No single approach can support rapid decarbonization. It will take a holistic mix of strategies and technologies for policies to hit targets.
In her recent Policy Options article “BC’s green stimulus needs to focus on fuel switching, not energy efficiency,” Katya Rhodes argued that fuel switching is the path to decarbonizing BC’s energy systems, and that energy efficiency as a strategy is largely ineffective. In our view, this argument overstates the limits of energy efficiency, and doesn’t account for other critical strategies and policies essential to decarbonize BC’s economy. A more holistic policy agenda is necessary.
The three main criticisms of energy efficiency policies are: 1) use of subsidies, 2) imperfect substitutions, and 3) rebound effects.
Energy efficiency policies often make use of subsidies, such as rebates from BC Hydro and FortisBC. Subsidy policies are criticized for having high rates of free ridership, meaning that consumers claiming rebates would have made their investments without the subsidy. Free ridership does occur. However, this is not overlooked in policy evaluations in BC or elsewhere, and reported energy savings are essentially always adjusted for free ridership. Free ridership, it should be noted, also occurs with fuel switching subsidies.
Energy efficient technologies are criticized as imperfect substitutes for conventional technologies. Dissatisfaction with lighting, specifically LED lamps, is cited as the key direct evidence of their shortcomings. However, multiple surveys of LED users in North America consistently reveal high rates of satisfaction. For example, an evaluation of BC Hydro customers found that 92 percent of respondents reported satisfaction with LED lamps. Even if there were current and accurate evidence that users do not like LEDs, dissatisfaction with LEDs should not be generalized to apply to all energy-efficient technologies. Comparing a 14-watt LED lamp to, say, a 26-million-watt natural gas compressor, a common industrial system in BC, would be a mistake.
We recommend that policy-makers utilize more complete evidence from “non-energy impact” studies to assess technology performance. These studies assess the side effects of energy efficient technologies by identifying and valuing outcomes other than direct energy savings. Example outcomes include maintenance costs (such as reduced failure rates for efficient pumps in a pulp mill) and worker productivity (for example, reduced sick time due to improved indoor air quality). These studies typically identify both negative and positive effects, with the balance being net positive value by a substantial margin.
Critics also cite indirect evidence for poor performance of energy-efficient technologies. Widespread deficiencies, such as reduced thermal comfort, are claimed based on economic models. Economists take data from consumer purchases, such as initial cost for efficient technologies and annual utility bill savings, and use mathematical models to figure out what rate of return (or discount rate) makes their equations balance. From these types of models, it is concluded that energy efficiency technologies perform so poorly that consumers and businesses invest in them only if their rate of return is 20 to 65 percent annually. The requirement for such a high rate of return on their investment, according to some economists, is to compensate for “intangible” shortcomings in energy-efficient technologies.
Yet there are multiple factors at work to explain these models of consumer purchases, including irrational decision-making. Evidence from cognitive science and behavioural economics shows that people persistently hold inaccurate perceptions of energy consumption and savings. One widely cited study documented examples of this phenomenon, with users grossly underestimating the money they can save using energy-saving thermostats by 75 percent. Large underestimates of energy cost savings suggest consumers will invest in energy-efficient technologies only if they are assured rates of returns two to six times greater than what they could get from other investment opportunities.
Rebound effects are another criticism of energy efficiency. Rebound theory states that consumers respond to energy savings by doing things like excessively raising thermostat settings in winter and spending their utility bill savings on energy-consuming goods and services. Rebound effects are real, and do partially offset energy savings. However, leading economists conclude that rebound effects are “overplayed,” and some rebound improves well-being for under-served users (for example, low-income households suffering with cold living spaces). Evidence does not support a “backfire” effect, where rebound offsets energy savings more than 100 percent, and leading economists agree that energy efficiency policies do contribute to carbon reduction goals.
We agree that energy efficiency policies alone will not support rapid decarbonization, and fuel switching is important. However, neither will fuel switching policies alone achieve targets. Fuel switching and efficiency are both needed, plus much more. Credible assessments emphasize the need to achieve net-zero carbon emissions by mid-century using multiple strategies, policies, and technologies. Granger Morgan, a world-leading interdisciplinary researcher, captured the policy needs succinctly: “Successfully decarbonizing the energy system will require a portfolio of everything we’ve got.”
For transportation, investment is needed in low-carbon energy and vehicles for multiple applications (personal transport and freight, for example). At the same time, reduced dependency on motorized transport should be encouraged by adopting transportation demand management policies. Travel management strategies include a diversity of options working together such as: increased use of micro-mobility technologies like e-bikes, improved public transit, increased urban density through land use changes, and more remote and virtual employment arrangements. Research has converged, with a consensus that an integrated policy mix is needed to accelerate progress toward low carbon transportation systems.
Two additional factors are critical to achieve green stimulus and climate change goals in BC: the scale of energy consumption must be reduced, and equitable access to energy services must be improved.
Canadians have amongst the highest per capita energy consumption on Earth. At the same time, our employment rates, gross domestic product, and other measures of well-being (leisure time and education, for example) are similar to many countries with less than half of our energy consumption. Fuel switching strategies cannot ignore the magnitude of consumption. To illustrate, a recent study estimated that electricity generation would have to increase by up to 60 percent, requiring construction of new natural gas electricity generation, in order to electrify BC’s road vehicle fleet. Fuel switching policies alone do not acknowledge or address the need to reduce the scale of consumption.
Any energy policy discussion must explicitly consider equity issues, which are absent from a policy agenda focused only on fuel switching. Average values of consumption and cost do not capture the distribution in levels of consumption, costs, and benefits. Affordability, environmental justice, and improving access to basic energy services for the most vulnerable and lowest income citizens need to be integral to BC’s stimulus and climate policies.
It is clear that fuel switching is one essential strategy to achieve net-zero carbon emissions. But the limitations of energy efficiency policies are overstated. From 1990 to 2016 in Canada, energy efficiency improved 31 percent, energy costs savings were $45 billion, and 112 million tonnes of carbon emissions were avoided. Policy-makers need to recognize that subsidies and technology substitutions from fuel switching are subject to the same outcomes for which energy efficiency is criticized. We argue for more holistic and evidence-based portfolios of policies aimed not only at economic stimulus and carbon reduction but also net reductions and more equitable patterns of energy consumption.