It is time for policy makers to recognize they can play a more active role in encouraging consumers to invest in and gain from energy efficiency. Steps taken by many individuals can save vast amounts of energy and boost both local markets and the national economy.

Mark D. Levine is director of the Environmental Energy Technologies Division at the Lawrence Berkeley National Laboratory in California.

Energy efficiency is usually regarded as a personal activity that can be recommended to individuals but has limited impact on a nation. This is a regrettable misperception. Energy efficiency is not only a tool for achieving energy security; it is the most potent of all the tools in our arsenal. Well-designed and implemented energy efficiency policies can not only substantially reduce energy demand but also give a boost to an economy.

Energy Conservation Versus Energy Efficiency

Energy conservation has come to mean actions taken by individuals to use less energy in carrying out their everyday tasks or even not doing certain activities so as to save energy. There has been only one time when energy conservation was implemented as a serious policy in the United States. This was during the electricity crisis in California in 2001. The state was in a desperate situation: There was no time to build more power plants, and importing electricity from outside the state was not viable. Energy efficiency—as defined below—could not come into play fast enough.

California came up with creative ways of inducing energy conservation, especially the 20/20 program, which gave consumers a 20 percent rebate on their electricity bills if they cut electricity use by 20 percent. During the crucial summer months of 2002, conservation yielded 11 percent electricity and 16 percent peak power savings. The state paid for the savings. But the money stayed in California, going to electricity consumers, and the rebate cost was a fraction of the supply cost, especially at the very inflated prices prevailing at the time.

Energy conservation is not a favored policy except in crisis. The more effective approach involves investment in energy efficiency. Please note the word "investment." Energy efficiency is an investment strategy, and government policy is as important to its success as the decisions of a country's central bank are to its macroeconomic policy. Energy efficiency is not a short-term policy; it is, in fact, effective only if carried out consistently over years and decades.

The Economics of Energy Efficiency

To many people, energy efficiency is either ethereal or so small as to make little difference. People easily relate to solar energy installations (for example, photovoltaic on rooftops) or wind energy. But energy efficiency does not lend itself to visualization. And it is achieved through the implementation of many measures, each of which contributes a small amount to reducing energy use.

Because policy makers typically do not recognize the importance of energy efficiency as a policy measure, it often gets ignored. Figures 1 and 2 clarify these points for the United States as a whole. Figure 1 compares energy intensity [energy consumption per unit of gross domestic product (E/GDP)] as it evolved during the three-plus decades after 1973 to what would have occurred if previous trends had prevailed.

Figure 2 shows the dramatic results of this change in energy intensity. If energy demand had continued its earlier growth patterns, we would today be using 75 percent more energy than we are.

The reduction in energy intensity is the result of structural change in the U.S. economy. The shift away from manufacturing toward services such as banking and information technology has contributed about one-third of the intensity gains. Two-thirds is from investment in energy efficiency. This means, remarkably, that energy efficiency contributed almost four times as much as new energy supply in the United States to meeting demand for energy services during the three decades since the 1973 oil embargo. For something virtually invisible and rarely addressed in high circles dealing with energy-security matters, energy efficiency has been a potent force.

The Five Major Energy Efficiency Policies

The energy efficiency gains in the United States have resulted from four explicit policies and one implicit policy. The four explicit policies have involved these:

• appliance efficiency standards;

• utility demand-side management (DSM) programs (utility investments to increase customers' energy efficiency);

• building-energy standards;

• corporate automobile fuel economy (CAFE) standards.

The implicit policy has been one by which the federal government does not stand in the way of modest energy price increases. That is, unlike other industrialized countries in which energy prices are much higher, the United States does not tax oil to reflect a broad range of external costs.

Of the four explicit policies, three are very actively pursued in the United States. The Energy Policy Act of 2005 set levels that led to 15 appliance standards. The U.S. Department of Energy, under judicial court order, is aggressively pursuing standards that will be issued over the next two to five years for 17 additional products.

DSM—utility programs working to increase energy efficiency on the customer side of the meter—appeared for a time to be stalled because of utility restructuring, but has come roaring back. One of the most successful of the utility DSM programs carried out by many utilities has involved rebates for replacing inefficient fluorescent lighting with efficient lamps.

