The Jevons Effect , the Khazzoom-Brookes Postulate and recent IEA assumptions – Is it time to rewrite economic theory or face reality ?
28 COLUMN
ESG | JULY-AUGUST , 2023
The economics of climate change
The Jevons Effect , the Khazzoom-Brookes Postulate and recent IEA assumptions – Is it time to rewrite economic theory or face reality ?
BY DR KENNETH PEREIRA
IN HIS book “ The Coal Question ”, published in 1865 , British economist William Jevons observed that England ’ s coal consumption substantially increased after James Watt developed the Watt steam engine . The Watt engine was a more efficient version of Thomas Newcomen ’ s earlier design . Thanks to Watt ’ s improvements , coal became a more cost-effective energy source , leading to increased use of the Watt engine design in a wide range of industries . With greater industrial application came a greater demand for coal , causing Jevons to note : “ 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 the peak of the Industrial Revolution , many in Britain were concerned that the nation ’ s prized coal reserves were rapidly falling , and 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 the rate at which Britain ’ s coal deposits , a finite resource , would be depleted , thus threatening the nation ’ s future energy security . Jevon ’ s thinking was later termed “ the Jevons Effect ”.
MORE RECENT RESEARCH ON THE JEVONS EFFECT
The Jevons Effect is probably the most widely known paradox when assessing environmental economics . It is sometimes also called the rebound effect ( or take-back effect ), and it refers to the reduction in expected gains from new technologies ( that increase the efficiency of using a particular resource ) because of behavioural or other systemic responses .
Figure 1 : Historical and Projected Energy Supply for the Period 2000 to 2050
In more modern times ( 1980s ), the then chief economist of the United Kingdom Energy Authority , Leonard Brookes , revisited the Jevons Effect for the specific case of society ’ s energy utilisation . Brookes argued that attempts to reduce energy consumption by increasing energy efficiency raised the demand for energy in the economy as a whole . Independent research in the United States by Daniel Khazzoom reinforced the same hypothesis .
In 1992 , the economist Harry Saunders dubbed the work of Khazzoom and Brookes the “ Khazzoom-Brookes Postulate ”, a concept similar to that of the Jevons Effect . Saunders added to the existing research , stating that increased energy efficiency tends to increase energy consumption in two ways . First , it makes the use of energy relatively cheaper , thus encouraging increased use ( the direct rebound effect ). Secondly , increased energy efficiency increases real income and leads to increased economic growth , which then ramps up energy use for the whole economy .
CLIMATE CHANGE , THE JEVONS EFFECT AND WHY IT MATTERS
In 2021 , the International Energy Agency ( IEA ) published “ Net Zero by 2050 – A Roadmap for the Global Energy Sector ”. In this document , the content of which has been widely cited by politicians , media and others , it is projected that the total energy supplied in the early 2020s of just over 600 Exajoules ( EJ ) will fall to 550 EJ in 2030 ( i . e . seven per cent lower than in 2020 ).
This is projected to occur despite significant increases in the global population ( between about two and three billion people ) because of a fall in energy intensity ( the amount of energy used to generate a unit of Gross Domestic Product ( GDP ). Figure 1 , below , shows the IEA projections .
Based on its assumption of a projected fall in energy intensity , the IEA has , in the same publication , called for a halt in investments targeting the development of fossil fuel projects that have not been sanctioned as of Dec 31 , 2021 .
Consistent with the learnings from the Jevons Effect ( more recently confirmed by the Khazzoom-Brookes Postulate ), if energy is affordable ( an objective of the Energy Trilemma – see Figure 3 ), then it is probable that human behaviour will adjust to demand energy at least the levels seen currently . Thus , the critical assumption made by the IEA in their 2021 document proposing pathways to a net zero world may require review .
If demand is unlikely to drop as projected in the coming decades ( Figure 1 ), then there will be a shortfall of supply , causing whatever available primary energy sources to increase in price , leaving those least able to afford higher cost levels , the most impacted . Is such a scenario a theoretical aberration , or could it manifest into a likely reality ?
THE LEARNINGS OF 2022
Western Europe faced an energy security threat when conflict arose between Russia and Ukraine in early 2022 . At the initiation of the conflict , Russia provided Western Europe with 35 per cent of its gas supply .
Curtailment of this supply as a punitive measure against the Russians without alternative replacement also meant that Western Europeans would face energy starvation .
With political and economic chaos on the horizon and winter only a few months away , European governments were forced to urgently intervene in the Liquified Natural Gas ( LNG ) markets to mitigate a potential energy shortage in the European Union ( EU ). LNG prices spiked as cargoes meant for the emerging economies from Thailand to Pakistan and other African countries were redirected to European ports .
Even more glaring , after several wealthy governments of first-world nations made this energy grab , they subsidised the actual cost of energy delivered to their citizens to protect the levels and quality of their livelihoods and minimally impact economic activity .
This was not the case for those in the emerging economies . In the poorer countries , economic activity and livelihoods at manylevels were significantly impacted as energy prices soared and governments could not fulfil a fundamental obligation of delivering affordable and available energy .
Figure 2 shows price movements in EU Gas Import Prices . Clearly , the response of the EU to the Russian / Ukraine war impacted energy prices globally in mid-2022 .
Let ’ s project forward to a 2050 world in which there :
• will be 2-3 billion additional people , each striving to increase their standard of living to that of their European or American fellow global citizens , performing energy-intensive activities ;
• would have been a prior period of continuous under-investment in traditional energy delivery systems ; and