Does the Energy-Efficiency Paradox Exist? Technological Progress and Uncertainty

We explain why firms may choose not to undertake investments inenergy-saving technologies that appear profitable from a net presentvalue perspective. As future technological advances are inherentlyuncertain and investments in new technology are, at least partly,irreversible, it may ``pay'' to postpone investments in energy savingand wait for the arrival of improved varieties. This insight casts doubton the existence of so-called ``low hanging fruits in energy saving''(although we do not wish to deny that organisational failures may alsobe important). Failure to appreciate the underlying stochasticity oftechnological progress may obscure the insight that there is value inwaiting, and costs involved in terminating the option to invest. Theappetite for low-hanging fruits will be less when these costs areincorporated in the analysis. We demonstrate that the effect of thearrival rate of new technologies on the adoption lag for a rational firmis ambiguous. The same holds for the effect of the expected ``jump'' inefficiency of new technologies. Government policies aimed at enhancingthe adoption of new technologies through stimulation of R&D maytherefore be counterproductive. Copyright Kluwer Academic Publishers 2001