Efficiency paradox: Americans pour cost-savings into more and bigger

energy-guzzlers

CIBC (CM: TSX; NYSE) - Energy-efficiency initiatives and regulations do little to cut energy use and often end up increasing consumption, finds a new report from CIBC World Markets.

"While seemingly perverse, improvements in energy efficiency result in more of the good being consumed - not less," says Jeff Rubin, the Chief Economist and Chief Strategist at CIBC World Markets. He finds an efficiency paradox where consumers have taken the cost-savings gained through greater efficiency and turned around and spent those savings on more and bigger energy-guzzling products.

Mr. Rubin notes that with the depletion of conventional oil supply becoming more and more evident and concerns growing over greenhouse gas emissions, energy-efficiency regulations have been widely viewed as the answer. Efficiency gains play a prominent role in most government plans to manage energy consumption, including the latest U.S. Energy Act. But his work finds that these programs are compounding rather than solving the problem.

"The problem is that energy efficiency is not the final objective -reducing energy consumption must be the final objective to both the challenges of conventional oil depletion and to greenhouse gas emissions," he adds. "Despite the huge gains in energy efficiency, that is simply not happening. Instead, energy consumption is growing by ever increasing amounts."

The report finds that while energy use per unit of U.S. GDP has fallen by almost 50 per cent since 1975, total energy usage in the U.S. economy has risen by more than 40 per cent in the same period. Most government efforts to promote greater energy efficiency have been targeted at the transportation and residential sectors which together account for half of total energy consumption in the American economy.

"While these initiatives have largely been successful at promoting large increases in energy efficiency - almost double the pace in the rest of the economy - overall energy usage in the transportation and residential sectors has risen faster than in the rest of the economy," says Mr. Rubin. "In short, energy usage has risen fastest where energy efficiency gains have been the greatest."

The situation is the same for carbon emissions where emissions from the transportation and residential sectors have risen by 40 per cent, double the pace of emission growth in the rest of the economy over the last decade.

The report notes that the transportation sector is one of the best examples of the efficiency paradox. The sector accounts for almost 30 per cent of end-use energy consumption and accounts for 70 per cent of oil consumption in the form of gasoline, diesel and jet fuel. The sector has seen steady and substantial improvements in energy efficiency since the OPEC oil shocks.

Since 1980, average mileage per gallon has improved by nearly 30 per cent but these gains have not translated into actual savings in the amount of oil consumed. American drivers consumed all of the gains in fuel efficiency by driving more and by driving larger vehicles. In 1970, the average American car was driven 9,500 miles a year, today it is driven over 12,000 miles a year.

"While initially the pursuit of fuel economy in North American led to the replacement of gas-guzzling eight cylinder full size cars with four cylinder sub-compacts, over time steady improvements in fuel economy encouraged Americans to drive larger and larger vehicles," notes Mr. Rubin.

"The number of light trucks, which include SUVs, vans and pick-ups, has risen 45 per cent between 1995-2005 - nine times faster than passenger cars. In fact, light trucks accounted for more than 80 percent of total new vehicle registrations since the early 1980s, making itself without question, the vehicle of choice for your standard American family. On average, light trucks have 25 percent worse fuel economy than the standard car."

But Mr. Rubin found the story does not end there. Improvements in fuel economy have allowed more people to drive cars. Today there are 130 million more vehicles on the road in America than there was in 1970. Over the past decade, the number of cars on American roads grew at twice the pace of household formation. Improved fuel efficiency that has brought down the operating cost of running a vehicle has encouraged more and more American households to own more than one.

The same patterns between improved efficiency and growing usage found in the transportation sector are also amply in evidence in the residential sector, which accounts for roughly 20 per cent of all energy usage in the American economy. Improvements in thermal insulation and in the energy efficiency of major appliances including furnaces and air conditioners have all contributed to major gains in energy efficiency over the last three decades. Virtually every major household appliance in the U.S. must now meet some minimum energy efficiency standard.

But these efficiency gains have also been swallowed up by large increases in usage - most noticeably by air conditioning and heating systems. The energy efficiency of air conditioning systems has risen 17 percent since 1990 but during the same time the number of air conditioning units has risen by 36  percent. The key reason why usage has grown so much faster than efficiency is the never ending trend toward larger and larger American homes with larger and larger heating and cooling requirements. Since 1950, the average American home has grown from 1000 square feet to almost 2500 square feet. And the trend to ever larger houses continues. Today, almost one third of all new homes in the U.S. are over 2500 square feet.

Over the last 15 years the energy efficiency of refrigerators has improved by just under 10 percent but the number of refrigerators is up 20  percent, due largely to the increased frequency of a second refrigerator in the home. Add to that, the ever increasing number of power consuming appliances like computers found in today's standard American home and the trend toward rising, not falling, energy usage per household is very clear.

Mr. Rubin believes that a world facing the twin challenges of oil depletion and global climate change has never had a greater need for energy efficiency but feels that the scope of current initiatives will not see this achieved.

"In order for efficiency to actually curb energy usage, as opposed to energy intensity, consumers must be kept from reaping the benefits of those initiatives in ever-greater energy consumption. Otherwise, energy usage will be the beneficiary of our best efforts towards greater energy efficiency."