Jevons paradox

William Stanley Jevons

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. It is historically called the Jevons Paradox as it ran counter to popular intuition. However, the situation is well understood in modern economics. In addition to reducing the amount needed for a given output, improved efficiency lowers the relative cost of using a resource – which increases demand. Overall resource use increases or decreases depending on which effect predominates.

History

The proposition was first put forward by William Stanley Jevons in his 1865 book The Coal Question. In it, 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. Jevons argued that any further increases in efficiency in the use of coal would tend to increase the use of coal. Hence, it would tend to increase, rather than reduce, the rate at which England's deposits of coal were being depleted.

Cause

Rebound effect

Main article: rebound effect (conservation)

Elastic Demand for Work: A doubling of fuel efficiency more than doubles the amount of work demanded, increasing the amount of fuel used. Jevons Paradox occurs

Inelastic Demand for Work:A doubling of fuel efficiency does not double the amount of 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. Jevons Paradox occurs when the rebound effect is greater than 100%, exceeding the original efficiency gains. This greater than 100% rebound is known as backfire.

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 actually 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 Jevons Paradox less likely to occur. Additionally, any change in the demand for fuel would also have an effect on the price of fuel, and also on the effective price of work.

Khazzoom-Brookes postulate

Main article: 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, and showed that it was consistent with neo-classical growth theory under a wide range of assumptions.

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. That is, the rebound effect is usually less than 100%. 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

In The Coal Question, Jevons argued that improvements in fuel efficiency do not reduce the use of fuel, "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." 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, efficiency increasing technological progress tends to increase, rather than decrease, fuel use.

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."

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).

Several points can be raised against this argument. 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. (However, fuel use may still increase because of faster economic growth.) Second, even if increased fuel efficiency does not reduce the total amount of fuel used, this ignores other benefits associated with increased fuel efficiency. For example, increased fuel efficiency may mitigate the price increases, shortages and disruptions in the global economy associated with peak oil. Third, fuel use will decline if increased fuel efficiency is met with government intervention (e.g. a green tax, license fees, etc.) that keeps the cost of use the same. By mitigating the economic effects of government intervention designed to promote ecologically sustainable activities, efficiency-improving technological progress may make the government intervention more palatable, and more likely to be implemented.

Additionally, the Jevons Paradox only applies to technological improvements that increase fuel efficiency, corporate or government policies that impose efficiency standards usually increase costs, and so will not display the Jevons Paradox.

External links

• Beating the Energy Efficiency Paradox by the Rocky Mountain Institute.
• Video on Jevons Paradox
• Report on The Economics of Energy Efficiency to the UK House of Lords.
• Does energy efficiency save energy? The debate and its consequences a survey article from Applied Energy.
• Energy Efficiency Works, and It Saves Money, New York Times, November 26, 1994.
• Conservation Wastes Energy, Wall St. Journal, May 17, 2001.