Energy Efficiency Doesn’t Work

By Cameron Murray, a professional economist with a background in property development, environmental economics research and economic regulation. Cross posted from MacroBusiness

The word efficiency carries a meaning immersed in all things positive – you never hear that being more efficient could possibly be detrimental. In fact, if you can bear the evangelical fervour, you may have read about achieving ‘Factor Four’ or ‘Factor Five’ gains in energy efficiency, as part of a ‘Natural Capital’ revolution comprising a ‘decoupling’ economic growth from a growth in the consumption of exhaustible resources – also known as ‘sustainability’. You may even have heard about the equation I=PAT or I = P x A x T, where environmental impact (I) is a function of population (P), affluence (A) and technology (T), and that becoming more efficient will enable a desired level of affluence with far less environmental cost.

Historical experience shows that these claims are untrue. While energy and resource efficiency does make us more productive, the facts suggest greater energy efficiency is counterproductive to the stated aims of curbing resource use and decreasing negative environmental externalities.



One hundred and fifty years later, the modern debate is fuelled by economic ignorance, with many of the most influential economists and environmentalists remaining confused – failing to acknowledge the parallel effects of technology on the resource called ‘labour’ and other resource inputs to the economy.

More rigorous economists have reopened the debate, under the new term rebound effect, breaking down the transition mechanisms between greater efficiency and greater resource consumption.

3. Economy wide effects: New technology creates new production possibilities and increases economic growth.

UCLA mathematics professor Terence Tao explains the direct effect as follows:







These economy wide effects have gained recent attention in The Economist where it is estimated that energy efficient lighting will contribute to greater energy use in the long run. You will note from the comments, the cognitive dissonance of economists when referring to labour and other resource inputs remains.

Conservation, using less at a given level of technology by giving up some utility, is equally ineffective (also highly recommended). We still face the indirect effects from conservation as we spend elsewhere in the economy, and if you believe all consumption has equal environmental cost per dollar (due to indivisibility once more and conceptual boundary problems to traditional input-output analysis of embodied resources), then you are back to where you started.


However, if there are enough private citizens sharing the same resource, then the “tragedy of the commons” effect kicks in. Suppose for instance that there are 100 citizens sharing the same energy resource, which is worth $1200 x 100 = $120,000 units of energy. If all the citizens conserve, then the resource lasts for $120,000/$400 = 300 months and everyone obtains $1800 long-term utility. But then if one of the citizens “defects” by using two light bulbs, driving up the net monthly energy cost from $400 to $404, then the resource now only lasts for $120,000/$404 ~ 297 months; the defecting citizen now gains ~ $7 x 297 = $2079 utility, while the remaining conserving citizens’ utility drops from $1800 to $6 x 297 = $1782. Thus we see that it is in each citizen’s long-term interest (and not merely short-term interest) to defect; and indeed if one continues this process one can see that one ends up in the situation in which all citizens defect. Thus we see that the tragedy of the commons effectively replaces long-term incentives with short-term ones, and the effects of voluntary conservation are not equivalent to the compulsory effects caused by government policy. (Emphasis added)



It really is that easy. If you are concerned about greenhouse gases, a cap on greenhouse gases is what is required. If you are worried about deforestation, you create a cap by ‘fencing off’ areas that are not be touched. If you are worried about over-fishing, you create a cap. Whether these caps/quotas are tradeable is a secondary concern, but making the caps tradeable does enable the cap to be met most efficiently.

What about a tax instead?

Many commentators argue that taxing negative externalities (such as a carbon tax) would not only reduce greenhouse gas emissions, but would also provide a ‘double dividend’ of improved economic efficiency because taxes which create other economic distortions could be reduced. However, the very nature of reducing other taxes to ensure revenue neutrality would mean that other sectors of the economy with a reduced tax burden now have greater purchasing power to pay for those goods subject to the new tax. Thus the double dividend comes at a cost to the primary dividend of reducing externalities.

Politics and ideology probably explain why the most basic economics is tossed out the window when it comes to the environmental protection. Then again, maybe we just can’t acknowledge that such a thing of beauty – efficiency – could possibly have a downside.

I can’t recommended enough the book The Jevons Paradox and the Myth of Resource Efficiency Improvements for a more thorough discussion of the topic.

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  1. Andrew in Seattle

    Efficiency always has a downside. An efficiently run company will employ fewer people, pay less to its vendors, and (very generally) have less flexibility in event of a crisis (few people to lay off, fewer costs to cut etc.). The same applies to industries and whole economies. Without “slack” industries (witness the financial industry in 2008) can become extremely brittle, and collapse in the event of a major external event. If the industry is important, thus warranting a bail out in extremis, this “efficiency” acts as a tax on the body politic. Efficient countries (though, efficiency, of course, is rather to loose a word in this instance) are likewise vulnerable. Witness Greece, which had its financial efficiency maximized by the likes of Goldman Sachs pre-crisis. In the event of a major dislocation, it too has crumbled. The fact that economists consider efficiency such a “thing of beauty” is part of why we are in this mess in the first place.

    1. Alianse

      While the econ proffessrrr discussing economy of efficiency, the chinese has brought down LED lighting to about efficient mercury light pricing and solar panel to near grid parity price.

      5 years from now, while they still discussing if coal plant and global warming have any connection, the chinese will try to beat germany renewable per capita generation at market price.

      Of course all these cost money. (LED lighting research cost money, debugging manufacturing line and bringing down price cost money. But they do it in factory floor instead of academic musing about economic of efficiency.)

      10 years from now, US will have the worst energy input profile per capita comparable to a third world country. Still relying on oil import and coal for most energy and transportation.

      1. JasonRines

        Stop it your making my insides hurt. The Chinese develop squat. The U.S. has handed them every piece of tech we had for the equivalent value of less than a cent per dollar. Same with a Canada and drug research. the key is making the big loot for personal insiders on the massive imbalances.

        And the U.S. is already near bottom. The Chinese culture are marvelous traders but really have lost innovation as a cultural proclivity. It will be intersting to see how quickly they gain it back. As for the US, who wants to let America now compete with all the financeers focus on their new baby China? These kinds of games always end very badly.

