Another Take on the Efficiency Gap

At the Energy Institute at Haas, we’ve long debated and investigated “the energy-efficiency gap.” It’s an idea that’s simple to state but, potentially, huge in its implications: it’s the difference between what’s technically feasible in terms of energy efficiency and what our economy manages to achieve. An easy example is programmable thermostats. Used correctly, they can help reduce energy usage. But how many people never get around to programming theirs? That kind of split between what’s possible and what people really do is the efficiency gap.

Researchers don’t agree on how big the gap is. Some, including Hunt Alcott at NYU and Michael Greenstone at MIT, argue that it probably isn’t that large. Their work focuses on the demand side of the energy-efficiency gap—in a recent working paper, they review research on how consumer behavior might create the gap.

The supply side matters, too, and can’t be overlooked. As the figure below shows, U.S. energy use per dollar of gross domestic product, a measure of energy intensity, has declined steadily for the past three decades. This decline is due, at least in part, to improved energy efficiency—and it can be read

U.S. U.S. energy use per dollar of gross domestic product, 1980-2011 (index, 2005=1). Source: U.S. Energy Informationuse per dollar of gross domestic product, 1980-2011 (index, 2005=1). Source: U.S. Energy Information

U.S. energy use per dollar of gross domestic product, 1980-2011 (index, 2005=1). Source: U.S. Energy Information

as evidence that there has been a persistent energy-efficiency gap. For the 30-year slide shown in the chart to happen, a difference had to exist between what was technically feasible and what companies and consumers did. Reducing that difference required changes on the supply side–the creation of better products and practices and diffusion of information about those products and practices. One reason that consumers don’t program their thermostats is that they are hard to program. Now manufacturers are beginning to introduce thermostats that are easier to use.  But innovations like this take time and money. Manufacturing processes and construction techniques may have to change. Obsolete equipment has to be junked and replaced. Workers must be trained or retrained. Consumers need to learn what works for them.

The energy-efficiency gap shrinks as people adopt new products and practices. It can widen anew as the result of the invention of new products and practices.

Are there market failures here that might justify the government’s intervention in this process? Maybe. The question turns on whether the returns to society from innovation are greater than the returns to the innovators.

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