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A Tale of Two Efficiencies: Negawatts and Mass Transit

May 15th, 2008 by Max Gladwell · 6 Comments

Big surprise: higher energy prices influence behavior and reduce consumption. When it comes to solving the climate and energy crises, it’s the economics…stupid.

Every once in a while, two stories converge in our RSS feeds that form a yin and yang and speak to a greater trend or issue. First, The Economist reports on “The elusive negawatt: If energy conservation both saves money and is good for the planet, why don’t people do more of it?” And then The New York Times reports that, “Gas Prices Send Surge of Riders to Mass Transit.”

The Economist demonstrates a compelling connection (no surprise) between energy prices and conservation, while The Times gives a specific example of a behavioral change associated with high gas prices. These should serve as lessons for legislators, as the single greatest source of clean, fossil-free, and war-free energy is right under our noses.

IN WONKISH circles, energy efficiency used to be known as “the fifth fuel”: it can help to satisfy growing demand for energy just as surely as coal, gas, oil or uranium can. But in these environmentally conscious times it has been climbing the rankings. Whereas the burning of fossil fuels releases greenhouse gases, which contribute to global warming, and nuclear plants generate life-threatening waste, the only by-product of energy efficiency is wealth, in the form of lower fuel bills and less spending on power stations, pipelines and so forth. No wonder that wonks now tend to prefer “negawatts” to megawatts as the best method of slaking the world’s growing thirst for energy.

In the greenest of futures mapped out by the International Energy Agency, a think-tank financed by rich countries, greater efficiency accounts for two-thirds of emissions averted. The McKinsey Global Institute (MGI), the research arm of the consultancy, thinks that energy efficiency could get the world halfway towards the goal of keeping the concentration of greenhouse gases in the atmosphere below 550 parts per million.

Most of us are encouraged to conserve energy because it’s the right thing to do. We’re compelled by ethics. The more compelling and universal agent of efficiency, however, is when the cost of being wasteful or inefficient becomes prohibitive. That’s what’s happening today in so many different ways.

Some cities with long-established public transit systems, like New York and Boston, have seen increases in ridership of 5 percent or more so far this year. But the biggest surges — of 10 to 15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited.

The increase in transit use coincides with other signs that American motorists are beginning to change their driving habits, including buying smaller vehicles. The Energy Department recently predicted that Americans would consume slightly less gasoline this year than last — for the first yearly decline since 1991.

While this is positive for the environment, it’s destructive to our economy. When it costs $100 for a tank of gas, a big portion of that is being sent to foreign governments. We’re essentially being taxed by Saudi Arabia, Venezuela, and even Canada in direct proportion to our appetite for oil. This has entirely to do with supply (theirs, which is dwindling) and demand (ours, which has steadily risen). There’s no conspiracy by oil companies or the Bush administration, though much of it can be attributed to a criminal failure of leadership.

We should have been paying $100 for a tank of gas long before now, but instead of sending those tax dollars to the Saudis, they could have gone into developing clean, domestic alternatives. Since most of our oil supply is out of our control, there’s little we can do now. Prices have hit a financial breaking point, hence the behavioral change; there’s no pricing room left. This newfound incentive to conserve will hopefully depress demand enough to drive down prices. In which case, the government should step in and, through taxes and other measures, keep prices high enough to continue depressing demand and bring oil prices (and emissions levels) even lower while bringing more clean forms online, which further depresses demand. It’s a magnificent cycle, though it’s questionable whether any of the presidential candidates can exhibit that level of vision and leadership. Considering Obama’s criticism of the “gas tax holiday“, he’s probably our only, er, hope. We do, however, control most of our electricity supply, so there is a lot of immediate potential there.

“Energy intensity” is the amount of energy required to generate each dollar of output. In the US, it’s been falling by 2% a year, which is good but not great. Globally, it’s falling by around 1.5% a year. By and large, The Economist article shows that higher energy prices lower energy intensity (and lead to greater efficiency).

It is no coincidence that Denmark has both high power prices and an energy-efficient economy. Among American states, for every cent per kilowatt-hour by which prices exceed the national average, energy consumption drops by about 7% of the average. George David, the boss of United Technologies, a conglomerate that makes air-conditioners, lifts and aircraft engines, among other items, argues that higher fuel and power prices are the only motor needed to drive energy efficiency.

The problem, analysts explain, is a series of distortions and market failures that discourage investment in efficiency. Often, consumers are poorly informed about the savings on offer. Even when they can do the sums, the transaction costs are high: it is a time-consuming chore for someone to identify the best energy-saving equipment, buy it and get it installed. It does not help that the potential savings, although huge when added up across the world, usually amount to only a small share of the budgets of individual firms and households.

For all these reasons, homeowners tend to demand exorbitant rates of return on investments in energy efficiency—of around 30%. They generally want new boilers or extra insulation to pay for themselves within two or three years, says Mark Hopkins, of the United Nations Foundation, an NGO. Businesses are not quite so demanding, he says, but they still tend to put greater emphasis on increasing revenues than on cutting costs.

Similar stories crop up in the markets for new homes and offices, appliances and vehicles. Builders are not the ones who end up paying the utility bills, so have little reason to add to the construction costs—and hence the price of a home or office—by incorporating energy-saving features. The makers of appliances and cars also know that not all consumers and drivers will think as carefully about running costs as about the purchase price. By the same token, landlords have scant incentive to invest in energy efficiency on their tenants’ behalf. And power companies are usually keen to encourage their customers to consume as much power as possible.

In other words, we need to completely restructure the energy landscape and its various tentacles, largely through policy, in such a way that we economically incentivize efficiency and conservation while disincentivizing waste. Guilt and ethics only get you so far in a market-driven economy.

This should be done through a combination of (a) tax incentives for energy-efficient business practices, (b) new taxes on electricity that will be reinvested in domestic renewables (with tax rebates for lower-income families), (c) putting a price on carbon emissions to encourage a stable market for clean energy, (d) investment in new efficiency technologies with the support of government guarantees and incentives to bolster that market, and (e) government-sponsored programs, in partnership with the private sector, to train and educate people for green-collar jobs in the new energy economy.

I’ve used the word “tax” many times in this post. It’s become a dirty word in today’s politics. Meanwhile, so many of the major costs we bear every day, from food and energy to healthcare, include taxes we pay to corporations and foreign governments. It’s really just a matter of semantics. We’re also capitalists and support the free market. However, when market forces so clearly work against the best interests and undermine the quality of life of an ethical society, government has a duty to step in and right the ship. Economics is a powerful force of good as well as evil. Government’s role is to referee the two.

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Tags: Alternative Energy