        1. Ita

          I can give you all papers and manufacturing blue print. And you have in your hand all the “pieces”. But doesn’t mean you are capable of producing anything. (no supply chain, no capital, no man power, no market)

          Plus, all those manufacturing lines are not US technology per say. They are mostly taiwanese and japanese lines in china. But most of patents are Japanese, Korean and taiwanese giants.

          btw, microbial and top ten drugs are all child plays. Nothing high tech about it. It’s all lawyer games instead of technology.

  2. cat

    This is another of the Economics Pseudo-science BS memes.

    1) Not enough Consumers operate at the marginal utility or long term utility levels to speak off.
    2) Even if they did it, they assume symmetrical information which is implausible.
    3) It prescribes the same motivation to all consumers which is false premise to go along with their other flawed premises.

    1. rotter

      Makes perfect sense to me. If you want to “conserve” a resourse you place an absolute limit on the amount used. period. The notion of “conservation through greater efficiency” is the “pseudo science Bullshit meme”.
      Thats not to say that efficiency isnt desirable for other reasons. But the idea that consumers will use less because they can afford more, is absurd.

      1. Binky the perspicacious bear

        So how does the author define “utility?”

        This is in reference to Pilkington’s discussion of the elusiveness of a definition for “utility” outside that provided by Lewis Carroll’s rabbit-it means what I want it to mean when I say it and nothing more. Is the author proposing that people with more efficient lights will turn on more lights? People with more efficient cars will drive more? I’m convinced that this is not an empirical fact; rather an economics modeler’s assumption that derives from an ideological desire, creating a tautology.

        1. Jim Tarrant

          Agreed this is where the utility/efficiency relationship becomes problematic. Utility is not linear; consumption of a good/service tends to have defined rational limits. For example, if food became extremely cheap due to production/processing efficiencies, one would not see an infinite expansion of consumption. On the contrary, you would expect to see trade-ups (into quality, organic, more meat vs. staples). Likewise, as cars become more fuel-efficient, do we really expect to see people driving around aimlessly because they can? No they will trade off those savings into other activities. The assumption of the article is that those savings will involve an equivalent and offsetting expenditure of direct or embodied energy but this is a facile assumption unsupported by empirical evidence. Those time/fuel cost savings could be used in leisure activities involving much lower or even no equivalent energy costs.

          Article also ignores the welfare benefit of energy efficiency in reduced health care costs (pollution externalities) and climate change impacts (reduced greenhouse gas emissions, assuming overall net lower fossil fuel use and substitution to higher quality fossil fuels – which hasn’t happened yet, I agree).

        2. rotter

          Your right people wont “decide” to drive around the block 4 times before they park. Because time is another resource people might not wish to use on driving around the block. But someone mentioned the air conditioner. Oh youd better believe the temp is coming down in the dog days of august. People might not choose to turn on all the lights in thier house, but probably, they wouldnt have done that anyway, under any circumstance. But people will most definately use more powerful bulbs, if they can afford to, if it makes them more comfortable.. NO ONE, counts kilowatts and calculates how much coal was burned to produce it, they count the dollars in thier bank accounts and budget how much they can spend. Physical creature comforts, which are about 99% of what the consumption of fossil fuels is all about, is not something people will forgo, or diminish if they can have more at the same cost. Its the diet drink situation. People dont reduce calories, they have more drinks.

  3. Glen

    If I understand this correctly – I’d call this the eight lane freeway effect:

    If you expand the freeway from four lanes to eight lanes all you get is a larger traffic jam.

    Or is this a too simplistic analogy?

    1. Sandwichman

      While it is true that the Jevons paradox can be picked apart at the micro-level, what that ALSO indicates is that the traditional “technology creates more jobs than it destroys” nostrum ist kaput. The two paradoxes are joined at the hip. You can’t have one without the other. Setting aside the microeconomics for a moment, the big picture is that in the last 60 years the energy intensity of employment in the U.S. has only declined for a brief period between 1973 and 1986. Before 1973, the amount of energy consumed for each job created increased substantially. Since 1986, the amount of energy consumed for each job has been roughly level.

      The bottom line is that under “business as usual” creating jobs will mean increased consumption of energy. Period. There is an alternative to business-as-usual but it isn’t some energy efficiency/conservation technological fix.

  4. energyecon

    Sigh–another zombie lie those of us in the energy economics community have to continually fight.

    It’s true that as people get wealthier, they consume more. And yes, energy efficiency saves money and makes people wealthier. But total growth in wealth isn’t attributable to efficiency–not by a long shot. That’s the key mistake here.

    Energy use and economy have a complex relationship, to be sure. But Jevons’ paradox doesn’t apply as broadly as its modern proponents argue. In some applications, like aluminum manufacturing, the cost of energy is such a high fraction of the total costs that efficiency can create substantial new demand. But in consumer segments of wealthy economies, that’s a laughable proposition. Does anyone know the marginal price of electricity they pay? If it was 20% cheaper, would you buy a fifth TV?

    For a much more detailed take on the issue, see a paper here (PDF link):

    That paper is now published in the journal Climatic Change (subscription only):

    1. Sandwichman



    2. Cameron Murray

      Interesting discussion here.

      Most people however are missing a key point. If energy services become cheaper (refigeration, transport etc), we may consume more of those, or we may consume more of something else.

      Now you might say that I might choose to spend on something with apparently low embodied energy – a massage perhaps. But tkaing an extra step in the flow of money we can see that this is nonsense. If I pay someone for a massage, they get to then spend the money. The net effect is that I may as well just let them choose how I spend.

      Once you realise that labour inputs hace energy embodied in them, you find that all consumption is equal in terms of resource consumption.

      Len Brookes made this point repeatedly in the 1970s and 1980s. Indeed, Robert Costanza revised economy-wide input-output techniques in 1980 to show that once we realise labour input requires inputs of other goods, all consumption is equal.

      Back to energyecon’s point –

      In fact it is. Efficiency is just another name for productivity, and productivity is THE key to total growth in the long run. No mistakes there.

      What the observation of Jevons suggests is that we need to enact artificial limits to resource use, if we believe there are environmental problems associated with their use, rather than hope that using them more efficiently will reduce their use (when it in fact will increase the use).

