The Energy Efficiency Paradox: $20 Bills Lying All Over The Sidewalk

Energy Efficiency: A Closer Look

The Importance of Energy Efficiency in Achieving Sustainable Development Goals

Not a week passes before yet another claim is made by the “experts” at the International Energy Agency (IEA) or the US Environmental Protection Agency (EPA) to instruct businesses and households on achieving and rewarding “energy efficiency”. Mandate after mandate, regulation after regulation, subsidy after subsidy, all at the altar of “energy efficiency”. It is as if normal folk like you and me, dear reader, don’t have a clue as to what energy efficiency or, for that matter, efficiency itself, is.

The IEA’s Report on Energy Efficiency

In the executive summary of the IEA’s 2023 report on energy efficiency, it is stated that energy efficiency is currently seeing a strong global focus among policymakers in recognition of its important role in enhancing energy security and affordability, and in accelerating clean energy transitions.

The Misconception Surrounding Energy Efficiency

Simple-minded folk like this author must ask, why do we need policymakers? Don’t policymakers know that if I run my own business or my own household, I will reduce costs as far as possible, to maximize my own profits or my own household income? Do I really need a bureaucrat to tell me how to save money? What am I missing here?

Defining Energy Efficiency

Energy efficiency is mom’s apple pie. It helps net-energy importing countries reduce their balance of payments account deficits, decreases energy costs for households and firms, enhances national energy security, and improves environmental outcomes. And as the IEA keeps proclaiming, the “energy transition” in which energy efficiency is critical will save the planet from climate catastrophe. What’s there not to like?

No wonder that the IEA, the EPA, the World Bank, the IMF, and their ilk keep banging on about energy efficiency. And, in doing so, they keep coming up with mandate after mandate, regulation after regulation, subsidy after subsidy, tax after tax. These include labeling and information requirements, bans of products like incandescent light bulbs, and countless bureaucratic requirements for businesses and households to prove that they are “energy efficient”.

The Reality of Energy Efficiency

But energy efficiency is a hollow drum. The evidence on the cost-effectiveness of energy efficiency is mixed at best. Academic studies based on randomized trials and ex-post analysis suggest that “on average the magnitude of profitable unexploited investment opportunities [in energy efficiency] is much smaller than engineering-accounting studies suggest.” In other words, what the bureaucrats promise in terms of energy savings for businesses or households means little. The actual outcomes on energy savings championed by bureaucrats are paltry if not a fantasy.

Examples of Energy Efficiency Failures

Let’s do one example from many years ago in Mexico. The lessons learned apply to most government energy efficiency policies. The study compared the difference between what the planners thought would happen and what actually happened. The Mexican government put in place a subsidy program to replace old refrigerators and air conditioners with more efficient ones. The government planners were expecting to save energy by 30%. But a follow-up study analysis found that energy savings were only 7%.

What happened was that buyers chose larger refrigerators with newer energy-using features while many households lowered their thermostat temperatures or installed more air conditioning units in their houses as a result of the subsidy. The “rebound effect” of cheaper subsidized energy on energy demand was not accounted for by the bureaucrats.

More recent examples would include UK households not going for the government push for heat pumps despite an all-out propaganda blitz on how electricity-driven heat pumps are better than natural gas boilers. US households seem to be rejecting the EPA push for a ban against gas stoves. And now, the “more efficient” electric vehicles are losing sales momentum as consumers realize that they do not deliver on driving range per charge, time and cost of charging, insurance and repair costs, and resale value. Ford and GM are delaying their plans to invest in EVs as sales forecasts keep disappointing earlier rosy projections.

The Fallacy of Energy Efficiency

Economists are a peculiar lot, and they have interesting stories. One of their famous ones is of Professor Milton Friedman walking down the street with a friend. The friend stops and says, “Look, there is a $20 bill on the sidewalk.” The famous economist turns and says, “Can’t be. If there were a $20 bill on the sidewalk, somebody would have already picked it up.”

People don’t often get the lesson behind this fable. If we relate this to our concern over energy efficiency, here’s how it goes. The bureaucrats working in IEA, the World Bank, the EPA, and others on tax-funded salaries keep telling us, “Hey, there are these massive energy efficiency opportunities to help our economy with “win-win” solutions, there are cheap solutions for producers which remain unexploited despite their obvious benefits.”

It’s not just bureaucrats. The consulting company McKinsey has made a pretty good business over its famous “abatement costs” curve that purportedly shows us all these unexploited opportunities to reduce energy costs across many technologies. The fact that cost-effective options to improve energy efficiency are not being adopted on a large scale has led to notions of the “energy-efficiency gap.” For a consulting fee, McKinsey experts will advise companies on how to cut their energy costs. Whether the resulting energy cost savings exceed McKinsey’s consulting fees is anyone’s guess.

Staid economists, like your author, often refer to this “energy efficiency gap” informally as the “$20 bills on the sidewalk” syndrome. Efficient markets do not imply that there cannot be such a thing, but it only exists in the very short term. Someone will pick it up very soon. But the main lesson is that it is not a sound investment strategy to go looking for $20 bills on the sidewalk. Likewise, it does not seem plausible to believe that there are these vast opportunities in energy efficiency and to have an investment strategy built on this belief.

One academic study found that much of the policy analysis on energy efficiency “runs counter to the most rudimentary economic theory and our general sense that we do not live in a world in which people never make sound choices”. What is the study saying? Well folks, it means that all that IEA/World Bank/McKinsey stuff on energy efficiency is hogwash. Normal rational folk, businessmen or heads of households, husbands and wives, workers and bosses, all know how to save money. They know what energy efficiency is

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 11: Sustainable Cities and Communities
• SDG 13: Climate Action

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 7.3: By 2030, double the global rate of improvement in energy efficiency
• SDG 9.4: By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes
• SDG 11.6: By 2030, reduce the adverse per capita environmental impact of cities, including by paying special attention to air quality and municipal and other waste management
• SDG 13.2: Integrate climate change measures into national policies, strategies, and planning

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Energy savings achieved through energy efficiency programs and policies
• Adoption and implementation of sustainable and clean technologies in industries and infrastructure
• Reduction in energy consumption and greenhouse gas emissions in cities
• Inclusion of climate change considerations in national policies and planning

Table: SDGs, Targets, and Indicators

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Source: forbes.com

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