Will financial crisis take the shine off efficiency?

Maybe not the best time for GM to be launching the Volt.

I previously noted that the financial crisis is likely to be very bad news for renewable energy developers dependent upon access to credit for their cash-hungry projects. Geoffrey Styles points out that a credit crunch will also affect consumer-driven efficiency improvements (of the sort the my colleague Erin recently undertook):

If consumers can’t obtain attractive financing for more efficient appliances, heating systems, or rooftop solar power installations, the markets for those products will languish, and their aggregate impact on energy consumption and greenhouse gas emissions will be less than hoped, at least for the next few years. That also applies to more efficient cars, especially those involving technologies that add significant up-front costs.

There are few different things going on here. One is that consumers often make large purchases on credit. As credit tightens, many will simply be unable to obtain that solar water heater, for lack of access to favorable loans.

A second issue is consumer confidence. There’s a tendency to simply hunker down when times are bad. And while generally consumption is thought to bring pressure on natural resources, the environmental math becomes trickier for products that are themselves consumers of energy. If you drive a 1983 Grand Cherokee, you do the world a favor by swapping it for a Prius.

A final problem is that the financial return on efficiency improvements actually drops when money becomes more expensive (that is, when interest rates go up). If you spend $1,000 on some new double-glazed windows that save you $100 a year in heating costs, you’ll make your money back in about 15 years, assuming a 5% interest rate. Why fifteen years and not ten? Because you could also put that $1,000 in the bank and get a nice 5% return. If the interest rate goes up to 10%, however, your investment in double-glazed windows will pay itself back…never.

On the flip side, if the credit crisis turns into a general recession, people will simply start using less energy to try to bring down their discretionary spending, much as they’ve curtailed driving in response to high gas prices. Unfortunately, such temporary cutbacks don’t offer much in the way of structural, long-lived solutions to greenhouse gas emissions. And more to the point, analysts aren’t really expecting the slowdown to affect carbon output very much.

Image by Flickr user bkusler.