      1. TheArchitect


        No, we don’t, particularly not when there exist “cleaner” substitutes. The point of taxing CO2 isn’t to decrease total energy consumption forever, but shift energy generation into cleaner sources, like wind and solar.

        Your continual suggestioning that we should make mandatory caps on total energy consumption because it’s only way to bring it down, is just another type of they-want-us-back-at-trees strawman. I think majority of these ecoterrorists doesn’t have problem with increasing energy consumption IF it is from clean and sustainable sources.

        1. Sandwichman

          “Clean and sustainable” is also a function of scale. What may be clean and sustainable on a moderate scale doesn’t necessarily stay that way when it has to expand to replace 50, 75 or 90 percent of fossil fuel consumption. When the internal combustion automobile was first introduced, its environmental impact was miniscule compared to the mountains of horse poop dumped on the streets every day.

          1. TheArchitect

            Don’t know about the horses and combustion motors, but wind and solar certainly retains efficiency and sustainability when used in scales comparable to current and foreseeable future levels. Of course it has it’s absolute limits, but I would leave the problem of earth completely covered with panels and mills as exercise to our grand(…)grandchildred, should it arise.

    3. Greg


      Wrong margin. The marginal *consumer* is the one for whom the price does matter.

      And even more important is the marginal *non-consumer.* With Yahoo reporting that 19% of Americans say they sometimes can’t afford food, a decrease in price most certainly will increase demand. And the same goes for electricity.

  5. Brian Davey

    I totally agree that a physical cap is necessary – the sort that might work was drafted in the USA by Senator Maria Cantwell – Cap and Dividend. Initial sellers of fossil fuels are required to purchase permits to sell – and the number of permits are strictly limited and reduced year by year. To make this palatable to the public the bulk of the revenue from the sale of the permits is distributed to the public on a per capita basis – the rest is used to help those particularly hard hit to invest in energy transformation and/or getting new jobs.

    This is really like indirectly limiting and then selling the right to use the earth’s atmosphere. The income from this sale is an economic rent and should go to the public – not, as in current carbon trading schemes, to the polluting corporations or the state. After all, the corporations did not invent or manufacture the earth’s atmosphere and it is the usual kleptocratic assumption of the corporate elite that they own it that guides current cap and trade arrangements.

    As the author says here an effective reducing cap would then lock in energy efficiency gains which would make sense. There would however be slippage into the over exploitation of biomass and other schemes are necessary to protect these from over exploitation.

  6. hello


    Easiest retort…..if America was less energy-price sensitive (eg energy independent via higher CAFE standards and a portfolio of nuclear, solar, hydro), we wouldn’t be in Iran 1953, Iraq in 1990 or Iraq 2003-now or Libya 2011 and the US foreign policy wouldn’t be geared towards kow-towing to Israel and Saudi Arabia.

    Total defense costs saved >$1 trillion+, American military (and foreign civilian) lives saved–priceless.

    1. LucyLulu

      Energy price sensitive? Add in the hidden government subsidies (military interventions et al.), and taxpayers are paying $10-15/gallon for gasoline.

      1. Jesse

        I think he means -more- energy price sensitive (not less.) In other words, if we were exposed to the true costs of fossil fuels (which you mentioned), we would use alternative energy.

  7. PaperMoon

    I know that article is a homework assignment, but it really is worth reading for an excellent example of why efficiency is not necessarily a good thing.

    There will never be a carbon cap, because people are not concerned about greenhouse gases. Everyone is well aware that a carbon cap is really the only effective solution, but the idea that you could implement it is completely insane. Energy efficiency and all these other ineffective solutions are just desperation in the face of a public that cares more about it’s energy consumption than it does about the consequences of continued greenhouse gas emission. And they have every right to prioritise in this way.

    1. LucyLulu

      Really interesting article to read but what a PITA homework assignment. Thanks for reinforcing my decision not to pursue grad school in nursing, as it looks exactly like something that would be assigned in the mandatory public health policy classes. Having pursued three different degrees (and completed two), nursing had the worst homework . It, like this assignment, was a great example of labor inefficiency (i.e. disproportionate increase in cost of labour vs gain in productivity).

    2. Lyle

      Well if we capped carbon then we would get a black market in it. Such as happened to some extent in WWII and of course in the 1920s with booze.
      Actually history indicates that higher costs (thus a carbon tax) tends to incent efficiency. Taking a point from the Greatest Idea in the World, it explains that James Watt invented the separate condenser for the steam engine because before that a steam engine only made economic sense in a coal mine. (It used so much fuel per unit of work). The history of the steam engine until about 1880 was one of constant innovation both small and large, double acting engines better valve gears … I have a copy of the Catechism of the Locomotive from 1890 and it emphasizes that engineers were rated back then on the coal consumption on their runs, and discusses how to minimize it. The electric industry started out with steam engines and moved to steam turbines for better efficiency. Depending on your index of inflation the cost of a kwh of electricity would be about $2-4 today if we used 1920s tech, based upon rates of the time.

  8. craazyman

    this is truly the undigested outpouring of a profoundly disordered mind.

    in reality, very few of the citizens in that fictitious town would defect because they can’t do math in their heads and because they fear the wrath of God.

    is it better to have your earthly life lit with a second bulb at your neighbor’s expense when the cost is an eternal burning in the fiery pit of hell? I think not.

    And then, even if they risked the wrath of the Lord and tried to do the math in their heads, it’s likely they’d mess up the calculations and come to the wrong conclusions. How many people can do math in their heads with light bulbs and electric bills? Maybe 1 out of 100. And of those, only about 1 out of 10 would actually want to. That also messes up the predictive power of a simple thought experiment.

    And third, if efficiency causes energy use to go up, that means prices go up, and the only thing that does is make Renewable Solar and Wind energy MORE LIKELY TO BE FINANCED BY INVESTMENT CAPITAL, which leads to cleaner energy over the long run, regardless of the volume of energy used.

    and fourth, how do we know that all those thoughts about energy efficiency don’t vibrate through the noosphere and make people more ethical in all areas of life, which cultivates the mind-space for the coming of Quezequatal in his return to the scene of his majestic triumph, and even if that doesn’t happen, the social comity promoted thusly sponsors deep thinking in each soul about their duty to Mother Earth and the Anima Mundi. How can that be bad?

    anyway. This sort of stuff should be on Saturday Night Live for Geeks. How can this be serious?

