Jevons Paradox

In economics, the Jevons [jev-uhnzparadox 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. In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to increased consumption of coal in a wide range of industries. He argued that, contrary to intuition, technological improvements could not be relied upon to reduce fuel consumption.

The issue has been re-examined by modern economists studying consumption rebound effects from improved energy efficiency. In addition to reducing the amount needed for a given use, improved efficiency lowers the relative cost of using a resource, which tends to increase the quantity of the resource demanded, 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 resource use to increase.

The Jevons paradox has been used to argue that energy conservation is futile, as increased efficiency may increase fuel use. Nevertheless, increased efficiency can improve material living standards. Further, fuel use declines if increased efficiency is coupled with a green tax or other conservation policies that keep the cost of use the same (or higher). 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 paradox.

The Jevons paradox was first described by the English economist William Stanley Jevons in his 1865 book ‘The Coal Question.’ 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 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.’ At that time many in Britain worried that coal reserves were rapidly dwindling, but some experts opined that improving technology would reduce coal consumption. Jevons argued that this view was incorrect, as further increases in efficiency would tend to increase the use of coal. Hence, improving technology would tend to increase, rather than reduce, the rate at which England’s coal deposits were being depleted.

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. 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%, exceeding the original efficiency gains. This effect has been called ‘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 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), then the quantity of fuel used would increase, not decrease. If however, the demand for work is inelastic (unchanging), 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.

In the 1980s, economists Daniel Khazzoom and Leonard Brookes revisited the Jevons paradox in 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, 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 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.

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 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 microeconomic and macroeconomic effects, technological progress that improves energy efficiency will tend to increase overall energy use.

Jevons warned that fuel efficiency gains tend to increase fuel use, but 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, increased fuel efficiency will not reduce the rate of depletion of fossil fuels.

The Jevons paradox is sometimes used to argue that energy conservation efforts are 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 have been raised against this argument. First, in the context of a mature market such as for oil in developed countries, the direct rebound effect is usually small, and so increased fuel efficiency usually reduces resource use, other conditions remaining constant. 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) that keeps the cost of fuel use the same or higher.

The Jevons paradox 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. As the Jevons paradox applies only to technological improvements that increase fuel efficiency, the imposition of conservation standards that simultaneously increase costs does not cause an increase in fuel use. To ensure that efficiency enhancing technological improvements reduce fuel use, efficiency gains must be paired with government intervention that reduces demand (e.g., green taxes, a cap and trade programme, or higher fuel taxes). The ecological economists Mathis Wackernagel and William Rees have suggested that any 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.’ 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.

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