Analyst: ‘Energy efficiency targets help, but they don’t go all the way’

This article is part of our special report Energy performance of buildings.

When EU ministers discuss new energy savings objectives for 2030, they should also consider the actual policies needed to achieve them, because targets alone won’t deliver, says Hector Pollitt.

Hector Pollitt is Director of Cambridge Econometrics. The UK-based economic research consultancy recently produced a study for the European Commission which for the first time attempted to measure the impact of energy efficiency on a broad range of policy areas, including health, the environment and public budgets.

The European Commission asked you to produce a study on the macro-level and sectoral impacts of energy efficiency policies, which was published in July. What made this study different from the previous ones that have been produced on energy efficiency?

Previous studies were very much focused on the economy whereas this one built upon previous work by the International Energy Agency (IEA) looking at the multiple benefits of energy efficiency. It covered six areas: 1) the economy and labour market, 2) health, 3) environment, 4) social cohesion, 5) public budgets and, 6) industrial competitiveness.

What were the main findings?

There was always the idea that energy efficiency would bring benefits in all these areas. But this is one of the first attempts to quantify it across different scenarios that can be linked to real-world policy.

In most areas, the results are quite positive, certainly in terms of the GDP and jobs impact but also the health benefits which are in the several billion euros per year. For the environment, the effects are mostly positive, mainly in terms of decreasing demand for natural resources.

On social cohesion, the benefits are potentially quite large but they depend on the exact types of policies that are implemented. On public budgets, the impact is positive in part because energy savings improve the economy in general, with more jobs being created rather than benefit payments, for example.

How solid are those findings? After all, the study was breaking new ground so how sure are you about the projections?

The approaches that have been applied, many of them were used in other areas before so they are not completely new. Part of the new bit was to link the economic modelling work done previously and extend it to other areas. Each bit has its own level of certainty or uncertainty, which we’ve brought in the report. But the direction is quite clear, the rough magnitude is quite clear. And like with any modelling exercise, we don’t want to get too high up on the exact numbers.

When you put the figures together, was there something that surprised you, something you found that you were not expecting?

Because of the previous IEA literature, we knew what we were expecting.  So to me, there were no major surprises.

In general, the higher the level of ambition the more positive the results.  But we are a bit less certain about the more ambitious scenarios because the sort of policies that need to be implemented are quite different from what we have today.

The study assesses the positive impact of renovation for the economy, jobs, health, environment, etc. But did you find any negative impacts of energy efficiency policies in some areas?

There are always some trade-offs. There are negative effects on the energy supply sector for example: If there is lower demand for energy, the market becomes smaller.

There are some other minor effects in the environmental field. We see for example a slight increase in material consumption just because many technologies to renovate buildings require a lot of materials to be used upfront, like cavity wall insulation, or double or triple glazing. But the effects are not big.

The trade-off has been highlighted for electric cars for example, with increased demand for EVs raising demand for some critical raw materials.

Yes, but you need to balance that against reduced energy extraction. A lot of countries still mine coal, for example, so lowering demand will help the environment. And similarly, if there is lower demand for electricity there could be lower demand for wind turbines that are affecting landscapes.

The report effectively sets out what the impact could be if the policies to achieve those targets are successful. And of course, it’s quite a significant challenge to meet those targets. So whilst the report does a good job at identifying the potential wins for jobs and the economy, we are by no means there yet.

This is why we are measured, it’s because there is a long way to go to get to these targets. It can’t be assumed that it will just happen, which is unfortunately often the case with energy efficiency.

As you go up in the energy efficiency ambition, that means the costs go up as well, right?

Yes, the scale of the investment that’s required goes up, quite significantly. And with that, the scale of the benefits that we’ve identified also goes up quite significantly.

The challenge is to ensure that the conditions are there for the investments to take place, like access to finance for example. And even education – making sure the average household is aware of the things it can do to improve energy efficiency.

Several targets were included in the scenarios, ranging from a 30% to 40% cut in energy consumption by 2030. Is the 40% reduction scenario attainable given the scale of the investment needed to get there?

We try to avoid making direct policy recommendations, we provide the numbers for the policymakers to make decisions.

Clearly, the amount of investment required increases as you raise the ambition, which means the scale of the challenge becomes bigger and the policies required as well. It’s difficult to say which particular scenario is best placed, that is more a question for the policymakers.

Energy efficiency renovations in buildings are still perceived mostly as a cost but they are also an investment. How do you turn that logic around?

Unfortunately, people don’t behave in a fully rationally economic way. We do hear a lot in the media about high energy bills or high energy prices. So I think there is definitely a question of messaging, making the average household aware. Even though there is cost upfront, further down the line, this is going to benefit you.

To the policymakers, the broad range of benefits should now be clearer. And it includes energy security, which should be important to them.

Still, politicians seem to view energy efficiency as a cost, not an investment. And EU member states are still trying to dilute the energy efficiency targets that are discussed currently in the Council. Can you make the case to them clearer?

Yes, the study provides information to feed into this debate. As most of the outcomes are positive, we would hope it is being interpreted with policies that are consistent with that. But how the report is used is a question for the politicians.

Imagine you were invited to make a presentation of your study to the next meeting of EU energy ministers. What part of the study would you highlight to convince them of raising their ambition level?

The headline numbers are always going to be jobs and GDP. The potential for job creation from energy efficiency, which increases with the level of ambition – these are all jobs that are local because they are mainly to do with the installation. So the range on employment goes from 0.2% in the 30% scenario to 2.1% in the 40% scenario, which across the whole of Europe represents quite a large number of jobs.

Anything else you’d like to highlight about your study?

The report looks into the targets but there is still the challenge about the policies to meet these targets. For example, making sure resources are available to invest in energy efficiency without taking them away from elsewhere in the economy. This is important because the economic and the labour market results depend on this.

There is an important role for signalling here. If you want ambitious energy efficiency policies, the companies that make the products need to know in advance that there is going to be demand for these products. They need to believe that the policymakers say things that can be realised and will be backed up by policy, not just targets. Because the targets help, but they don’t go all the way.

Politicians seem reluctant to do both – the targets and the policies…

Businesses don’t like uncertainty. For the products they manufacture, it’s important they get some kind of signal. Jobs and GDP are the potential macro-benefits that politicians will look for but for the individual companies, they need to have the capacity available – factories, labour, and finance – to invest in all of this.

They need to believe that the targets will be backed by policies because they need plenty of time to make those investments. And what the report shows, is that if you do that, the benefits are far larger across the whole economy.

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