  9. carl

    I’ve had a gut feeling for a couple of years now that most of the rhetoric around green jobs and all of the sales pitches for energy efficiency products amounted to useless greenwashing.

    The core of our dilemma remains:
    1. Americans will burn as much coal as they possibly can so long as there’s mountaintops to flatten in Appalachia and there’s pits to be dug in the Powder River Basin.

    2. Resource exhaustion and global warming are inexorable eventualities without serious population reduction. I like to hope there won’t be any high-body count wars in the coming century so chances are global population will be well north of 9 billion by 2100.

    The population thing will never get addressed in the US without a serious, unlikely, turn of the wheel on religious sentiments. Also, nobody’s been able to figure out a way past the trap of a greying, then shrinking population in an industrialized economy that requires constant growth to keep from imploding.

    Me, I’m praying for cheap fusion, nanobots, and home 3D printers democratizing production.

    More likely somebody will figure out how to leverage quantum computing to financialize those parts of our lives not already monetized, and then sell us back our possible futures while we try to fuck each other over for crumbs with which to pay the HMO for our rented organs.

    1. LucyLulu

      Lies, lies, lies. There is no global warming, that is the communist fraud perpetuated by George Soros. Dismantle the EPA, end all regulations, bring back capitalism, and we will have plenty of oil from the Gulf, Arctic, and Canadian oil sands to last ad infinitum. We promise $2.00/gallon gasoline for all.

      Herman Cain for President 2012

      Swearing on the Evangelical Bible,
      Charles and David K.

  10. gordon

    Prof. J. Quiggin (U. of Queensland) implicitly admitted Murray’s point when he wrote:

    “Some people have worried that an increase in energy efficiency will simply result in an increase in the demand for energy services, so that energy use will not decrease much and may perhaps increase. … But this refers to an exogenous increase in energy efficiency, meaning that energy services become cheaper. Where the increase in energy efficiency is driven by an increased (price or regulatory) cost of energy use, we are … moving along the demand curve, not shifting the supply curve. So, there will normally be no rebound effect”.

    This of course still leaves the tax and regulation options open. I’ve always been dubious about whether “revenue-neutral” carbon taxation is likely to happen, and now that so many Govts. are financially underwater the likelihood seems even less than before. So an uncompensated (ie. not revenue-neutral) carbon tax ought to improve carbon efficiency, at the cost of some economic distortions. And then of course there is regulation, which was where we all started from back in the days when Clinton was US President and before anybody had heard about “cap-and-trade”. How long ago that seems now!

  11. Brent Eubanks

    I’m an engineer who works on green buildings, so I grapple with these issues regularly. I don’t have time to descontruct this article, but I do want to say that the Jevons Paradox is real, but it’s a whole lot more complicated that this author’s simpleminded analysis.

    Just to pick on two specific points:
    1) Not all consumption is equal or equally damaging. That assumption is false, and thus misleading.

    2) The impact of efficiency has a great deal to do with the degree to which the need for the service has already been saturated. As an American, just because my car is 4x as efficient does not mean I’m going to drive 4x as much. All things being equal, Jevons is much more of an issue in a developing country than in a developed one (but all things are NOT equal, including our assumptions about market in a developing country).

    Anyone who wants to dig into the issue more can find many discussions here:

    The author has a clear bias but they do link to several articles that argue against their position, including the most recent one of significance, by the Breakthough Institute.

  12. Sandwichman

    I commend Cameron Murray for noting the strict parallel, explicitly mentioned by Jevons, between the way economists traditionally view the labor market and Jevons’s views on energy efficiency and resource consumption. I have raised the issue several times.

    But surely there is another possible interpretation of the parallel: that if the Jevons paradox doesn’t hold then neither does the traditional economists’ argument about technology and employment. In short the technology/employment paradox and the efficiency/consumption paradox are inseparably joined at the hip. They stand or fall together.

    Now here is the ray of hope. The principle Jevons based his paradox on is from popular classical political economy. It’s basically a variation on the wage-fund doctrine (AKA, the lump-of-labor fallacy). Is the wage-fund doctrine true (in spite of Mill’s recantation)? Is the fallacy claim itself a fallacy (as Pigou and Dobb explained)?

    It’s a metaphysical merry-go-round. But what it comes down to is this: to the extent that our current political and economic institutions are founded on the same metaphysics as the technology/employment paradox and the efficiency/consumption paradox, we’re fucked. In that metaphysical world you can ONLY decrease energy consumption at the expense of employment and can ONLY increase employment by consuming more energy.

    The alternative?

  13. scraping_by

    As to efficiency — in ecology, they have a principle of mediocrity that says that if an organism is too well adapted to its environment, it will be extinct the moment that environment (inevitably) changes. The natural universe favors generalists and jazz.

  14. Roger Chittum

    And yet I’m not tempted to leave the door to my refrigerator open because it is more efficient than my old one. Nor do I celebrate my new high-SEER HVAC unit by chilling my house to 68 degrees. Also, it turns out that people don’t go out and drive around in circles when gas prices go down or they get a more fuel-efficient car. Cambridge Energy Associates and Exxon-Mobile both are projecting a 20% decrease in total US gasoline consumption by 2030 because of projected increases in automobile fuel efficiency driven by CAFÉ standards. Already three refineries near Philadelphia have closed or are closing this year, and exports of refined products are up. This is not just a Great Recession phenomenon. Surely there are some rebound effects, but in many important areas it’s a dead-cat bounce.

    1. rotter

      Thanks for linking the chrysler ad, but i thought you were going to link to some data that supportted your completley subjective and speculative assertions.

