Carbon trading and the rebound effect: When power saving harms the climate

My own translation of an edited comment published originally in German on Klimareporter. Last revision on September 11, 2020.

For 25 years now, the European Union has been attaching colorful labels to washing machines, televisions, and the like, which tell customers by means of energy efficiency classes whether an appliance consumes comparatively much or little electricity.

Nine out of ten Europeans know the efficiency label and take it into account in their purchasing decisions. After all, if you replace the old G-class power guzzler with a new A-class device, you have not only done a good thing for your wallet.

Since, despite the energy transition, around 40 percent of electricity still comes from the combustion of coal and gas, we are also making an important contribution to climate control, right?

Wrong. Unfortunately, no CO2 is saved by the replacement at all. In the worst case, the change could even harm the climate. The detailed explanation for this grotesque has recently been published by Grischa Perino and me in the journal Resource and Energy Economics. However, the logic is easy to explain with an example.

Let's assume that my new refrigerator consumes 20 percent less electricity than the old one. With a given electricity mix - in Germany, an average of around 400 grams of CO2 are produced per kilowatt hour - this means that, from a purely technical point of view, the CO2 savings are also 20 percent.

However, this calculation leaves out two important things: the “human factor” and EU emissions trading.

The human factor

Firstly, the effective price of a volume hour of cooling with a class-A machine is lower than with the class-G power guzzler. Accordingly, it hurts less to lower the working temperature so that the milk lasts longer, or to go for a larger refrigerator.

Secondly, I spend the savings on my electricity bill on other things. But these can also release CO2 - for example, a weekend trip by car.

Such adjustments in consumption behavior - experts speak of "rebound effects" - eat up at least part of the technical savings potential.

The emissions trading problem

But things get really crazy when you consider the EU emissions trading scheme to which all European power generation and other industries are subject.

The emissions trading system caps all greenhouse gas emissions of the facilities covered and breaks them down into tradable emission allowances, which are distributed or auctioned to the facility operators. An emissions allowance entitles the holder to emit one ton of CO2 or an equivalent quantity of other greenhouse gases.

In principle, this is a clever idea, because now the emissions cap can be controlled precisely, conveniently, and transparently via democratic institutions and adapted to international legal commitments such as the Paris Agreement.

Trading of emission allowances then “only” determines in a second step in which facilities the emissions are produced or avoided. In a functioning market, the latter will happen in precisely those sites where cutbacks are relatively cheap.

However, there is a catch. Emissions trading does not combine well with additional measures in the industries covered. 

My new refrigerator might use less power, but my electricity provider will simply sell the allocated emission allowances to other plant operators. And they will use them.

Thus, the corresponding emissions are not saved, but merely relocated: Of the 20 percent CO2 savings that my refrigerator swap-out could technically bring about, zero percent remains to this point.

Together with the rebound effect described above, the balance sheet even turns into the red. The bottom line is that I am harming the climate and at the same time increasing the profits of coal-fired power plants, which now get emission allowances cheaper because there is less demand for them.

So, is saving electricity obsolete?

Now should I keep my old power guzzler to do something good for the environment? Of course not. After all, electricity generation harms the environment in many ways, depending on the production method.

But the mere fact that this question comes up and that other similar paradoxes arise in relation to emissions trading, for example in connection with the coal phase-out, the promotion of electric mobility or individual voluntary action, should give cause for concern.

Emissions trading is so clever precisely because it is sufficient. The reality, however, is that many other climate policy measures coexist at European, national, and local levels, and many people feel the need to contribute to climate action on their part. 

Yet it is precisely this intrinsic motivation that can only be harnessed if it is possible to identify quickly and easily whether a certain action will help the climate or not. Contradictions of the kind described above are of no help in this respect. And since the introduction of the “market stability reserve” last year at the latest, the EU Emissions Trading System has gotten so complicated that consumers can hardly keep track of the climate effects of their own actions.

The are solutions

However, alternatives do exist. For example, if CO2 emissions were directly priced with a levy instead of via emissions trading, then saving electricity would translate directly into CO2 savings.

Complexity reduction in action - certainly with its own set of issues. As in modeling, Paul Valéry's dictum applies here as well: “Everything simple is wrong, everything complicated is useless.”

As an aware consumer, you can at least avoid the rebound effect by using just two rules of thumb: First, do not adapt your consumption behavior to the efficiency class of a device! The new (electric) car has a lower norm-cycle consumption than the old one? Great, but don't drive faster or farther because of it!

Second, you should spend the money you save in your electricity bill on activities that are as climate neutral as possible. Or you use it to cancel emission allowances - yes, that is actually possible.

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