If energy conservation both saves money and is good for the planet, why don't people do more of it?
...MGI is particularly enthusiastic because it believes that unlike most other schemes to reduce emissions, a global energy-efficiency drive would be profitable. The measures it has in mind, all of which rely on existing technology, would earn an average return of 17% and a minimum of 10%. The Intergovernmental Panel on Climate Change, a group of scientists advising the United Nations on global warming, makes a similar point. It believes that profitable energy-efficiency investments would allow Pakistan to cut its emissions by almost a third, Greece by a quarter and Britain by more than a fifth.
In other words, big investments in energy efficiency would more than pay for themselves, and fairly fast. Although a lot of money would have to be spent - $170 billion a year until 2020 - by MGI's reckoning that is only 1.6% of today's global annual investment in fixed capital. Moreover, with ample profits to be made, financing should be easy to attract.
Yet if there are so many lucrative opportunities to improve efficiency, why are investors not already taking advantage of them? To a degree, they are: in America, for example, energy intensity - the amount of energy required to generate each dollar of output - is falling by about 2% a year (see chart 1). This is only partly because America's factories, houses, cars and appliances are becoming more efficient: it is also because energy-guzzling factories have moved to cheaper spots such as China. But globally, too, energy intensity is falling by around 1 ½% a year.
That decline is not predestined. Before the first oil shock, in 1973, America's energy intensity was falling by only 0.4% a year. At that languid pace, America would now be spending 12% of GDP on energy instead of 7%, according to Art Rosenfeld, an efficiency pioneer and a member of the California Energy Commission, which sets efficiency standards and other energy policies for the state. Simply by buying more efficient fridges over the years, he reckons, Americans have come to save more than 200 terawatt-hours (TWh) annually, or roughly 80 power plants' worth.
But as McKinsey points out, there are still hundreds of billions of dollars' worth of unfulfilled but potentially profitable opportunities in energy efficiency available to households and companies. What is holding investors back?
One answer is price. In the eyes of many consumers, electricity and fuel are often too cheap to be worth saving, especially in countries where their prices are subsidised. Industrialists in Russia are profligate with natural gas, because it sells there at a quarter of the international price. Drivers in Qatar have little incentive to scrimp on petrol when they pay barely a dollar a gallon for it. ...
...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. Despite recent price increases, spending on energy still accounts for a smaller share of the global economy than it did a few decades ago....
...Financing energy-efficiency investments can also be difficult. In the developing world, capital can be scarce. In rich countries, the savings from making individual homes more efficient are too small and the overheads involved too high to be of much interest to most banks. ...
...Firms that help businesses and families to trim their energy bills have become common enough to earn an acronym: ESCos, or energy-service companies. Their industry group in America says business, which had been growing at 3% a year in the early part of this decade, is now increasing by 22% a year. The total revenues of the 46 ESCos it surveyed were about $3.6 billion in 2006, about three-quarters of which came from energy efficiency. ...
...Anyway, environmentalists dispute the notion that energy-efficiency standards drive up prices. The average price of fridges in America has fallen by more than half since the 1970s, even as their efficiency has increased by three-quarters, according to Mr Goldstein. Those gains have come in spite of steady increases in the size of the average unit (see chart 2)....
...However, no matter what methods governments adopt to encourage energy efficiency, the results may not be as impressive as they imagine. The culprit is something called the "rebound effect". Falling demand for electricity or fuel brought on by an efficiency drive should lead to lower prices. But cheaper energy, in turn, is likely to prompt greater consumption, undermining at least some of the original benefits. What is more, consumers with lower electricity or fuel bills often put the money they have saved to some other use, such as going on holiday or buying an appliance, which is likely to involve the consumption of fuel and power.
Economists disagree about the size of the rebound effect, which is hard to measure. The British government commissioned two studies of the effect, from two different universities. The first found that it cancelled out roughly 26% of the gains from energy-efficiency schemes; the other put the figure at 37%. Either way, negawatts are worth pursuing. But they are unlikely to satisfy the world's thirst for energy to the extent their advocates assume.
