New research shows that rising income inequality has been just as influential as energy-efficiency programs in reducing electricity consumption.
Climate advocates have long pushed for energy-efficiency policies and incentives, which could increase home energy efficiency enough to reduce electricity consumption and greenhouse gas emissions. If you look at new Residential Energy Consumption Survey (RECS) data from the US Energy Information Administration, which detail how much electricity an average household in the United States uses each year, you might think these efficiency programs are working. After rising for decades, US electricity consumption has been dropping since around 2005 (Figure 1).
Figure 1. Average Electricity Consumption per Household in the United States
But have energy-efficiency policies led to this development? Resources for the Future Senior Fellow Joshua Linn, along with researchers Jing Liang and Yueming (Lucy) Qiu, wanted to understand which of a multitude of factors are driving this trend and how much of the observed decline can be attributed to energy efficiency. The researchers identify a few possible explanations for the turnaround in energy use: average income changes, cross-household income inequality, geographic location, and consumption habits (including energy-efficiency changes, home size, and appliance use).
We might readily explain why income growth, geographic location, and consumption habits all affect average energy consumption, but why would income inequality matter? All households consume more electricity as income rises. But the rate of increase for higher-income households is much, much lower than the rate of increase for lower-income households. Another way to say this is that lower-income households are more energy constrained; when they get another dollar of income, much more of it goes to energy than for a higher-income household. Rising income inequality means that income growth is tilted toward higher-income households and leads to less growth in energy consumption than a scenario of more balanced income growth across households or reduced inequality.
The researchers discovered a surprising result. Between 1990 and 2020, average income growth would have caused consumption to increase by 11 percent, if the income growth were spread evenly. However, because most of that income growth went to higher-income households, the increase in energy consumption was almost entirely offset. Rising income inequality effectively reduced consumption by 9 percent. Put another way, the growth in electricity consumption slowed partly because much smaller income increases went to the lowest-income groups, who would have used relatively more of their increased income to buy energy than in the case of a proportional increase in income across all groups.
Figure 2 shows the extent to which income growth and income inequality contributed to average electricity consumption between 1990 and 2020. The dotted red line shows what consumption would have been if consumption habits were held constant over time (the “counterfactual”). The dashed blue line in Figure 2A shows what electricity consumption would have been if average income growth were applied across the population evenly (i.e., that the income of all households grew by the same amount between 1990 and 2020). During that period, rising average income with no changes in income inequality (the dashed blue line) would have caused consumption to increase by about 11 percent. The gap between the blue and orange lines shows the extent that rising income inequality has reduced consumption, which Figure 2B illustrates directly. The researchers also find that changes in consumption habits, including energy-efficiency upgrades, contribute about as much as increased inequality to reductions in energy consumption.
Figure 2. Income Inequality Contributes to Changes in Energy Consumption
This research highlights two important ideas: One, that rising income inequality has been just as influential as energy-efficiency programs in reducing electricity consumption. Second, to the extent that policies designed to reduce income inequality are successful, these types of policy approaches may have the unintended consequence of driving up energy consumption.
Linn, Liang, and Qiu’s work is a critical reminder that if we want to mitigate inequality as we address energy-related pollution, and particularly energy poverty, then we need to consider the policies together. Moreover, to accurately assess the impact of policies and better understand what may happen in the future, we must consider a wide variety of factors.