made efficiency investments, ignorance of the subsidy program, slowness in applying for limited subsidy funds, or having a low income or poor credit rating that hinders the ability to get financing to cover the non-subsidized portion of the efficiency investment.
For over three decades, some technologists have argued that there are extensive opportunities for profitable energy efficiency investments. For much of these three decades, however, some economists have countered that these estimates of profitable energy efficiency overlook important intangible costs facing firms and consumers. These include transaction costs, investment risks facing new technologies and long payback investments, heterogeneity in the market, and differences in quality of service. While these costs are usually ignored by technologists, economists have done little research to estimate their actual magnitude—so fault lies on both sides.
These competing paradigms are confusing to policy makers trying to assess the cost-effectiveness and likely contribution of energy efficiency to efforts to reduce GHG emissions. Bottom-up cost curve analysis by technologists suggests an extremely large and profitable potential, which implicitly suggests that information and subsidies alone may reduce emissions substantially. Top-down marginal abatement cost curve analysis by economists suggests the opposite, implying the need for strong emissions pricing and/or regulations. More recent research with hybrid models that are technologically explicit but behaviorally realistic suggests that while there is some profitable potential for energy efficiency, strong pricing and regulatory policies will indeed be required for a modern economy to achieve substantial GHG emissions abatement over the coming decades.
Arimura, T., Newell, R. and K. Palmer, 2009, “Cost-effectiveness of electricity energy efficiency programs,”Resources for the Future, Discussion Paper DP 09-48.
Energy Information Administration (U.S.), 2009, The National Energy Modeling System: An Overview 2009, Washington, D.C.: Energy Information Administration.
Geller, H., 2003, Energy Revolution: Policies for a Sustainable Future, Washington, D.C.: Island Press.
Jaccard, M., Nyboer, J., Bataille, C. and B. Sadownik, 2003, “Modeling the cost of climate policy: distinguishing between alternative cost definitions and long-run cost dynamics,” The Energy Journal 24 (1): 49-73.
Jaccard, M., 2009 “Combining top-down and bottom-up in energy-economy models,” In Evans, J. and L. Hunt (eds.) International Handbook on the Economics of Energy, Cheltenham, UK: Edward Elgar, 311-331.
Jaccard, M., 2005, Sustainable Fossil Fuels: The Unusual Suspect in the Quest for Clean and Enduring Energy, Cambridge: Cambridge University Press.
Jaffe, A. and R. Stavins, 1994, “The energy-efficiency gap. What does it mean?” Energy Policy 22 (10): 804-810.
Jaffe, A., Newell, R. and R. Stavins, 1999, “Energy-efficient technologies and climate change policies: issues and evidence,” Resources for the Future, Climate Issues Brief #19.
Lovins, A., 1977, Soft Energy Paths: Toward a Durable Peace, New York: Ballinger.
McKinsey, 2007, Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? New York: McKinsey & Company and the Conference Board.