebound effect. According to the Climate Institute, a strategy incorporating renewable energy, emissions trading and energy efficiency would likely facilitate the least cost transition (long-run) to a low carbon economy⁵.

Energy efficiency policy options include:

• Improved building standards and appliance standards (MEPS)
• Compulsory public sector efficiency audits and improved procurement standards (and mandatory implementation of cost-effective investments)
• Subsidized energy efficiency audits for residential buildings⁶ and compulsory audits and labelling for rented premises.
• Increased scope of compulsory audits for large consumers and generators and the introduction of negotiated industry efficiency agreements (potentially incentivized by the way in which emissions permits are allocated).

There are at least three main challenges to designing and implementing serious policy to encourage energy efficiency in Australia:

1. Political focus - energy efficiency projects tend to lack the 'ribbon cutting,' political appeal of major renewable energy projects.
2. Industry lobby by those opposed to renewable energy targets and energy efficiency targets ('The Greenhouse Mafia') ⁷. Campaign funding and lobbying reform appear to be required.
3. Further challenges also exist in getting the design of various schemes right, so that energy efficiency investments are made where they are most cost - effective⁸.

Trent Crawford (B.E. Mech, postgraduate Energy Studies student at Murdoch University)
 

Footnotes

¹ In his essay "Does Energy Efficiency Save Energy: The implications of accepting the Khazzoom-Brookes Postulate," Horace Herring explains various positions in the long-standing debate on the merits of energy efficiency programs (Open University 1998) Available at http://technology.open.ac.uk/eeru/staff/horace/kbpotl.htm [Accessed 2/1/2008]

² The level of increase in energy consumption depends on the nature of the growth (e.g. service oriented or industrial).

³ Either through taxation or fuel excise, which is used to subsidize renewable energy research and projects or through off-budget measures such as an expansion of MRET.

⁴ In economic terms, subsidies to renewable energy can be justified on numerous grounds, such as overcoming economies of scale barriers, correcting market failure such as externalities, and compensating for historical subsidies to fossil fuel producer and consumers.

⁵ Making the Switch. Available at http://www.climateinstitute.org.au/index.php?option=com_content&task=view&id=41&Itemid=41 [Accessed 2/1/200]

⁶ Income tax deduction for individuals. Enhanced deductibility for businesses (say 125%) for businesses.

⁷ See Scorcher, The Dirty Politics of Climate Change, Clive Hamilton (2007)

⁸ Economists generally assume that industry and individuals make rational decisions about energy in the absence of any policy programs. This means that cost effective energy efficiency options have already been exploited. Bottom-up analysis tend to suggest there are often unexploited energy efficiency savings with substantial internal rates of return (greater than 10%). One explanation for the discrepancy is the extremely high internal rate of return (IRR) that many businesses expect from energy efficiency investments. The IRR hurdle is potentially inflated by unsustainable profits (or market returns) derived from the sale of products with externalities (such as coal), massive energy subsidies, and in some cases inadequate resource rent payments to compensate the community for the extraction of resources. (Further references on request).

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