21 Pages Posted: 10 Dec 1999
Date Written: December 1999
Enhanced energy efficiency occupies a central role in evaluating the efficacy and cost of climate change policies. Ultimately, total greenhouse gas (GHG) emissions are the product of population, economic activity per capita, energy use per unit of economic activity, and the carbon intensity of energy used. Although greenhouse gas emissions can be limited by reducing economic activity, this option obviously has little appeal even to rich countries, let alone poor ones. Much attention has therefore been placed on the role that technological improvements can play in reducing carbon emissions and in lowering the cost of those reductions. In addition, the influence of technological changes on the emission, concentration, and cost of reducing GHGs will tend to overwhelm other factors, especially in the longer term. Understanding the process of technological change is therefore of utmost importance. Nonetheless, the task of measuring, modeling, and ultimately influencing the path of technological development is fraught with complexity and uncertainty?as are the technologies themselves.
Although there is little debate over the importance of energy efficiency in limiting GHG emissions, there is intense debate about its cost-effectiveness and about the government policies that should be pursued to enhance energy efficiency. At the risk of excessive simplification, we can characterize "technologists" as believing that there are plentiful opportunities for low-cost, or even "negative-cost" improvements in energy efficiency, and that realizing these opportunities will require active intervention in markets for energy-using equipment to help overcome barriers to the use of more efficient technologies. Most economists, on the other hand, acknowledge that there are "market barriers" to the penetration of various technologies that enhance energy efficiency, but that only some of these barriers represent real "market failures" that reduce economic efficiency.
In this essay, we examine what lies behind this dichotomy in perspectives. Ultimately, the veracity of different perspectives is an empirical question and reliable empirical evidence on the issues identified above is surprisingly limited. We review the evidence that is available, finding that although energy and technology markets certainly are not perfect (no markets are), the balance of evidence supports the view that there is not as much "free lunch" in energy efficiency as some would suggest. On the other hand, a case can be made for the existence of certain inefficiencies in energy technology markets, thus raising the possibility of some inexpensive GHG control through energy-efficiency enhancement. We conclude with some reflections on the role of appropriate energy efficiency policy in climate change mitigation.
JEL Classification: O3, Q4, Q2
Suggested Citation: Suggested Citation
Jaffe, Adam B. and Newell, Richard G. and Stavins, Robert N., Energy-Efficient Technologies and Climate Change Policies: Issues and Evidence (December 1999). Climate Issues Working Paper No. 19; KSG Working Paper. Available at SSRN: https://ssrn.com/abstract=198829 or http://dx.doi.org/10.2139/ssrn.198829