The Jevons Paradox: What Is It And Why Has It Never Been More Important?

The above problem is actually well understood. In fact, it is so well known that it has a name:

It is called the Jevons' Paradox.

We have written about this concept before. In fact way back in the autumn of 2021 we worried about exactly this type of outcome and gave credit to the Englishman, William Stanley Jevons, who made a key insight that we collectively seem to have forgotten.

Mr Jevons discovered that technological progress made the use of resources more efficient but, puzzlingly, didn't seem to impact the amount of resource used.

In other words, energy efficiency gains tended to encourage more energy use, rather than less.

Hence the use of the term "paradox."

Jevons' first proposed his theory in his 1865 book The Coal Question in which he sketched out something he had long observed around steam engines in Britain's Industrial Revolution. Greater efficiency in later versions of James Watt's famous steam engine did not have a commensurate reduction in the amount of coal used. In fact, the very opposite happened.

Here is Jevons:

It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.

Back in his day, Jevons' was worried about the fact that Britain would not have enough coal to sustain their energy revolution. That proved a red herring but his observation about the paradox at the heart of technological development has been well studied and proven true again and again since.

In fact, economists are constantly discovering that his theory can be found in more places and is stubbornly difficult to eradicate.

Now his ever green paradox is playing out with regards to the climate transition. We are finding out that - even if you lavish huge subsidies on electric vehicles or other "green" targets - the correlation between adoption and declining usage of fossil fuels writ large isn't what we assumed (or hoped).

Put simply: More EVs mean less gasoline demand which lowers the cost of gasoline which makes oil cheaper as a whole which means that fossil fuels become more price competitive and people/businesses select oil over renewable sources of power.

This should have been a surprise to precisely no one. Jevons isn't some obscure figure. He is a hugely important thinker and, among other accomplishments, was one of the originators of the "marginal revolution" in economics alongside Léon Walras in Switzerland and Carl Menger in Austria. His paradox has been known and tested for over a century and a half.

The paradox made Jevons' fame in academic circles but for some reason we keep forgetting this crucial insight at a societal level.

As we have written a few times already we continue to live in the Great Forgetting. We are constantly making basic errors that could and should be easily prevented.

This frustrates us. But it is also revealing about two important questions going forward:

What will happen? And what to do about it?!

Hard to say, of course. We have already made the critical error of assuming the Jevons' Paradox does not apply to the carbon transition.

It obviously does and what the Norwegians are painfully discovering is - surprise, surprise - going to happen elsewhere as we stumble with distinctly unScandinavian style towards a greener economy and society.

There are a few likely outcomes:

The tried and true way to counteract at least some of this is to tax energy use. Taxing something leads to less of it. So, expect more taxes as we find out the brutal reality of our approach to reducing fossil fuel demand.

The other way to regulate energy use further. It is not as if we do not already do this - see our earlier story - but in the years to come this will likely only become an even thornier problem as we try to regulate ourselves out of a problem partially and perhaps largely created by regulation. So, expect more regulation in energy use.

The third and less tested is to try and not ration the amount of energy use but rather make it not just efficient but also green as possible. This should suggest more investments in green energy. That may actually occur but will be severely limited by what we described in our first piece this week. You can build all the renewable projects you want but if they cannot be connected to the grid.....

Are we doing any of this yet? We are not sure. Let us stay optimistic and imagine we will make huge leaps

What to do about it?:

  1. Be prepared for the narrative on energy use to shift. This has already begun (see Norway) but do not be shocked when the mainstream press and expert opinion suddenly starts talking about the lack of reductions in fossil fuel consumption and/or emissions despite the greater adoptions of EVs/heat pumps/solar panels etc.

  2. The assumptions around the demise of fossil fuels - and the end of fossil fuel companies' profits - will be seriously challenged. This may get less press but stay open to the idea that Exxon and Chevron etc. may be with us for some time yet.

  3. The way the tax and regulation question develops could be starkly different depending on how the 2024 election goes. So, when you think about election implications, energy policy should be at the forefront of your thinking.

  4. Lastly, the disappointing discovery that lavishing billions on green subsidies will not really dent our energy consumption is going to hopefully cause a serious rethink about our energy policies. This may not happen quickly or cleanly but other approaches - including nuclear energy but also geothermal and perhaps also liquid natural gas will get a lot of press.

The Jevons' Parardox remains powerful and very relevant, even 160 years after its author first came up with it.

As we try and navigate the volatility of the election year and a lot of uncertainty around inflation and interest rates and even economic growth, try and save some mental headspace for Mr Jevons. His argument is all around us, even if we neither realize it nor name it.


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