We commonly ignore profitable actions

This is an extract from my doctoral research. It is well known in some research areas. Often, in wider society, we don’t believe we will ignore money.

Practical analysis of energy efficiency and other GHG mitigation options often makes the narrower assumption that people are cost-minimisers. Such assumptions are undermined by experience with energy efficiency programmes. It has long been recognised that consumers do not necessarily act on their stated values, and fail to take up measures that appear on paper to be economically worthwhile.
Intergovernmental Panel on Climate Change^

Energy efficiency refers to improvements that can be undertaken that reduce the amount of power used for a given activity. A clear example is lighting. The same amount of light can be delivered from a variety of sources including incandescent, compact fluorescent and LED bulbs. An LED bulb is approximately an order of magnitude more efficient, delivering the same quantity/intensity of light while using 10 times less electricity. Changing a light bulb, or lighting sources, is relatively simple, low risk, with savings and profits quickly realized (IEA, 2006 pp25-28)^^. Consequently, from a purely objective or financial perspective, high rates of uptake and implementation should be expected (Gillingham, Newell, & Palmer, 2006; Gillingham et al., 2009). 

Energy efficiency opportunities extend well beyond artificial lighting and are ubiquitous across human power uses. The term is used specifically for technology as well as more broadly across a physical system. For example, using waste heat from electricity generation (combined heat and power) can be regarded as energy efficiency (Garnaut, 2008 p445; Sorrell, 2007 p11; von Weizsäcker et al., 2009). There are multiple examples including designing buildings, suburbs, transport systems, industrial production, and across primary and secondary industry (Farrell, Nyquist, & Rogers, 2007; von Weizsäcker et al., 2009). Importantly, cutting carbon-intensive power use through efficiency can address greenhouse gas emissions and these technologies are commonly discussed in relation to climate change IPCC, 2007b; Pacala & Socolow, 2004).*

Despite this evidence, cost-effective changes generating profitable returns through reduced energy bills are not being implemented. Studies (e.g. Energy Efficiency and Greenhouse Working Group, 2003; Enkvist et al., 2007; Farrell et al., 2007; Gillingham et al., 2009; A. Lewis et al., 2008; Sanstad, Hanemann, & Auffhammer, 2006) demonstrate that substantial unrealized efficiency opportunities exist. Internationally, these assessments typically calculate large savings (negative cost greenhouse gas abatement) that can be achieved through efficiency measures. There are numerous examples such as Farrell, Nyquist and Rogers 2007) who find that efficiency could be implemented at more than twice the current rates. For lighting alone, the International Energy Agency finds that US $2.6 trillion of costs could be avoided by shifting to more energy-efficient lights globally IEA, 2006 p28; Waide, 2007 p26). 

In Australia, six giga-tonnes of greenhouse gases cuts are available at a net profitable return or at zero cost (A. Lewis et al., 2008). Nearly 25% of the total target for Australian greenhouse gas emissions reduction could be met with profitable or zero net cost actions.** Similarly, a major Australian Government report all state, territory and the federal governments) calculates the potential for emissions reduction from efficiency opportunities. It finds 20 to 30% of Australian emission reduction requirements can be achieved from efficiencies with a payback period of less than four years Energy Efficiency and Greenhouse Working Group, 2003). 

The Energy Efficiency and Greenhouse Working Group (2003) using a conservative scenario 50% adoption in 12 years of its low improvements scenario) finds the following benefits: 

• Real GDP would be $1.8 billion higher (+0.2%) 
• Employment would increase by around 9000 (+0.1%) 
• A 9% reduction in stationary final energy consumption
• A 9% reduction in greenhouse emissions from the stationary energy sector.

A paradox

Over a decade ago, Cameron and Quinn (1988) claimed that by exploring paradox, researchers might move beyond oversimplified and polarised notions to recognise the complexity, diversity, and ambiguity of organisational life.
Marianne Lewis^^^

Such benefits are a two-part paradox. The first element of this is that there is an enduring gap between the rate at which such efficiency opportunities should be implemented—as
gauged by economic theory—and actual practice (DeCanio, 1994, 1998; Gillingham et al., 2009; van Soest & Bulte, 2001). The gap is well documented with a wide range of publications addressing the topic (Shove, 1998; Thollander, Palm, & Rohdin, 2010; Weber, 20) However, the existence of such a paradox is not necessarily widely accepted (Gillingham & Palmer, 2014). 

Economic theory struggles to explain the gap. For example, Diederen, Van Tongeren and Van Der Veen 2003) analyse a specific case using a hurdle rate – that is, assuming that people are unwilling to invest as they may believe that in doing so they miss out on other potential profitable opportunities. However, the hurdle rate only correctly models 6% of businesses that did not invest in such efficiency. Consequently, hurdle rates do not account for this gap (Diederen et al., 2003; Sanstad, Blumstein, & Stoft, 1995). 

How people think they act, versus what can be measured in practice, is a second element of the paradox. Economically rational human behaviour should result in the adoption of energy efficiency actions at optimal rates and such rational behaviour does not occur Gillingham et al., 2009; van Soest & Bulte, 2001). This paradox manifests as the difference between polarised perspectives – that we will act on climate change mitigation if it is in our economic interest to do so – and actual behaviour observed from energy efficiency studies. Such an economically driven action perspective – we do not act on climate change as it is not in our economic interest to do so – is an established reason for the lack of action on sustainability or climate change issues. Stern 2007b) and Garnaut 2009), for example, highlight market failure, as the world’s ability to absorb carbon emissions is overused and using this resource is free. However, slow implementation of economically beneficial energy efficiency actions contradicts theory that humans behave in such a rational manner. Yet the assumption that we do act in this way dominates climate change discussions – a paradox as defined by Caprar et al., (2010 pp. 146-147). 

For efficiency, Gillingham, Newell and Palmer (2009) analyse this paradox—defining it as a significant difference between the level of energy efficiency implementation we observe and what could be regarded as ‘socially optimal’. In seeking to understand this they argue from two perspectives: market and non-market failures. Market failures include the perception of cost and price, as well as more objective pricing and investment barriers. NonN market failures are those particularly related to individual and group actions—that is, behavioural failures. 

Within such broad categories there are a range of theories and frameworks such as discount rates —a ‘discount’ on future cost savings and profits that is typically applied to investment decisions (Weitzman, 1998). The higher the rate, the less value placed on profitable future savings. For typical investments, this rate is approximately 5 to 10%. However, the implied discount rates for energy efficiency projects are estimated at 20% or more and continue upwards above 100% Gillingham et al., 2009; Jaffe & Stavins, 1994b; Sanstad et al., 2006). 

These high discount rates are well beyond levels expected for such investments. This raises significant questions about the presence of other factors, such as substantial non-market behavioural influences. Soest and Bulte 2001) highlight this, saying that “the economic literature has difficulty explaining why firms don’t undertake profitable investments in energy saving”. Gillingham et al. 2009) are more direct—discussing behavioural economics and non-market barriers and arguing that “consumers are irrationally reluctant to move from the status quo” and “systematic biases may exist in consumer decisionmaking (sic)”. Stern (2007b p378) similarly notes that “consumers and firms frequently do not make energy efficiency investments that appear cost-effective”. 

Consequently, the literature and analysis support considering objective factors such as discount rates and market forces), as well as subjective influences such as individual perspectives and organisational cultures) to explain and understand individual and society responses to energy efficiency. This paradox reflects the main lines of enquiry for this thesis N why do some organisations or groups act while others may not? For example, within the case example of energy efficiency, employees of the companies in this study describe success and failure that is not necessarily based on economics (see Chapters 4 and 5 of my PhD here>).