    2. darms

      Yeah, I need X amount of light. With more efficient lights I’ll still only need the very same amount of light hence my energy use will decline. Likewise if the cost of gasoline was reduced I would still do the same amount of driving and I have had small fuel-efficient vehicles since the early 70’s. Maybe I’m just out of step or something…

  15. Chris Pratt

    Nothing like a good depression to increase efficiency and reduce consumption. In economic boom time you get increased efficiency and increased consumption. The point of efficiency to Madison avenue ad execs is that You get to go farther on a gallon of gas, that is the selling point of more efficiency, not you use less gas then your neighbor or use less gas so that your neighbor or the rest of the world can use more. Sadly I don’t see this paradigm changing anytime soon, even if we are frying and drowning from climate change. I do think there is a good chance the economy will hit the wall, which may buy us the time we need to sort this mess all out.

  16. Sandwichman

    Forget about “debunking” the Jevons Paradox, folks. Not because the Jevons Paradox is “absolutely true” but because it is inseparable from the classical economists’ traditional employment principle that labor saving machinery will eventually (and inevitably) expand employment (“technology creates more jobs than it destroys”).

    The two principles stand or fall together. They are in fact two variations on the same principle. So the question is NOT “does the Jevons Paradox always hold” but “does the paradox hold RELATIVE TO employment.” Anything else is wanking.

    1. Frank Revelo

      There are differences between energy and labor. It is easy to imagine all sorts of ways to expend more energy so as gain more utility. For example, if the fuel cost for flying from North America to Europe were zero, then there would likely be more travel between those areas. But labor is different. Rush Limbaugh has joked that he is willing to pay $1/day for someone to be his lackey and clean his boots and do other menial chores as he demands, but he is not willing to pay minimum wage for such services. Thus the cause of unemployment is an excessively high minimum wage. But I have to question this reasoning. What sort of person would take a job paying $1/day, as opposed to simply living like a homeless person and eating from dumpsters? I certainly wouldn’t take the job. IMO, the sort of people who would take that job would likely be mentally unstable, adn I think Limbaugh would feel the same way. Hence if minimum wage WERE reduced to $1/day, people with money would still refuse to hire. You notice the same phenomenon in the third world. All these shoe-shine boys surround you, because they know you have money. They all undercut each other with absurdly cheap shoeshine deal. But do you really want to risk ruining nice shoes with a 10 cent shoeshine? I mean, what sort of materials is he using? Maybe he’ll just rub black dirt on the shoes for want of real shoeshine wax. And then there is the risk that the boy will demand more than he originally offered, and raise a ruckus if you don’t pay, etc, etc. Much simpler to just say no and shine your own shoes back at the hotel. And you can extrapolate this. In general, humans are a nuisance. The only reason many of us put up with hiring people is because we have to. But if there is a way to get what we want without humans, many of us will jump at that opportunity. Energy is different. Energy, in itself, is not a PITA the way humans are.

      Of course, there are some people who like the idea of a human they can kick around with impunity and perhaps the more people they can kick around, the better. But I suspect these sorts of people are not that common anymore. Modern people have more of a need for privacy than say the oriental satraps of the past.

  17. Joe Buck

    What Prof. Tao misses is that fluorescent bulbs and LEDs are so much more efficient than incandescents that his example is laughable: to spend as much money on lighting with the new bulbs as you spent with the old ones, or to consume as many watts, you’d have to blind yourself. This is the same kind of sloppy economic thinking that gave us the Laffer Curve.

    1. Paul Jurczak

      “…to consume as many watts, you’d have to blind yourself” – not at all, you just have to remember to put your sunglasses on when indoors. Everyone deserves equatorial luminosity, that’s what the good life is all about. Madison Avenue will make sure you remember that. And don’t you forget to illuminate under the furniture. The days of darkness under your bed are over! The shade is so anti-american!

  18. jcrit

    This is a bogus argument. Energy efficiency would be getting by on a single light bulb at any price. What this author is alluding to is the concept of marginal utility, not energy efficiency. What is the good motive for this semantic folderol?

  19. George Phillies

    So if I insulate my home, and cut my heating bill in half, on a cold winter’s day when I am heating from 10 F (outside) to 70 F (inside), because it’s cheap I am going to turn up the thermostat, and heat my home to 130 F? If my home town builds wider streets I am going to drive back and forth twice as much? I don’t think so.

    You might claim (it’s like ‘technolgoy creates more jobs than it destroys’) that because I am spending less money on fuel oil, I can spend more money on something else, but the energy cost of that other application is fairly independent of home heating or driving.

    1. Sandwichman

      Cameron Murray doesn’t claim it’s like technology-creates-more-jobs, William Stanley Jevons claimed that. And if you examine the argument, you’d have to concede his point unless you can identify a substantive difference.

      The energy cost of the alternative you spend your money on is a non sequitur. One individual might be able to spend their savings on something with no energy cost. That doesn’t matter. What matters is what happens in the macro-economy. One individual can find a job even if the unemployment rate is 25%. In fact, individuals DO find jobs when unemployment is high. But that’s not sufficient basis to dismiss the general difficulty of getting a job when unemployment is 25%. Otherwise unemployment wouldn’t be 25%!

      So remember, Jevons was making a macroeconomic argument, not a microeconomic argument and his argument about energy was inseparably tied to the argument about employment. If you aren’t addressing the totality of that argument, you haven’t responded to any part of it.

  20. LucyLulu

    If I use fluorescent bulbs and save money on the electric bill despite spending 10x as much per bulb and never remembering to turn out the lights, what is the cost to the environment of throwing mercury into the county dump because of either ignorance or inconvenience related to its recommended disposal?

    1. taunger

      Surprised to see this piece arguing against practical behaviour based on misapplied academic economics on this blog.

  21. Alex SL

    This is a bit silly. So better energy efficiency alone does not reduce consumption if we can assume that people behave like they should according to the underlying economic model, which is not a given, but okay. But does that mean we should not achieve higher efficiency? That conclusion, which is at least implied here, is ridiculous, akin to saying that dieting is more important to losing weight than exercise, therefore you should never exercise (or vice versa).

    Caps may be a more viable solution than efficiency, but how about caps AND higher efficiency? Don’t play off one good thing against another as if they could not both be implemented at the same time.

    1. Jesse


      To boot, this argument was exactly the one my micro-economics 101 book debunked as fallacious back in the early 2000’s. Even though people could afford the same amount of energy as before, they’re incentivized (by the additional tax) to conserve.

