Jevons paradox

Coal-burning factories in 19th-century Manchester, England. Improved technology allowed coal to fuel the Industrial Revolution, greatly increasing the consumption of coal.

In economics, the Jevons paradox, sometimes called the Jevons effect, is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.[1] In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to the increased consumption of coal in a wide range of industries. He argued that, contrary to common intuition, technological improvements could not be relied upon to reduce fuel consumption.[2]

The issue has recently been reexamined by modern economists studying consumption rebound effects from energy efficiency. In addition to reducing the amount needed for a given use, improved efficiency lowers the relative cost of using a resource, which increases demand for the resource, potentially counteracting any savings from increased efficiency. Additionally, increased efficiency accelerates economic growth, further increasing the demand for resources. The Jevons paradox occurs when the effect from increased demand predominates, causing overall resource use to increase.

The Jevons paradox has been used to argue that energy conservation is futile, as increased efficiency may actually increase fuel use. Nevertheless, increased efficiency can improve material living standards. Further, fuel use will decline if increased efficiency is coupled with a green tax that keeps the cost of use the same (or higher).[3] As the Jevons paradox applies only to technological improvements that increase fuel efficiency, policies that impose conservation standards and increase costs do not display the Jevons paradox.

Contents

History

William Stanley Jevons

The Jevons paradox was first identified by William Stanley Jevons in his 1865 book The Coal Question. Jevons argued that improvements in fuel efficiency tend to increase, rather than decrease, fuel use: "It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth." [4]

Jevons observed that England's consumption of coal soared after James Watt introduced his coal-fired steam engine, which greatly improved the efficiency of Thomas Newcomen's earlier design. Watt's innovations made coal a more cost-effective power source, leading to the increased use of the steam engine in a wide range of industries. This in turn increased total coal consumption, even as the amount of coal required for any particular application fell.

At that time, many in Britain worried that coal reserves were rapidly dwindling, but some experts advised that increasing efficiency would reduce coal consumption. Jevons argued that any further increases in efficiency would tend to increase the use of coal. Hence, increasing efficiency would tend to increase, rather than reduce, the rate at which England's coal deposits were being depleted.[2][4]

Cause

Rebound effect

Elastic Demand for Work: A doubling of fuel efficiency more than doubles work demanded, increasing the amount of fuel used. Jevons paradox occurs.
Inelastic Demand for Work:A doubling of fuel efficiency does not double work demanded, the amount of fuel used decreases. Jevons paradox does not occur.

One way to understand the Jevons paradox is to observe that an increase in the efficiency with which a resource (e.g., fuel) is used causes a decrease in the price of that resource when measured in terms of what it can achieve (e.g., work). Generally speaking, a decrease in the price of a good or service will increase the quantity demanded (see supply and demand, demand curve). Thus with a lower price for work, more work will be "purchased" (indirectly, by buying more fuel). The resulting increase in the demand for fuel is known as the rebound effect. This increase in demand may or may not be large enough to offset the original drop in demand from the increased efficiency. The Jevons paradox occurs when the rebound effect is greater than 100 percent, exceeding the original efficiency gains. This greater than 100 percent rebound has been called 'backfire'.[2]

Consider a simple case: a perfectly competitive market where fuel is the sole input used, and the only determinant of the cost of work. If the price of fuel remains constant, but the efficiency of its conversion into work is doubled, the effective price of work is halved and so twice as much work can be purchased for the same amount of money. If the amount of work purchased more than doubles (i.e., demand for work is elastic, the price elasticity is less than −1), then the quantity of fuel used would increase, not decrease. If however, the demand for work is inelastic (elasticity greater than −1 and less than 0), the amount of work purchased would less than double, and the quantity of fuel used would decrease.

A full analysis would also have to take into account the fact that products (work) use more than one type of input (e.g., fuel, labor, machinery), and that other factors besides input cost (e.g., a non-competitive market structure) may also affect the price of work. These factors would tend to decrease the effect of fuel efficiency on the price of work, and hence reduce the rebound effect, making the Jevons paradox less likely to occur. Additionally, any change in the demand for fuel would have an effect on the price of fuel, and also on the effective price of work.

