Premium Newsletter No. 03

Decarbonizing Through Efficiency

There is no silver bullet that will solve climate change. Every proposed pathway to remain below the (scarcely) tolerable level of 1.5 degrees C warming invokes a portfolio of solutions: increasing energy efficiency, deploying renewable energy sources, capturing and storing CO2 from the atmosphere, changing our land use patterns, eating habits, transportation methods, and others.

In that portfolio, each solution will provide its own small downward bend in the trajectory of global greenhouse gas emissions, create wedges between the path we are heading down today, and the path we need to be on (Figure 1).

Figure 1. Decarbonization strategies are comprised of many discreet solutions – individual wedges that make up a whole. Adapted from the International Energy Agency’s World Energy Outlook 2019.

But how big any wedge will be in the actual pathway we follow to net-zero greenhouse emissions will depend largely on which portfolio we bet on now. Which wedges will we choose to put the largest investments in today?

“On one hand, we need to invest in multiple things to hedge our bets, but we can’t invest in everything because if we invest in everything, we don’t make progress in anything. You need to pick a few things, and really put investment behind them to make them happen.”  – Doyne Farmer, Oxford Martin School, Episode 56

It is all of us: scientists, activists, economists, lobbyists, politicians, entrepreneurs, educators and consumers, that will decide, in part, where the biggest emissions “wedges” will be found. We will decide based on what integrated assessment models determine as the most cost effective. Based on what entrepreneurs are excited to pursue. Based on what we can sell to investors, to governments, and to the public.

Intriguingly, though, one wedge, which represents one of the world’s simplest and most readily available solutions, has yet to capture our collective imagination, and join renewables, EV’s, carbon prices and carbon capture in headlining the most popular ideas in our march towards zero emissions. That solution is efficiency: designing our world so that we can do more, while using less energy.

Could energy efficiency make up a much, much greater piece of the pie than we think?

In 2011, a team of researchers from the University of Cambridge calculated by how much global CO2 emissions would be reduced if we maximized all existing technologies to make the end-use systems for energy – building heating and cooling, electricity generation, transportation, and industry – as efficient as possible. They concluded that we have the technological capability to reduce the energy we currently use by 73%, while maintaining our current output of services, just by improving efficiency. If we also optimized conversion devices – the technologies that convert energy from one form to another along the energy supply chain (i.e. fuel refineries, electricity generators, combustion engines, electric motors, lightbulbs) – we would need 85% less energy than we use today.

Energy consumption is by far the largest producer of greenhouse gasses, responsible for more than three quarters of global emissions. So the “efficiency wedge” could potentially be as large as 65% of total emissions reductions:

Energy emissions (=76% of all emissions) x 85% efficiency reductions = 65% reduction of all emissions

And yet: efficiency only accounts for about 30% of planned emissions reductions in the International Energy Agency’s Sustainable Development Scenario (Figure 1); Princeton University’s Net-Zero America report projects that, efficiency and electrification gains combined could account for up to 32% reduction in in energy use; the IPCC estimates that efficiency improvements and behavioral change (eating less meat, driving less, telecommuting) could combine to decrease energy demand by 45%.

So why are these strategies predicting only about 30% of emissions reductions from efficiency, when the potential is 65% reduction? Are we underestimating the value of efficiency in reaching net-zero emissions goals, and therefore inhibiting its growth?

When it comes to predicting efficiency gains, our track record isn’t great

“They were using sophisticated models, the best forecasting tools at the time, but they were really steering by looking in the rear view mirror, not through the windshield.”  – Amory Lovins, RMI, Episode 59

In 1909, headlines declared the U.S. would run out of petroleum by 1940. In 1945, the estimate was that the U.S. had 13 more years of petroleum reserves left. In 1966, we only had 10 more years before the “figurative dipstick in the United States’ oil supplies” came out dry. We have a pretty consistent track record of underestimating our available fuel reserves, because we do not anticipate future improvements in technology or efficiency. Why?

Because modelers build their models from a historical view of energy intensity.

