This article, written by Morten Theilgaard P.Eng., raises awareness of an ‘age old’ paradox that has interesting applications to some of the changes currently taking place in modern times. The underlying principal is that when we advance technologies, i.e. increase efficiency and thus reduce resource requirements, the actual rate of consumption of the resource increases. A fascinating and game-changing concept once understood and embraced.
I love a good paradox and I am probably not the only one that is intrigued by a statement that intuitively seems to contradict itself, however upon further investigation proves to be true. I recently learned about the “Jevons Paradox” from an adviser who helps with new start-ups:
“When we advance technologies, which makes a process more efficient (less of a resource required), the actual rate of consumption of the resource increases”.
William Jevons an English Economist formed this observation in 1865, when he saw that the demand for coal dramatically increased with the invention of the “Watt” Steam Engine; a high efficiency steam engine relative to its predecessor, the “Newcomen”.
The Rebound Effect
The invention and development of machines created a shift from local artisans to production facilities. The efficiency drove down prices of consumer goods, making products accessible to a larger portion of the population, manufacturing grew immensely, and the Industrial Revolution had begun. Mass production accelerated the depletion rate of coal and this became a big concern. Industry experts were calling for the need to develop a more efficient steam engine to conserve coal usage. While not all industry was running on steam, seeing this marked improvement in the “coal usage to power output” ratio, focus moved towards the steam engine as a better power source. So, while each application of the steam engine was using less coal, the cumulative effect was that more coal was being used than ever before.
What Jevons observed was later to be referred to by economists as the “rebound effect”. When automobile consumers were offered a more fuel-efficient vehicle, they could travel further and there was a rebound in the amount of fuel being purchased.
Applying the “Law of Demand”, the amount of rebound is related to the price elasticity. If we fix the price of gas, manage to double the efficiency of the car, we would half the gas requirement and that tank of gas can take us twice the distance. If the driver responds by travelling more than twice the distance, we have an elastic demand curve, as we now exceed the gains brought by the increased efficiency, the paradox is confirmed.
In 1980, the Jevons paradox was updated by the Khazzoom-Brookes postulate:
“Energy efficiency improvements that, on the broadest considerations, are economically justified at the micro level, lead to higher levels of energy consumption on the macro level”.
The Khazzoom-Brookes postulate was the result of the research conducted on the OPEC energy crisis of 1973 and 1979. In 1992, economist Harry Sauders took the postulate one step further by saying that energy consumption is increased in two ways, he re-enforced that efficiency brings more consumption, and secondly, increased efficiency creates an increase in economic growth, that pulls with it, an increased consumption in the whole economy.
Many Economists were seeing that the paradox was not unique to coal and energy, it could be applied to many things such as electricity and water usage through to today’s environmental economics.
The Energy industry has been severely impacted by low resource prices and in response, energy companies are searching for any means of reducing their costs to stay competitive in the marketplace. A common cost savings measure is asking engineering companies to lower their charge out rates on projects. If this is the solution, perhaps the focus should be towards efficiency and the total hours spent?
The Value Lives in the Engineering Design
When we look at how new engineering projects are executed, there is a lot of time spent on conceptualizing a new facility which ends up looking like what has always been done before. The cost is time, effort and results in a cost estimate with a high degree of uncertainty. Why do we not just pick up from where the last project left off? I agree, that each new project has its own nuances which needs to be addressed, however the value still exists in the underlying concept and the knowledge of what worked and what didn’t, so why repeat this effort? The value lives in the engineering design.
Create More Engineering Jobs by Decreasing Hours to Design Projects
Owners of designs could recoup some of their previous costs by making their designs available to others and new designs can be accelerated by acquiring this shared knowledge and continuing the work. The cost savings is realized by less hours spent, due to less effort in churning. The savings from each project can be combined into new budgets. As there are many unfunded projects waiting on the shelf for their day to come; these projects can now be funded earlier, more engineering is required, the additional assets contribute to the Owners cash flow and engineers are put back to work. A positive upward spiral begins.
Every day, I learn from people I meet. The Jevons Paradox is only one such learning and I would be very interested in hearing your thoughts of the application of the Paradox and where the industry should set its course as it navigates into the future.