The Car, the Refrigerator, and the World’s Booming Demand for Energy

Unprecedented growth in developing countries, led by the Asian giants China and India, has established a delicate balance in energy consumption between North and South. In 2008, consumption in the non-OECD world surpassed the combined energy consumption of the OECD’s 34 high-income member countries. Furthermore, the Energy Information Administration (EIA) has predicted that energy consumption in non-OECD countries will grow a whopping 84 percent between 2007 and 2035, compared to growth of 14 percent in OECD countries during the same period.

In a recent National Bureau of Economic Research working paper, Catherine Wolfram, Orie Shelef and Paul J. Gertler assert that both the International Energy Agency (IEA) and the EIA might have underestimated future consumption because “they do not accurately capture increased demand along the extensive margin.” The authors explain that as a larger fraction of the population in developing countries enters the middle class, they invest in energy-intensive assets that are the norm in the developed world: refrigerators, air conditioners, cars. Ownership of such assets in non-OECD countries is bound to grow significantly over the near- to mid-term, driving greater demand for electricity and fuel. For example, in China refrigerators alone account for nearly 30 percent of residential electricity demand, or 15 percent of total energy demand.

Cars and refrigerators are uncommon for the lowest earners in these countries, but energy consumption shoots up rather dramatically at mid-level incomes, suggesting a first-time purchase of these energy-guzzling assets as wealth increases. This sharp increase stems partly from credit constraints in the developing world that force households to save in order to self-finance such purchases. At the same time, infrastructure improvements—better roads and electrification—facilitate the purchase of modern conveniences. As the authors point out, about 20 percent of the world’s population still lacks electricity, which is a figure that is likely to decrease.

Combined, these factors indicate a potentially huge increase in energy demand in coming decades. The authors stop short of reporting their own projections, but they note that the EIA underestimated energy consumption growth in China and Brazil by 10-15 percent from 2000-2005. More robust forecasts of energy consumption are essential in order to plan for energy infrastructure investments, to avoid production shortages and price spikes, and to predict the greenhouse gas emissions trajectory and plan a suitable climate policy framework.

The authors argue that despite these rather alarming statistics the sharp rise in energy consumption will also result in dramatic improvements in health and economic welfare for those same people. Under no circumstances should developing countries be denied the chance to invest in such assets. In fact, increased access to electricity and other sources of energy could curb the use of more primitive and inefficient solid fuels in developing countries and offset, or even negate, the increased emissions from global electricity use. This presents a rather interesting opportunity to invest in energy-efficient technologies through increased R&D and more stringent efficiency standards.

Wolfram, Shelef, and Gertler’s paper implies the need for developing countries to participate in global greenhouse gas emission mitigation and climate change adaptation efforts. The development versus abatement debate has long occupied center stage. But if the authors are correct, the challenge of containing climate change is even more tremendous than is currently understood. Inaction just became even riskier.