Energy intensity is a measure of how much energy is used per unit of output, for example the amount of energy needed to produce one dollar of a country’s GDP. Energy forecasters are trying to determine the total amount of energy we will use in the future, and compare it to how much known energy resources are available. That total energy use is determined by how energy intensity has changed in the past, combined with projections for how the population and wealth (GDP/person) will grow in the future:

Total Energy = Energy/GDP x GDP/Person x Population

In the 1970’s United States, total energy use showed a strong and upward trajectory (Figure 2) – energy intensity had held steady since about 1950, while GDP/person and total population increased.

This led to more alarmist projections about exponential growth of energy demands and running out of fossil fuels by the year 2000 as a result – all of which turned out to be wrong.

Due to the oil crises of 1973 and 1978, the US government started mandating efficiency improvements to high-energy products like cars and appliances, and our energy intensity factor declined (Figure 3).

In fact, U.S. energy intensity has been decreasing slowly and steadily since – with energy use per GDP about one third what it was in 1980.

Figure 2. Forecasters in the 1970’s did a terrible job predicting our energy use by end of 20th century. Figure adapted from a 1979 DOE report summarizing dozens of total energy use forecasts (orange) and the U.S. Energy Information Association (actual historical primary U.S. energy use, teal).

Figure 3. Change in U.S. Energy intensity was minimal until the oil crises of the 1970’s, when it declined sharply until the mid-1980’s, after which global oil prices stabilized and the rate of energy intensity improvement decreased. Data from Morris (2018).

Today, most models project that the ~1.5% annual decrease in energy intensity that we have experienced over the last half century will continue along the same trajectory going forward.

It is from that historical trajectory of energy intensity, combined with estimates of population and GDP growth, that net-zero pathway models land at the “efficiency wedge” removing ~30% of annual emissions by 2050.

But, while the historical rate of energy intensity improvements has slowly and steadily plodded along, the Cambridge study, along with others, such as Dr. Amory Lovins’ work with RMI (Episode 59), has demonstrated that the technology and expertise already exist to achieve those significantly greater efficiency gains (the 65% decrease in global emissions). This includes things like improving insulation in buildings, using tankless water heaters, increasing pipe diameters to reduce friction, reducing the mass of cars with lightweight alloys so they need less fuel/km, to name just a few.

So, what is stopping us from taking advantage of all this energy-saving potential?

It comes down to the answers of a few critical questions:

1. Who has the power to demand the efficiency gains?
2. Who pays for those efficiency gains and who benefits from them?
3. What is the real impact of those efficiency gains?

Let’s illustrate why these are the relevant questions with a few historical examples.

Figure 4. Then and now. Pontiac GTO, 1965 vs. 2005. The kitchen, ca. 1940’s vs. today.

How efficiency gains have happened in the past

Two sectors in which some of the most significant efficiency gains took place in the last half-century were in household appliances and fuel economy of passenger cars.

In both cases, efficiency came about through government mandates – policy makers were the ones with the power to demand. And they had to make those demands because manufacturers had no inherent incentive to pay the upfront costs of research and development to make new, more efficient products.

Efficiency cost savings don’t matter to manufacturers, because they don’t buy the energy to run their machines (the consumers do that).

So, firms did not increase efficiency until it was mandated by the government, first via state mandates, and then federal mandates. Once mandated, the initially high R&D costs needed to achieve those efficiency gains were shared by smaller profit margins for the manufacturers and a higher cost-to-buy for the consumers.

But that’s only early on, right? Won’t consumers just demand more efficient products, because they are better for the climate and our utility bill? It turns out, not really. Mandates need to stay in place, because demand from the consumer to buy efficient products only lasts as long as energy prices are high. How do we know? Let’s consider the auto industry as an example.

