Edited by Joanne Evans and Lester C. Hunt
Chapter 7: Economics of Energy Efficiency
Grant Allan, Michelle Gilmartin, Peter McGregor, J. Kim Swales and Karen Turner* 1 Overview Improvements in energy efficiency are seen as a key mechanism for reducing energy dependence and meeting sustainability and security of supply goals (Sorrell, 2007; Stern, 2007). However, there is dispute about the way in which the economy responds to such efficiency improvements. An increase in energy efficiency reduces the price of energy, measured in efficiency units, and this has output, income and substitution effects that tend to mitigate, and possibly to offset totally, any energy saving. Mitigation is labelled as ‘rebound’ and an increase in energy use as ‘backfire’. Rebound and backfire involve system-wide effects that are difficult to quantify and track. In this chapter we adopt a purely analytical approach that investigates the impact of an improvement in energy efficiency in a stylised open economy. The aim is pedagogic: that is, to identify and clarify the nature of the various system-wide factors that can affect the change in energy use that accompanies improvements in energy efficiency. Section 2 explains the small open economy model used and the resource, technology and sustainability problems that it faces. Section 3 introduces improvements in energy efficiency into the model and discusses measures of energy productivity. Section 4 analyses the way in which energy use will be affected by improvements in energy efficiency. Section 5 discusses how tax policy can adjust the profit-maximising energy use after improvements in energy efficiency. Section 6 extends the simple model in three ways so...
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