  22. David

    For the argument to work, there has to be a difference in utility between one light bulb or two, with the two bulb option providing greater economic utility. I do not value, nor do I think those that provide lighting value bulbs in this simple manner. You either have sufficient light or you don’t. If you don’t have sufficient light you get more lumens. More lumens doesn’t necessarily mean more bulbs or more energy. So, the analysis is flawed from the initial description.

  23. joecostello

    This is a joke right? Where anti-environmental propaganda used for years now becomes “economic orthodoxy” — ok thats a joke too.

    1. Yves Smith Post author

      He’s not anti-environment. He’s saying relying on greater efficiency is not going to solve the problem. He advocates hard caps, meaning rationing! That’s a brutal but guaranteed to work solution.

      1. David

        I don’t think this shows that efficiency doesn’t work to reduce energy use. In fact I think we have examples, like California where efficiency has been very successful in keeping total electrical energy demand flat while the population and the states economy has grown significantly.

  24. Roland

    Jevons’ Paradox is not some sort of Law of Nature. It was an observation of the use of coal at that place and time.

    It was a time when a whole bunch of new uses of coal were being found (e.g. chemicals, dyes)

    It was a time when electrical generation was on the horizon.

    It was a time of massive expansion of railways and steamships.

    Moreover, much of the population of the UK had an unrealized demand for heat, light, and hot water.

    More efficient use of coal helped make all that demand possible.

    Now ask yourself, how many of these factors apply to the current use of petroleum?

    There is of course a massive unmet demand for motor transport in many developing countries. So we can expect overall world demand for petroleum to keep rising for some time to come.

    But that’s not to say that increased petroleum efficiency in the most advanced countries would not result in lowered overall consumption.

    There is no dazzling array of new uses of petroleum, at least not that anyone can foresee.

    There is little unmet demand for motor transport in North America.

    Enough worshipping at Jevons’ altar. History trumps economics. Think afresh for the situation.

    1. Nathanael

      More efficient use of petroleum in transportation gives people less incentive to switch to entirely different, non-petroleum forms of transportation. From electric railways to electric cars to bicycles. All of these are in the “needs capital investment” phase and more efficient petroleum cars make for less capital investment in alternatives. Not exactly Jevon’s paradox, but related.

      Now, take the argument over to heat. Energy efficiency in a house is mostly about insulation. More efficient insulation does NOT cause people to use more oil (or electricity or whatever) for heat generation. It doesn’t displace alternatives. It doesn’t even make people build larger houses, or more houses. This is because there’s no induced or unmet demand for anything going on here; people’s house-heating demands are fairly constant. This sort of efficiency has all upside.

      Consider, then, electricity. Energy efficiency in electricity use should drop the price and cause people to switch other things over to electricity. But this is a good thing! There are few things for which electricity is less efficient than the main alternative, fuel-burning. And the rebound effect, being entirely price driven, will keep washing out the moment it raises the electricity price — so there will be no particular incentive to build new electrical generation, which *could* be bad.

      I think, as you do, that each individual market must be analyzed individually for the effects of improved efficiency.

    2. Nathanael

      I think you might agree with me that increased petroleum efficiency in every arena *other* than cars would be a great benefit.

      In cars… well, we really do want people to switch to an alternative. Even with increased efficiency, ICEs are just *awful* in overall efficiency. Increased efficiency could keep them cheap enough to prevent electric vehicles from displacing them.

  25. TenderBig

    The incentive structure is broken. Imposing a cap with the same broken system will probably just ensure everyone uses right up to the cap. Perhaps we can do better than that. Electric consumption is either flat rate for consumers or declining block rate (as in you pay less the more you consume). By simply changing this to an inclining block rate system and adding some form of dynamic pricing (more expensive when demand is highest), people will learn to use less power, no cap required.

  26. avgJohn

    I wonder how many people that claim to be energy conservationists, fail to shut off the heat in their bedrooms and use electric blankets in the winter, drive SUV’s, wouldn’t think of reusing paper plates (save water and electricity), run air conditioning even on moderately warm days, fail to grow at least a few vegetables in their flower gardens, or give a second thought to the energy they use vacationing in Cancun, Hawaii, or their week-end ski trips to Vail?

    Nothing makes me laugh more, than to see upwardly mobile young people, talk their smack about energy conservation and environmental exploitation from their smart phones in their 2700 sq ft homes, with their SUV and luxury car comfortably parked in their driveway, because their garage is full of “stuff”.

    About as funny as “limousine” liberal’s sincerity and concern in a discussion, at a Washington D.C. black tie dinner, of the plight of the average middle class citizen, with their Wall Street hedge fund manager.

    1. Jesse

      Sort of agree with you (I take issue with your SUV example – that’s a pretty obvious no-no for anyone seriously claiming to be an environmentalist). The problem is a lack of information – people trying to live “green” know to take the bus/ride a bike/walk to work, but they don’t realize the costs of things like bottled water, paper towels, etc…

      1. Jesse

        Re-reading your post, it seems that you are going after people that are clearly hypocritical — which is different from the point I was making (un-hypocritical people who are unwittingly harmful).

        1. avgJohn


          I spent some time living at a Buddhist community located in the Rocky Mountains, some years ago.

          The people there grew their own food (using organic farming techniques), prepared and ate at a community kitchen with all able body people taking turns providing kitchen help, provided cold showers, as well spiritual and educational services to the world at large for revenue streams, and had an open forum several time a week and on special occasions where everyone had an opportunity to discuss matters relating to the community. Since the community was made up of people, there were still problems of sorts, but all in all, these people were environmentally conscious.

          To talk about environmentalism, and live the average lifestyle of the typical American, is hypocritical, even if it’s out of ignorance of the possibilities of creating totally different lifestyles (such as this tribal way of life). I returned to the world at large (admittedly with regret looking back now), but I stopped talking smack about being an environmentalist after that experience. Clearly I saw what a hypocrite I was.

          I don’t know what your situation is or what your lifestyle is like. Perhaps you have chosen a path, that you feel is harmonious with nature, and are extremely environmentally conscious, but you are the exception (the 1% of environmental friendly lifestyles).

          Our problems are only going to be solved with radically different ways of thinking and living. It would be nice to choose a better way, but I am more inclined to believe it will be thrust upon us.