Around the same time that the US government mandated that appliances become more efficient, they set the Corporate Average Fuel Economy (CAFE) standard, mandating that by 1985, the average fuel economy for new passenger vehicles must be at least 25 miles per gallon (mpg).  And the mandate got results:

By the mid-1980’s, the average vehicle on the road had improved its fuel efficiency 68% relative to 1975 

But the CAFE standard did not have any stipulations on how to keep getting more efficient beyond that year. Congress did not pass an update to the fuel economy standard for 20 years (one in 2007 and another in 2011). In those 2 decades, from 1987 to 2007, U.S. vehicles actually became 6% less efficient. Consumers did not demand better fuel economy, because when adjusted for inflation the price of gasoline was historically low. So, once the policy pressure was off, auto manufacturers had no internal or consumer-driven motivation to innovate.

And what was the impact of those fuel economy improvements that were mandated?  Not a decrease in CO2 emissions from the US transportation sector.  Road transportation-related emissions have, in fact, increased by 23% in the U.S. since 1990, the earliest year we have sector-specific data. By being more efficient, cars in general became easier to own, and big cars in particular became more affordable. The number of cars in the U.S. rose from 773.4 per 1,000 people in 1990 to 842.3 per 1,000 in 2019. In 2010, SUVs made up 27% of new car sales in the U.S., and less than 17%, globally.  A decade later, they now account for 50% of new car sales in the U.S., and 46% of new car sales, globally.

This phenomenon – improved efficiency leading to increased demand that offsets any benefit – is so prevalent that it has a name: the Jevons Paradox  

The Jevons Paradox can be seen in the larger picture of our energy economy, in which, since 1980, we’ve seen 20-70% improvements in the energy intensity of vehicles, appliances, the industrial sector, electricity transmission, and in-home energy use in the U.S., while national energy-related CO₂ emissions have remained about constant. Certainly, that is better than the apocalyptic energy use projections of the 1970’s, but we are not trying to maintain an emissions status quo, we are aiming for drastic reductions.

“Inertia is a hell of a thing, right? Inertia is there and there’s very little motivations for an incumbent to change course. So you have to have that disruption from the outside.” – Marilyn Waite, Climate Finance Fund, Episode 58

FIGURE 5. An example of the Jevons Paradox: Air travel became 40x more fuel efficient since 1950, but that led to a decrease in the cost of flying, which contributed to a dramatic increase in the number of people flying (measured as the number of kilometers that each revenue-producing passenger flew), which led to a nearly 16-fold increase in carbon dioxide emissions by the global aviation industry. As of 2018, global air travel produces more than 1 billion tonnes of CO2 annually.

Is the past predictive of the future? Or could we do better?

One problem in assessing the potential of future efficiency improvements is that “efficiency” is not a catch-all solution.  In the above examples, who demands the change, who pays for the change, and who benefits from the change were about the same (government, manufacturer/consumer, consumer) – but that relationship varies in different contexts and for different kinds of efficiency improvements.

In industry, making the conversion of energy more efficient (getting more electricity per kg of coal burned in a power plant, or reducing friction in a turbine so that it requires less fuel to rotate) is a wise investment: the manufacturer pays the costs, but also reaps the benefit, and so has an incentive to regulate itself.  The effect is that efficiency improvements in the industrial sector have been nearly 2x greater than in the transportation or building and heating sectors over the last 50 years.

Another place where the demander/payer/beneficiary are aligned is in building a new home.

A homeowner who has the luxury of building their own house from scratch can demand that it be efficient, pay the upfront costs of ensuring those efficiencies are met, and enjoy the long-term returns of energy savings.  And this is an avenue where progress is being made: companies that specialize in building energy efficient homes and new “net-zero communities” are popping up across the U.S. Even better, upfront costs of building a net-zero home are now comparable to building a traditionally designed home.

But being able to build new, super-efficient homes leaves a lot of people (and their still high-emissions homes) out in the cold. About 1.3 million new homes were built in the U.S. in April 2022, compared to 123 million households nationwide, and there is no shortage of arguments against tearing down the older buildings most people live in to make new, more efficient ones. Some are of historical or cultural importance. Demolition of older buildings come with their own environmental hazards (release of asbestos or lead from paint), and waste of built materials. And for many communities, relocating to a new, more efficient home is not an economic option.