Khazzoom-Brookes postulate

In the 1980s, the economists Daniel Khazzoom and Leonard Brookes revisited the Jevons paradox for the case of a society's energy use. Brookes, then chief economist at the UK Atomic Energy Authority, argued that attempts to reduce energy consumption by increasing energy efficiency would simply raise demand for energy in the economy as a whole. Khazzoom focused on the narrower point that the potential for rebound was ignored in mandatory performance standards for domestic appliances being set by the California Energy Commission.

In 1992, the economist Harry Saunders dubbed the hypothesis – that improvements in energy efficiency work to increase, rather than decrease, energy consumption – the Khazzoom-Brookes postulate. Saunders showed that the Khazzoom-Brookes postulate was consistent with neo-classical growth theory (the mainstream economic theory of capital accumulation, technological progress and long-run economic growth) under a wide range of assumptions.[5]

According to Saunders, increased energy efficiency tends to increase energy consumption by two means. First, increased energy efficiency makes the use of energy relatively cheaper, thus encouraging increased use (the direct rebound effect). Second, increased energy efficiency leads to increased economic growth, which pulls up energy use for the whole economy. At the microeconomic level (looking at an individual market), even with the rebound effect, improvements in energy efficiency usually result in reduced energy consumption.[6] That is, the rebound effect is usually less than 100 percent. However, at the macroeconomic level, more efficient (and hence comparatively cheaper) energy leads to faster economic growth, which in turn increases energy use throughout the economy. Saunders concludes that, taking into account both the microeconomic and the macroeconomic effects, technological progress that improves energy efficiency will tend to increase overall energy use.

Energy conservation policy

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The Jevons paradox warns that improvements in fuel efficiency will not reduce the rate at which fuel is used. This does not imply that increased fuel efficiency is worthless. Increased fuel efficiency enables greater production and a higher quality of material life. For example, a more efficient steam engine allowed the cheaper transport of goods and people that contributed to the Industrial Revolution.

However, if the Khazzoom-Brookes postulate is correct, in order to increase energy conservation, fuel efficiency gains must be paired with some government intervention that reduces demand (e.g., cap and trade, fuel tax or carbon tax). The ecological economists Mathis Wackernagel and William Rees suggest that cost savings from efficiency gains be "taxed away or otherwise removed from further economic circulation. Preferably they should be captured for reinvestment in natural capital rehabilitation."[3]

The Jevons paradox is sometimes used to argue that energy conservation is futile. For example, that more efficient use of oil will lead to increased demand, and will not slow the arrival or the effects of peak oil. This argument is usually presented as a reason not to impose environmental policies, or to increase fuel efficiency (e.g. if cars are more efficient, it will simply lead to more driving).[7][8]

Several points have been raised against the argument that energy conservation policies are futile. First, in the context of a mature market such as for oil, the direct rebound effect is usually small, and so increased fuel efficiency usually reduces resource use, all other conditions remaining constant.[6][9][10] (However, fuel use may still increase because of faster economic growth.) Second, even if increased efficiency does not reduce the total amount of fuel used, there remain other benefits associated with improved efficiency. For example, increased fuel efficiency may mitigate the price increases, shortages and disruptions in the global economy associated with peak oil. Third, environmental economists have pointed out that fuel use will unambiguously decrease if increased efficiency is coupled with an intervention (e.g. a green tax, cap and trade, or license fees) that keeps the cost of fuel use the same or higher.[3]

The Jevons effect indicates that increased efficiency, by itself, is unlikely to reduce fuel use, and that sustainable energy policy must rely on other types of government interventions.[11] By mitigating the economic effects of government interventions designed to promote ecologically sustainable activities, efficiency-improving technological progress may make the imposition of these interventions more palatable, and more likely to be implemented.[12] As the Jevons paradox only applies to technological improvements that increase fuel efficiency, the imposition of conservation standards that simultaneously increase costs do not cause a paradoxical increase in fuel use.

