The Khazzoom-Brookes Postulate and Neoclassical Growth

In a disturbing assault on intuition and conventional wisdom, Khazzoom and Brookes have asserted that energy efficiency improvements might increase, rather than decrease energy consumption. If true, policies aimed at encouraging conservation could worsen rather than ameliorate global warming and would accelerate the need for offshore drilling rather than provide a substitute for it. More generally, this result would pit conservation against environmental goals, in direct contradiction to many countries' energy plans (which see conservation as an environmental solution). Yet neoclassical growth theory confirms this possibility given certain fairly reasonable conditions-conditions that recent work by Hogan and Jorgenson indicates may hold in the U.S. economy. By no means proving the postulate, this analysis appears to make it much more difficult to dismiss. In fact, the effect can be more dramatic than even Khazzoom and Brookes may appreciate. Energy efficiency gains can increase energy use even more directly by increasing the economic growth rate, not only by decreasing the effective cost of energy. Efficiency gains for other factors (capital and labor) can also increase energy use.