It is possible to retrofit existing buildings to be more or entirely energy efficient, but the upfront costs and long-term benefits of this kind of work is highly site-specific, and the pathway for a home owner to understand these economic factors is opaque (Episode 49). And when we move past the single family home in the hunt for building efficiency, we run back into the demander/payer/beneficiary problem.

Would a landlord want to pay tens or hundreds of thousands of dollars to make an apartment building more efficient, so their tenants can have lower utility bills?  Probably not.

“As customers are transitioning into this distributed energy resources world, and want to adopt the smart thermostat and the solar panel, and all these things in [their] home, your traditional utility might not be able to even know how to bill you or measure the net impact of all those different pieces that you have.”  – Monica Varman, G2 Venture Partners, Episode 49

Even simple solutions run into the demander/payer/beneficiary problem. For example, the nearly 1 billion tonnes of CO2 emitted by the global shipping industry could be reduced by nearly a quarter just by slowing down the ships (Episode 54). And yet, with no regulatory body that can mandate slower speeds, and the cost of shipping fuel being relatively low, companies have no incentive to take advantage of such a simple opportunity for increasing fuel efficiency and reducing emissions.

Does this mean that big efficiency gains are merely a pipe dream?

“Over half the world’s electricity runs motors. Half their power runs pumps, and fans that move liquids or gasses through pipes and ducts. If you make the pipes and ducts fat, short and straight, instead of skinny, long, and crooked (the standard method), they have a lot less friction. And you end up saving, if everybody did this, about a fifth of the world’s electricity.”  – Amory Lovins, RMI, Episode 59

Just like in the 1980’s and 1990’s, mandates, incentives and technological improvements are Step 1 of the solution. The next step is to make those improvements visible, financially accessible and popular for consumers. And there are many ways to do this.

Financing structures could be put in place, extended, or better advertised to alleviate the high upfront costs of efficiency improvements.

The upfront costs to making your home or car more efficient, or ignorance about resources for financing them (Episode 49 and Episode 62), prevent many consumers from purchasing energy efficient products like solar panels, heat pumps or electric vehicles. Making sure the real costs and opportunities are advertised to the consumer is an imperative.

And governments can lead by example by ensuring their building and construction projects follow best practices in terms of energy and materials efficiency, their vehicle fleets showcase the utility of electric mobility and low-carbon fuels, and urban planning initiatives are focused around providing public transit, ride sharing and micro-mobility transportation options so individuals can use their cars less (Episode 45).

If technologies that improve energy efficiency also offer superior service or fulfill a need, they will be adopted simply due to consumer demand. Think smart homes, induction stovetops, or electric vehicles (Episode 47).

“I actually think that consumers, once they experience an EV, there will be a brush fire of interest. And there’s a couple of reasons. One is the torque and power and performance. So you don’t need to have necessarily leading environmental sensibilities to be the primary driver. It could be, you just happen to like to drive the fastest car on the road. EVs are the answer for you. You could be more sensitive to the economics… It’s 300 to 500% more expensive per mile to fuel your vehicle with gasoline rather than electricity. – Joe Britton, Zero Emissions Transportation Association, Episode 49

Finally, even making efficiency improvements attractive and accessible has limits. If consumers are not incentivized to reduce their energy use, the Jevons Paradox is at play – and any mandated or technological efficiency gains will be offset by consumer demand for more. The final step, then, is to make the cost of energy less palatable while continuing to making the cost of efficiency more accessible.

What inspires consumers to conserve? The price of energy. 

Today’s gas prices in the U.S. are nearly double what they were one year ago, and EV registrations increased by 60% in the first quarter of 2022. As we have mentioned again and again at Climate Now, embedding the true cost of carbon into what we pay for our energy use is one of the simplest, and surest ways to ensure we use that energy more efficiently. It would prevent the same multi-decadal lapse into complacency that followed the oil crises of the 1970’s, when the price of oil dropped again, and it could ensure that the parade of modern day alarmists, concerned about rising energy demand and dwindling fossil fuel resources, will look as silly in retrospect as those of the last century.