          And I do not claim to be an environmentalist anymore, but I do love Mother Earth and do some little things to limit my environmental foot print.

          1. Mikhail Kropotkin

            The biggest immediate activity anyone can make to reduce their environmental foot print is to eliminate meat and fowl consumption for the entire house. That includes the dog and cat!
            A large dog’s meat consumption over it’s life is equivalent in oil usage as the construction and lifetime fuel consumption of a large 4WD vehicle (SUV).
            I’m not a ranting vege, just letting you know.

    2. Nathanael

      This is the moral hairshirt argument.

      I don’t approve of it. It’s stupid and unhelpful.

      People are lazy little monkeys and we should be trying to create a situation which is sustainable which *accounts* for this aspect of human nature and *accepts* it.

  27. Hugh

    When someone goes back to 1865 to pick up some “law” to describe modern economics, 50 kinds of red flag go up for me.

    The author overlooks that we live in a kleptocracy not some rationalist model where people make choices based on mythical concepts like marginal utility. He equally ignores that sustainability would require a real industrial policy, environmental policy, resource policy as well as discussions on what kind of society we the 99% want and what kind of population we think we can handle. We have none of this so it seems a bit premature to declare sustainability dead.

    As it is, this comes across as a fresh water hit piece where the conclusion is decided upon in advance and then the argument is constructed to support it. Perhaps I am being overly sensitive here but the author’s approach strikes me as similar to Thomas Sargent’s, a godfather of discredited freshwater economics. He used rational expectations to argue that Keynesian stimulus doesn’t work because markets come to expect it factoring in its consequences and negating its results. After the 2007 housing bubble burst I remember market analysts repeatedly maintaining that markets had factored in the bust and that everything was back on course, and we all know how that turned out. I could go on but basically I think Murray hasn’t made his case.

    1. Cameron Murray

      Hugh, the effect happens whether you think utility theory is a good way to describe behaviour or not. I personally don’t think it is the best way to describe behaviour, and even less so on a macro level.

      For trained economists it is an accessible way to describe the effect.

      However, the very mechanics if the problem are that if energy services (or goods in general) become cheaper due to energy efficiency improvements, you can produce and consume more of them at an economy-wide level (globally). It also make energy use a more attrative substitute to other resource inputs.

      This simply means that energy efficiency technology is not a means for reducing energy resource use (coal, oil, gas etc), but a way to enable increased use. It points to the fact that direct regulation is needed to combat energy-related environmental externalities.

      1. Roger Chittum

        I won’t argue that direct regulation is always the only or best answer or that price manipulation can’t ever work, but it is difficult to imagine a set of market incentives for automobiles that would have reduced in 40-60 years tailpipe emissions per mile by 89%, fatalities/mile by 85%, and gasoline consumption per mile by 40%. Yet we did all that–simultaneously–with direct regulations like CAFE standards, safety standards, and emission limits.

      2. Nathanael

        The thing, Cameron Murray, is that this article overstates the case.

        More efficient use of resources for a purpose where there is *potentially more demand* depending on price, generally leads to, at best, the same level of use for them, and at worst, a larger level — and if they are *nonrenewable resources*, this is bad.

        But you can’t say as a blanket statement that “energy efficiency doesn’t work”, because your analysis simply does not apply to resources being used for purposes with very inelastic demand; or to use of renewable resources, so long as you’re below the sustainable rate, because there increase in demand isn’t a bad thing.

        Because of the fact that many things have alternative energy sources (substitutes in economic jargon) which are renewable and alternatives which are non-renewable, the latter matters; any efficiency which changes the relative prices of the two, and so drives the substitution choice towards the renewable, is good.

        Because of the fact that many resources have alternative uses, both prive-sensitive and price-insensitive, the former also matters. Only the price-sensitive uses will rebound after efficiency gains. If the alternative energy sources for all the price-sensitive uses have been made sufficiently cheap, then the resource will be driven primarily into price-insensitive uses — and at that point, efficiency gains are a straight-up win.

        Oil uses are startlingly price-insensitive already…. except for transportation fuel usage.

        This suggests a strategy, if it remains impossible to price the negative externalities of oil burning. :-) Make it *much* cheaper to use non-oil means of transportation, through whatever aggressive changes you can make (support for electric cars, building lots of electric trains, bike roads, whatever). Then pour efficiency into every *other* use of oil (home heating, for instance).

  28. Fíréan

    More efficient power consumption in my home allows me to pay the increasing utility bills with the ever decreasing income (or stagnant), there is no resultant greater discretionary income to spend on other items.

  29. JohnPro

    The Jevons Paradox is similar to the Prisoners Dilemma. Both demonstrate that a person will maximize his return or utility. However, Jevons is based upon the false assumption that a person will spend a fixed amount regardless of the product’s cost. It doesn’t address real world situations where people are on a fixed budget or can’t justify consuming more. Some people only buy what they need.

    You need to look at assumptions the theory is based upon as well as the the theory. If the assumptions are false, can the theory be true?

  30. Earl Killian

    I have seen no evidence of the Jevons paradox with respect to energy efficiency in the US. First, realize the Jevons was originally making an observation about a society in the midst of a transition, and the transition effects probably completely overwhelmed the efficiency effects. On a theoretical basis, one would expect energy efficiency to result in rather small increases in energy consumption. Why? Because the money saved will be used on a variety of consumption, only some of which will result in increased energy use. This should apply to lower income consumers as well as higher income consumers. In practice this is exactly what we see. California has rather aggressive energy efficiency programs. Consider electricity, where usage in California was 7,032 kWh per capita in 2005, vs. 12,347 kWh per capita in the U.S. The average cost of electricity in 2005 was 11.63 cents per kWh in California, vs. 8.14 cents per kWh in the U.S. Multiplying gives $818 per capita in California, and $1005 in the U.S. The $187 difference did not cause California’s consumption to increase. The savings was presumably spent on other things.

    Generally the only way to have a true Jevons Paradox is to have a situation where there is only one thing to spend on, and the price elasticity of demand (PED) of that thing is less than −1. This is a rather artificial set of assumptions. Wikipedia, for example, gives the PED of auto fuel as −0.25 (short run) and −0.64 (long run); both are greater than −1.