California utilities will invest $2 billion over three years in DSM, almost double the previous level and quadruple the average over the last decade. According to the utility forecasts, this will cut electricity demand growth from 2 percent per year to 0.5 percent per year over the next decade. California is among the most aggressive states in promoting energy efficiency. Electricity demand growth is expected to be reduced by about 85 percent over the next decade, compared to a projection without the appliance/building energy efficiency and utility DSM programs. As shown by this state's pursuit of electricity end-use efficiency for at least two decades, good energy efficiency investment policies can bring significant results over the long term. This is not widely recognized by the public or by public policy makers.

The third policy involves energy efficiency standards for buildings. Like utility demand-side management, building standards are generally set at the state level and implemented at the local level. As such, performance varies greatly among states. In part because of important achievements in federal research and development (R&D) programs, energy use in new buildings is two-thirds to one-half that of existing buildings, resulting in an assurance of savings over the lifetime of the building.

There are two critical factors necessary to continue this success story: (1) revitalization of the federal R&D effort on energy efficiency in buildings, an effort that produced technology that enabled the energy efficiency improvements; and (2) strengthening of the building energy standards. Several states—especially those on both U.S. coasts—have programs for updating and strengthening standards, but most states do not.

The fourth policy—and the one that is directly related to oil supply security—is auto fuel economy standards. In the long term, the solution to oil imports will require an economically and environmentally viable replacement for oil. But this will not happen soon. Oil imports will continue to rise for the coming decades. While there is universal agreement that the United States needs to cut imports, the problem is not being addressed. This increases our peril in the world.

The problem is not intractable, except perhaps from a political viewpoint. Strengthening corporate auto fuel economy standards, much like appliance efficiency standards, has the beauty of simplicity: It applies to only a small number of manufacturers who can make the required investment to achieve higher efficiency and pass the cost on to consumers. This is also a weakness in the sense that a few strong manufacturing companies can oppose the policy in the U.S. Congress and win the battle. Manufacturers are concerned that stronger fuel economy standards will make consumers unhappy at losing important amenities—in the case of autos, size, safety, and power (acceleration). In fact, prior experience, including the original CAFE standards in the United States in 1975, shows that the industry has been able to innovate and meet what were thought to be tough standards without compromising these characteristics.

Such improvements in auto fuel economy can be achieved to the satisfaction of tens of millions of consumers in other countries. Figure 3 shows the fuel economy standards in the United States and several regions. One wonders, looking at this figure, if there may be some clouds on the horizon for U.S. auto manufacturers in world markets.

The United States can aim to achieve the 2005 European Union level of fuel economy standards by 2015 with all vehicles, including sport utility vehicles and other light and heavy-duty trucks, having the same percentage increase as automobiles. It could also agree to meet the European 2012 standard by 2020. Although either goal is unlikely to be set by policymakers, the result of such policies, which would still leave us well behind the Europeans, would be to decrease our dependence on imported oil from a projected 56 percent in 10 years to about 40 percent and from 62 percent in 20 years to 25 percent.

For many, the primary motivation for auto fuel economy is energy security. There are other economic, environmental, and safety benefits. The policy is almost certainly cost effective—the energy efficiency investment pays a healthy return. Much like the energy efficiency gains shown for the whole economy in figure 2, such investments in more efficient autos result in very significant benefits to the entire U.S. economy—annual returns of 20 percent or more compared to supply investments that provide no net benefits.

Role for Public Policy

Policies addressing energy efficiency are not adequately recognized as the major tools for increasing energy security. Even though the policies have had only limited attention and support, savings from energy efficiency over the past three decades have yielded four times the impact in meeting demand as new energy supply. Today, America's annual energy bill is $1 trillion. Without earlier energy efficiency, it would be $1.5 trillion!

Energy efficiency is an investment with a well-understood payback. The return on investment is generally high, as long as the policy is well designed and implemented. The financial return from this policy is every bit as certain as the return from an investment in a new oil well or coal mine, only generally better. The big difference between the supply and demand investments is that the former goes to companies that have strong incentives to pursue them. The latter generally are spread among millions of consumers. These consumers are often not aware of the benefits.

Because the energy efficiency investments often are not made without strong policies to promote them and because energy demand growth has very large impacts on the nation, there is a strong case to be made for the role of public policy. Proper policy on energy demand can induce investments from consumers and thus not require government subsidies, unlike some policies that affect energy supply.

It is desirable for energy policy to become a priority for government decision makers, especially those concerned about the energy security of the nation.

The opinions expressed in this article do not necessarily reflect the views or policies of the University of California or the U.S. government.