EMF Publications

EMF-13: Markets for Energy Efficiency


Energy Modeling Forum - Stanford University

Published by
Energy Modeling Forum, Vol. 2
October 1994

Two decades after the emergence of contemporary energy studies, many problems central to the discipline remain conspicuously unresolved. Is there an energy efficiency ‘gap’, ie a divergence between socially (and perhaps privately) optimal levels of investment in energy efficiency and the levels actually seen in practice? More Generally, what is the relationship between energy efficiency and economic efficiency? What policies, if any, to promote energy efficiency are warranted? And what role should such policies play in society’s response to global climate change?

These problems and others rest in part upon an underlying quandary: what is the nature, extent, and severity of so called ‘market barriers’ to energy efficiency? Debate on this topic has been extensive but not, as it were, convergent. The basic battle lines are well known: on the one hand, technologically oriented energy analysts see a range of unexploited opportunities for cost-effective investments in energy efficiency. What inhibits such investments are market barriers. The existence of these barriers clearly demonstrates the shortcomings of the market mechanism in achieving an optimal diffusion of energy-efficient technology. A variety of policies to overcome these barriers and thus promote investments in energy efficiency are therefore warranted.

On the other hand, many energy economists view this picture with skepticism, at best. They see no evidence of basic problems in energy markets beyond the usual ones arising from, eg deviation from marginal cost pricing, or risk associated with national security considerations. That is, markets for energy and energy using technology basically ‘work’. Where there are problems that can be overcome, the price mechanism is the appropriate instrument. The idea of market ‘barrier’ has little if any economic content. Fundamentally, the operative criterion for most energy policy analysis should be that of economic efficiency, and this standard is assuredly not met by policies promoting energy efficiency.

While simmering for years, this debate has recently moved to the forefront in meetings organized by Schipper in conferences for of the International Association for Energy Economics (IAEE) as well as in working sessions of Stanford University’s Energy Modeling Forum (EMF). The EMF has been studying the issue of energy conservation, specifically, analyzing how much energy savings can be achieved through various policies, and at what cost. Meetings of the EMF have constituted, perhaps, a microcosm of the more general debate. While initially focused on technical comparisons of different models’ treatments of energy conservation, they have become the scene of protracted and sometimes heated discussions of fundamental issues and first principles. These interchanges as well as those in the IAEE meetings have revealed clearly that disputes over the ‘efficiency gap’ are a complex mix of theoretical, empirical, methodological and in some cases ideological disagreements.

What has emerged from these meetings, however, is a possibly unprecedented interest among many participants in sharpening and, perhaps, resolving the debate, and in searching for the ever elusive ‘middle ground’. This special issue is a product of these efforts. Four papers (by Jaffe and Stavins, Metcalf, Nichols and Levine and Sonnenblick) were reported at EMF meetings and extensively discussed therein. Four others (Sanstad and Howarth, Koomey and Sanstand, Johnson, and Huntington) were written by participants in response to issues raised at the meetings. Scheraga’s paper builds upon a well-received IAEE presentation, while Kempton and Layne, and Lutzenhiser, were invited to contribute to broaden the range of perspectives presented.