Barriers to Energy Efficiency: More Than Just Market Failure

Abstract

The importance to environmental policy of improving energy efficiency is now widely agreed. It is also well established that levels of energy efficiency are below the optimum for economic efficiency, i.e. there are market barriers to energy efficiency. Neo-c1assical economic theory provides a taxonomy of the barriers in terms of market failure and can evaluate short term policy options to address them. However, this paradigm does not explain the underlying causes or why all the market failures act in the direction of lower energy efficiency. Economic analysis alone cannot identify long term, sustainable approaches to removing the barriers; input is needed from other disciplines. A review of the multi-disciplinary literature identifies some common elements in the nature of the barriers: a dichotomy between producers and consumers, centralisation in energy supply and planning, a commodity view of energy, and complexity of energy efficiency markets. It is concluded that these are fundamental characteristics of energy use in a modem economy. They constitute a meta-barrier - a framework in which the other barriers can be described. Barriers to energy efficiency therefore remain deeply entrenched and, in the short term, optimisation of energy efficiency is unlikely. However, future changes in technology, market structures and institutions may open new opportunities to address the fundamental problems in the longer term.