A simple plan to cut energy demand growth and carbon emissions

By Diana Farrell

Diana Farrell of the McKinsey Global Institute argues a commitment to energy efficiency can help avert a global climate crisis.

G8 leaders meeting in Germany this week will debate the merits of rival European Union and US approaches to global warming. Amid all the jockeying, there's a clear way forward that could cut both carbon emissions and global energy-demand growth without damaging the economy of the US or any other country. Research by the McKinsey Global Institute (MGI) and McKinsey's global energy and materials practice finds that a concerted global effort to boost energy productivity—the output we achieve from the energy we consume—would have spectacular results.

Using existing technologies, we could cut global energy-demand growth by more than half over the next 15 years. By 2020, that could save the equivalent of one and a half times total US energy consumption today—getting us about halfway toward emission levels needed to keep global warming in check. And, far from being costly, these initiatives would pay for themselves. This makes them an obvious first step in efforts to address energy-related environmental or supply security issues.

So what are these opportunities? Five top priorities would collectively deliver a third of the total improvement to energy productivity. And because the sectors entailed are so carbon-intensive, they would represent 45% of the overall carbon dioxide reduction potential from energy productivity improvements.

It Starts With China
The single largest opportunity is Chinese industry. Because China is at a relatively early stage in its industrial development, the country has a golden opportunity to leapfrog more established industrialized economies in energy productivity. China will account for one-third of global energy-demand growth between now and 2020, nearly half of which will come from its industrial sector.

So it's crucial that China incorporate cutting-edge energy-efficiency technologies, such as the recovery of heat generated in the production of electricity, into new factories and power plants. The economics of doing so are attractive and would reduce projected global energy demand in 2020 by the equivalent of 6 million barrels of oil a day.

The second opportunity is replacing the world's least efficient power stations with new high-efficiency plants. Energy losses in the generation and distribution of electricity alone represent close to 25% of global energy demand today. This waste could be significantly cut with new technologies such as advanced combined-cycle gas turbines. Globally, replacing the least efficient power plants could cut 2020 demand by another 6 million barrels of oil per day. For instance, Russia could replace its entire gas-fired capacity, and see a payback in two years.

China's residential and commercial buildings are third in our top five priorities. With the explosion of China's middle class, energy consumption by households and nonindustrial businesses will grow at close to 5% annually, more than doubling by 2020. However, constructing new buildings with world-class insulation standards and installing energy-efficient heating and cooling equipment would help reduce demand by the equivalent of 4 million barrels of oil daily.

US Homes Are Lagging
The fourth area of rich potential is US homes, the single largest consumer of energy in the world. If the energy efficiency of all US households were to increase to the levels of California or Europe, global residential energy demand in 2020 could decline by more than a third—the equivalent of nearly 4 million barrels of oil a day.

A typical US family can retrofit incandescent bulbs with compact fluorescent lighting fixtures and get a payback in less than a year; or replace obsolete heating and cooling equipment with a state-of-the-art heat pump and save 25% of the annual heating and cooling bill for less than $1,000 extra cost. The opportunity is even larger in new homes, where the most efficient heating and cooling package saves 50% of the energy consumption required by current standards, or $400 annually for an average household.

Today, high prices for many energy-efficient ovens, refrigerators, and the like are a turnoff for many consumers. However, if policy makers tightened standards, production of such appliances would rise, cutting their cost.

Reducing Subsidies
The fifth priority is to reduce fuel subsidies that shield consumers from the true price of energy they use—and therefore encourage over consumption. We estimate that reducing fuel subsidies by 80% globally (largely in the Middle East, Venezuela, and Mexico) would reduce global demand for road transportation fuel by 5% of the global sector's demand in 2020.

The challenges of climate change and the security of energy supply often appear insurmountable. However, we already have the ability to make deep cuts in energy-demand growth, and in a practical, relatively painless way. This, surely, is an agenda around which we can build a global political consensus.

Diana Farrell is the director of the McKinsey Global Institute, McKinsey's economics think tank.

This article originally ran in Businessweek.

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