Mandated increases in energy efficiency — popular almost everywhere on the ideological spectrum — have been implemented around the world. Laws like the European Union’s new requirement for 15% energy savings, or the U.S. Senate’s proposed Clean Energy Standard Act of 2012, appear like clear winners for almost everyone. If the costs of new technologies are within reason, they promise consumers lower energy bills and producers more profit while mitigating the environmental costs of energy development and consumption.
There is just one problem: Basic economics says that the best way to promote some activity is to reduce its price. That often means efficiency requirements end up having the opposite effect than the one intended.
Consider Mexico’s recent cash-for-coolers program, which subsidized the swapout of inefficient refrigerators and air conditioners for more efficient ones. A World Bank engineering study claimed that the new refrigerators would consume nearly 30% less energy. But the actual savings estimated by researchers at the University of California Energy Institute was only 7%, because buyers chose larger capacities and options like ice makers in the doors. Newer air conditioners actually consumed more electricity because they cut the cost of attaining previously unaffordable comfort levels in summer months.
Research on the effects of efficiency measures tells us that such overestimates of savings are significant, and economic theory suggests that they are to be expected. Overestimating the energy savings from new refrigerators is an instance of “rebound.” The more extreme case of increases in total consumption by new air conditioners is usually called a “backfire.”
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