    1. Nathanael

      I think Cameron Murray was thinking of the example of making gasoline engines in cars more efficient.

      This is a case of a difficult-to-substitute good (transportation) which already has suppressed demand (thanks to cars being expensive). Making those more efficient does tend to bring the gas price down and then cause usage to rebound.

      However, we do not observe any such phenomenon with electricity efficiency, or with home heating efficiency. The former has fairly inelastic demand, and the latter has *extremely* inelastic demand and fairly substitutable fuels. To the extent that we see increased electricity use, it is substituting for *worse* choices (such as oil burning) and so it’s actually desirable.

      Confusion of different types of energy efficiency is bad, and this is another way of describing the error made by the article’s author.

      1. Earl Killian

        Yes, different energy sources have different characteristics, but even gasoline has a PED that fails insufficient to create the Jevons paradox. It is strange that Mr. Murray, as an economist, is unaware of the theoretical basis of the Jevons paradox, and thus that it doesn’t actually apply.

        Let’s do a little gedanken, and suppose that instantly the MPG of the US fleet went from 22 to 45. Do you think that the Vehicle Miles Traveled in the US would double from 3.1 trillion miles to 6.2 trillion miles? This seems absurd on the face of it. There are two many other limiting factors (time, highways, etc.) Would it rise? Yes, but it would not rise by enough to increase the number of gallons of gasoline consumed. Not even close. Gasoline usage would in fact fall dramatically.

        Mr. Murray’s analysis was deeply flawed and I wonder why it was cross-posted here.

  31. charles 2

    I don’t understand why on one side the “tradeability” of caps is a secondary concern and on the other side the income from externalities tax come dilutes the efficiency of the scheme.
    If the caps are tradeable, they ultimately have to be sold at market price by the State, right ? So this is an income just as a tax. It is just that in the first case the quantity is fixed, whereas the price is fixed in the second.

    IMHO, the real issue is how the monies are employed. There are three ways to use them effeciently as far as the consumption of finite resources is concerned :
    1) invest it in basic research to further increase the efficiency, from the direct (like, say developing cheap and efficient batteries) , to the less direct (like purchasing or exproppriating for a fair compensation the patents realted to the most efficient technologies), down to the most indirect (like subsidizing University or High School science and technology education)
    2) once all valid ideas for 1) have been exhausted (and this is hard to do !), subsidy the early retirement of the most polluting assets.
    3) Once all these have been exhausted (again very hard to do), diminish the level of debt in the economy.

    2 and 3 are delationnary, and unfortunately , it is more politically likely to see 3-2-1 than 1-2-3…

    1. Skippy


      Line item input used for solutions and not gold]en bathroom accessory’s.

      Skippy…as everyone is part of the problem…shouldn’t we be part of the solution. 1. 2. 3. pull!

  32. Tyzao

    sounds like a discussion in experimental economics and bounded rationality — get out the agent based models and lets run a few simulations to see what happens

  33. DiSc

    Conservation is not “equally ineffective”. One could save on energy costs and use the money to buy, for example, locally produced organic foods. Not all consumption has equal environmental costs per dollar spent – why on earth should it?

    Or you can use the money to pay down your debt, or just save it: that way you induce deflation on a micro-level, and slow down the overall economy.

    And sure we can all do conservation, the same way we all do waste – WTF?

    What is this article supposed to imply?

    1. Sandwichman

      Not ALL conservation is equally ineffective. I sympathize with the difficulty of expressing and of comprehending the paradox. It is, after all, a paradox. What is needed, in addition to simple conservation, to avoid (or deflect) a rebound effect is an enforceable social consensus on aggregate use of the resource and a system of rationing.

  34. ep3

    i dunno yves. something tells me that we are staring down the barrel of a cannon that brings about mad max type living (re: natural resource extraction). It seems that throughout human history ppl(the ruling classes) don’t do anything to prevent such a chaos scenario. It ends up taking a societal upheaval to radically transform and eliminate the dependence upon…whatever it is at the time.

  35. Michael

    This is an awesome article, but the third-last paragraph is very weak. If the problem is that energy efficiency makes output cheaper, and we make output more expensive, then we have addressed a big part of the problem.

  36. political economist

    this is not even good neoclassical economics

    it is ridiculous to conclude that raising the price of a something and compensating for that price increase by subsidizing income will not lead to lower usage of the product taxed

    indeed in theory the tax can be raised to discourage consumption of it to any level

    as a neocl economist might say QED

  37. Samuel

    I don’t agree with the premise, research, or conclusions of this article at all. While delving into the world of Math and economics, we can end up with myopic vision.
    Efficiency could lead to greater consumption, but this operates from the supposition that people would run their washing machines and light up as many bulbs as possible if left to their devices. Maybe in 1865, when we used considerably less electricity, whenever we could get our hands on power, we’d use as much as was available. Not so much anymore, because we already use as much as we want. That precedent is outdated.
    Those who are environmentally conscious, a growing number, will simply seek to consume less energy, not to save money, but because it is a good thing to do. Those who aren’t (the majority), generally use as much as they want regardless, because energy costs aren’t enough of a factor to stop them. Therefore, if washing machines and lightbulbs become more efficient, they’ll end up using less energy. Caps would be useful, but don’t count efficiency as an enemy, that is idiotic.
    As for the “other goods” postulation — Some goods are more resource intensive than others, something like local apples bought at a farmers market may cost more, but use fewer resources than their supermarket counterpart. All saved money from energy efficiency is not equal.
    So many more objections, but I’m getting tired for the moment.

  38. Nathanael

    Efficiency is useless as a NATIONAL POLICY — useless on the macro level.

    On the macro level, yes, Pigovian pollution taxes, quotas, cap-and-trade, or outright bans are the only way to improve the situation.

    On the micro level, however, efficiency sure helps each individual household or business which does it.

    And if everyone does it, why then there is no demand to build a giant *new* megapolluting plant. The only macro benefit of efficiency is that it reduces the incentives to build big new pollution factories. It never ever gets rid of old ones, which I think is the actual point of this essay, but the essay overstates its case.

  39. Oil rigs job


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