Notes

  1. ↑ Alcott, Blake (July 2005). "Jevons' paradox". Ecological Economics 54 (1): 9–21. doi:10.1016/j.ecolecon.2005.03.020. http://www.sciencedirect.com/science/article/B6VDY-4G7GFMG-1/2/5da4f921421a31032f8fcd6971b0e177. Retrieved 2010-08-08. 
  2. ↑ 2.0 2.1 2.2 Alcott, Blake (2008). "Historical Overview of the Jevons Paradox in the Literature". In JM Polimeni, K Mayumi, M Giampietro. The Jevons Paradox and the Myth of Resource Efficiency Improvements. Earthscan. pp. 7–78. ISBN 1844074625. 
  3. ↑ 3.0 3.1 3.2 Wackernagel, Mathis and William Rees, 1997, "Perpetual and structural barriers to investing in natural capital: economics from an ecological footprint perspective." Ecological Economics, Vol.20 No.3 p3-24.
  4. ↑ 4.0 4.1 Jevons, William Stanley (1866). "VII". The Coal Question (2nd ed.). London: Macmillan and Co.. http://www.econlib.org/library/YPDBooks/Jevons/jvnCQ0.html. Retrieved 2008-07-21. 
  5. ↑ Saunders, Harry D., "The Khazzoom-Brookes postulate and neoclassical growth." The Energy Journal, October 1, 1992.
  6. ↑ 6.0 6.1 Greening, L; David L. Greene,Carmen Difiglio (2000). "Energy efficiency and consumption—the rebound effect—a survey.". Energy Policy 28: 389–401. doi:10.1016/S0301-4215(00)00021-5 
  7. ↑ Potter, Andrew (2007-02-13). "Planet-friendly design? Bah, humbug.". MacLean's 120 (5): 14. Archived from the original on 2007-12-14. http://web.archive.org/web/20071214235056/http://www.macleans.ca/article.jsp?content=20070202_154815_4816. Retrieved 2010-09-01. 
  8. ↑ Strassel, Kimberley A. (2001-05-17). "Conservation Wastes Energy". Wall St. Journal (Wall St. Journal – Opinion). Archived from the original on 2005-11-13. http://web.archive.org/web/20051113194327/http://www.opinionjournal.com/columnists/kstrassel/?id=95000484. Retrieved 2009-07-31. 
  9. ↑ Small, Kenneth A.; Kurt Van Dender (2005-09-21). "The Effect of Improved Fuel Economy on Vehicle Miles Traveled: Estimating the Rebound Effect Using U.S. State Data, 1966–2001". Policy and Economics (University of California Energy Institute, UC Berkeley). http://escholarship.org/uc/item/1h6141nj. Retrieved 2010-09-01. 
  10. ↑ Gottron, Frank. "Energy Efficiency and the Rebound Effect: Does Increasing Efficiency Decrease Demand?". http://www.ncseonline.org/nle/crsreports/energy/eng-80.cfm?&CFID=11262148&CFTOKEN=7028302. Retrieved 2007-11-21. 
  11. ↑ Giampietro, Mario; Kozo Mayumi (2008). "The Jevons Paradox: The Evolution of Complex Adaptive Systems and the Challenge for Scientific Analysis". In JM Polimeni, K Mayumi, M Giampietro. The Jevons Paradox and the Myth of Resource Efficiency Improvements. Earthscan. pp. 79–140. ISBN 1844074625. 
  12. ↑ Laitner, John A.; Stephen J. De Canio and Irene Peters (2003). "Incorporating Behavioural, Social, and Organizational Phenomena in the Assessment of Climate Change Mitigation Options". Society, Behaviour, and Climate Change Mitigation 8: 1–64. doi:10.1007/0-306-48160-X_1. http://www.springerlink.com/content/n107734r313hh4wp/. Retrieved 2010-08-08. 

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