Can energy saving policy survive in a market economy?

Panel: Panel 1: Assessment of Energy Efficiency Policy

Author:
Jorgen Stig Norgard, Technical University of Denmark

Abstract

The paper deals with the conflicts between energy savings on the one side and a market economy on the other side. The current high emphasis on free markets is sometimes perceived, as if the goal should be a totally unregulated global market. On second thought nobody would probably subscribe to that model. It would disregard the main environ-mental problems, because they are basically collective and have a long-term effect, and none of these aspects are well cared for by a free market.

Energy savings are environmentally often superior to renewable energy, and should be treated correspondingly. A simple graphic model is used to illustrate the consequences of a government policy based on that criterion and economic rationality. For the sake of the environment, energy savings should be promoted to a level where the marginal cost per saved unit of energy is higher than the cost of providing a unit from renewable resources.

Those energy savings, which are cost-effective, can be considered a productivity increase. They will, through the rebound effect, tend to spur the economy in a society where production capacity is the limiting factor. In affluent societies, however, where consumption capacity or demand somehow is the constraint for growth in GDP, cost-effective energy savings seem to be in conflict with an aim for growth in general consumption. This will be illustrated by various cases.

Most experts would agree that GDP is a poor indicator of the welfare of people. Therefore attempts are made to adjust the GDP to better reflect at least the real economic welfare, for instance by what is termed the Genuine Progress Indicator, GPI. The general trend is that energy savings will reduce GDP and increase GPI.