Induced Energy-Saving Efficiency Improvements Amplify Effectiveness of Climate Change Mitigation

Induced energy-saving efficiency improvements strongly influence energy use and climate change. This mechanism has previously been studied by bottomup methods in models, but the effect is debatable because of lack of empirical data needed to calibrate model parameters. We provide a top-down calibration of the relation between historical rates of various efficiency changes and energy's share of costs. To do this, we develop a modification of Solow's model of economic productivity. We find that a 1% rise in energy cost share increases energy-use efficiency by about 1.2% in the following 20 years, a higher gain compared to previous bottom-up estimates. When we incorporate this relationship into an integrated assessment model, we find that carbon prices save up to 30% more energy by 2120, relative to model configurations without the inducing mechanism. A carbon tax induces energy-saving efficiency improvements and could therefore be a more effective mitigation tool than previously recognized.