The developing world will account for a huge share of the growth in energy demand in the future. But, if the rising demand is met with energy-efficient technologies – everything from efficient appliances for first-time purchasers to efficient industrial processes – energy demand, and hence greenhouse gas emissions, will be lower than forecast.
So, are there steps that governments in the developing world, lending agencies like the IMF or World Bank, or US policymakers (e.g. through offset programs) can take to encourage energy efficiency in the developing world? And, are there lessons we can draw from US energy-efficiency programs? Unfortunately, given the huge energy subsidies in much of the developing world, the lessons from the US are limited.
In the US, many policymakers trumpet energy efficiency as one of the most cost-effective carbon-mitigation strategies. McKinsey has famously identified a number of situations where a consumer’s investment in energy efficiency seems to pay off given the savings it would generate at current energy prices. Since consumers appear to be leaving proverbial $20 bills on the sidewalk, some of the current programs to promote energy efficiency involve informing consumers—essentially waving the bills in their faces. For example, the EPA promotes Energy Star labels for efficient appliances and cities like New York and San Francisco now require large commercial building owners to disclose their energy usage.
Better information is unlikely to promote energy efficiency in many parts of the developing world, where current energy prices are seriously out of whack and cover very little of the private costs of energy production (i.e., the costs before accounting for environmental and other externalities).
A recent IMF report documents energy subsidies around the world, and they are staggering, amounting to almost 1 percent of worldwide GDP.
- Residents of Venezuela pay less than 10 cents per gallon of gasoline.
- Nearly 30 percent of the electricity generated in India is not paid for, most of it written off as a “nontechnical loss,” basically a euphemism for theft.
- Residential electricity rates in Mexico cover less than half the estimated costs.
One of the most fundamental tenets of economics holds that when prices are low, consumers will demand more of the good. Chris Knittel has noted this relationship in gasoline consumption across developed economies, where countries with high gasoline prices (driven by high gasoline taxes) consume far less per person than the countries with lower gasoline price. Presumably the usage (after adjusting for lower income levels) would be even higher at low, Venezuelan-style prices.
To help the citizens of the world make efficient choices about energy, it’s important to get the prices right. The IMF report concludes on an optimistic note with case studies of several countries that have reformed their subsidies. But, the recent riots in Indonesia over proposals to remove fuel subsidies highlight just how controversial this task is. In the battle against dangerous climate change, though, we need to pursue all possible tools.
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.