28 November 2005

Energy Efficiency leads to ... Wealth?

In the era of cheap energy the development of more efficient services (transportation, lighting, etc.) historically has not led to a reduction in consumption. While the standard in automobiles may have progressed from a blocky Ford V-8 POS to the stylish Honda Accord the corresponding increase in fuel economy has not reduced per capita gasoline consumption (caveat: for transportation, given the shift away from oil for electricity generation). Instead, people have taken advantage of the reduced marginal cost of driving to simply drive more. Alternatively, they might have taken their savings in energy in and sunk it into a February plane ticket to Mexico. Either way the annual kilometers traveled by the average person has increased, not decreased over the past century.

This is not so much a conscious decision people make to consume more energy but rather a move towards enriching ones lifestyle. Wealth is not the number of digits of fiat currency one has in their bank account and stock portfolio. That would be an overly simplistic viewpoint. The wealth of an individual is argely be determined by the services they have access to and can afford. By most measures I am wealthier than the Rockefellers of the late 19th century. I have access to faster and far safer transport, superior health care, and the marvel of modern internet communication, yet I am a graduate student and live below my country's version of the poverty line. All of my wealth is due to the efforts of scientists and engineers before me who have developed the technology and infrastructure that I now enjoy.

This issue becomes important when we try to evaluate the impact of improved efficiency on the production of greenhouse cases or oil consumption. Would a significant effort to increase the fuel efficiency of the personal vehicle fleet lead to a real reduction in oil consumption? Or would the reduction in demand drive a price drop in the cost of various forms of energy and in turn generate more wealth?

At what price point does efficiency begin to effect conservation positively?

I am not an economist (and economists have a terrible track record on predicting the future) but I suspect the answer lies somewhere between demand elasticity and fossil fuel depletion rates. I would suggest that the more inelastic the demand for oil the greater the long term reduction in consumption with increased prices. A high degree of inelasticity suggests that the system has a great deal of inertia and that much of the consumption is not so much voluntary but necessary to produce our wealth. In comparison shifts in elastic economy would be more temporary. Fossil fuel depletion is important because it dictates supply or will do so very shortly.

While improvements in efficiency certainly seem to present the lowest hanging fruit on the quest for sustainability they will likely only have a transient impact on energy consumption. Long term solutions to our energy situation will require a change in supply rather than demand.

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