Energy efficiency and the cost of GHG abatement: A comparison of bottom-up and hybrid models for the US

A highly influential report by the McKinsey consulting firm suggests that a large potential for profitable energy efficiency exists in the US, and that substantial greenhouse gas emissions reductions can therefore be achieved at a low cost. This result is consistent with other studies conducted using a bottom-up methodology that dates back to the work of Lovins beginning in the 1970s. Research over the past two decades, however, has identified shortcomings with the conventional bottom-up approach, and this has led to the development of new analytical frameworks that are referred to as hybrid energy–economy models. Using the CIMS hybrid model, we conducted simulations for comparison with the McKinsey results. These exercises suggest a more modest potential to reduce greenhouse gas emissions at a given marginal cost, as well as a smaller contribution from energy efficiency relative to other abatement opportunities such as fuel switching and carbon capture and storage. Hybrid models incorporate parameters reflecting risk and quality into their estimates of technology costs, and our analysis suggests that these play a significant role in explaining differences in the results.

► We examine the potential for energy efficiency and GHG abatement in the US.
► Conventional bottom-up analysis by McKinsey & Co. is flawed but highly influential.
► We generate comparative results using the CIMS hybrid energy–economy model.
► We find higher costs for GHG abatement and less energy efficiency than McKinsey.
► This is likely because hybrids represent risk and quality attributes of technologies.