Economics of Energy Efficiency in a CO2 Constrained World

Greenhouse gas emission trading programs have been initiated in the European Union, Canada and the United States in an effort to harness market forces to efficiently reduce greenhouse gas emissions. Three major methods for reducing or offsetting greenhouse gas emissions are purchasing greenhouse gas emission reduction credits, purchasing renewable energy certificates, and improving energy efficiency on site. This paper investigates the economics of energy efficiency in comparison to purchasing renewable energy certificates or CO2 emission reduction credits. The analysis considers three legislative scenarios: the current case with no CO2 taxes or mandatory CO2 emission reductions, a tax on CO2 emissions, and mandatory CO2 emission reductions with emission credit trading. A relation to quantify the cost of energy efficiency in terms of dollars per tonne of avoided CO2 is proposed. Results show that at current prices, energy efficiency will remain more cost effective than purchasing renewable energy certificates or CO2 emission reduction credits as long as the simple payback is less than the life of the energy efficiency project.