Does the energy-efficiency paradox exist?<ΤΒ> Technological progress and uncertainty

We explain why firms may choose not to undertake investments in energy-saving technologies that appear profitable from a net present value perspective. As future technological advances are inherently uncertain and investments in new technology are, at least partly, irreversible, it may "pay'' to postpone investments in energy saving and wait for the arrival of improved varieties. This insight casts doubt on the existence of so-called "low hanging fruits in energy saving'' (although we do not wish to deny that organisational failures may also be important). Failure to appreciate the underlying stochasticity of technological progress may obscure the insight that there is value in waiting, and costs involved in terminating the option to invest. The appetite for low-hanging fruits will be less when these costs are incorporated in the analysis. We demonstrate that the effect of the arrival rate of new technologies on the adoption lag for a rational firm is ambiguous. The same holds for the effect of the expected "jump'' in efficiency of new technologies. Government policies aimed at enhancing the adoption of new technologies through stimulation of R&D may therefore be counterproductive.