The Rebound Effect

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The Rebound Effect

The Khazzoom-Brookes Postulate (Brookes, 1990; Khazzoom, 1980, Berkhout et al., 2000), or "rebound effect," argues that energy saving innovations induce an increase in energy consumption that offsets the technology derived saving. Rebound effects can be defined for energy saving innovations in consumption and production. A consumer consumes energy services that are produced using energy itself and an appliance whose energy use requirements are reduced by the innovation. Five rebound effects can be defined:

1. A substitution effect towards greater consumption of the now cheaper energy service and therefore of energy (Khazzoom, 1980).

2. A direct income effect, which can be positive or negative depending on whether the energy service is a normal or inferior good (Lovins, 1988). Lovins (1988) argued that energy services were inferior goods in developed economies and, therefore, the negative income effect would outweigh the positive substitution effect.

3. Income effects on the consumption of other energy services by the consumer. The money saved on the cheaper energy service can be spent on other energy services. Other energy services may be substitutes for or complements with the energy service that is now cheaper and, therefore, the effects are complicated (Berkhout et al., 2000). Most empirical rebound studies are microeconomic studies that only include these first three effects.

4. Increased real income also increases demand for all goods in the economy and, therefore, for the energy required to produce them. Berkhout et al., (2000) call this a structural effect.

5. There also may be economy-wide changes such as adjustments in capital stocks that result in further increased long-run demand response for energy that Howarth (1997) terms a "macro-economic feedback". These are the long-run consequences of structural change.

The production case is very similar, except that the income effect is replaced by an output effect. Consumers are constrained by a fixed nominal income but producers’ costs are not similarly constrained. Therefore, output effects can be large. For example, Darwin (1992) found that for wood-saving technological change in the US Pacific Northwest output effects were sufficiently large as to increase the consumption of raw logs.

Brookes (1990) suggested that, due to long-run growth effects, the rebound effect could be larger than the initial saving resulting in higher, not lower, energy consumption, sometimes termed “backfire”. In partial equilibrium, absolute value of the demand elasticity for energy should be an upper limit on the size of the rebound effect (Sorell and Dimitropoulos, 2008). Using a macro model with fixed energy prices, Saunders (1992) showed that this required that the elasticity of substitution between energy and other inputs is greater than unity, which in my opinion is unlikely. Howarth (1997), however, argues persuasively that even if the elasticity of substitution is one or greater that, when a distinction is made between energy services and energy use, the macro-level energy rebound effect for a production innovation is less than the initial innovation induced reduction in energy use, so improvements in energy efficiency do, in fact, reduce total energy demand.

Extensive empirical studies have been conducted for both production and consumption primarily at the micro-economic level. In an extensive survey of empirical estimates of the rebound effect through the mid-1990s, Greening et al. (2000) find that micro-level rebound effects for consumption are typically in the range of 10-30% and may typically be even smaller for industry. In subsequent studies, Bentzen (2004) finds a 24% rebound in U.S. manufacturing, Haas and Biermayr (2000) estimate a 20-30% rebound effect in Austrian space heating, and Berkhout et al. (2000) find rebound effects of 15-27% for the Netherlands. Roy (2000) argues that because high quality energy use is still small in households in India, demand is very elastic, and thus rebound effects in the household sector in India and other developing countries can be expected to be larger than in developed economies. Sorrell et al. (2009) review the literature on the micro-level or partial equilibrium rebound effect, which they term the “direct rebound effect”, for personal transport, household heating, and other household services, also finding that the effect appears to be less than 30%.

Grepperud and Rasmussen (2004) use a general equilibrium model for the Norwegian economy with econometrically estimated parameters. For an increase in the growth rate of the augmentation index of electricity, they find rebound effects greater than 100% in manufacturing industries where there are good substitution possibilities between electricity and other inputs, electricity dominates energy consumption, and the industries face perfectly elastic export demand which allows output to expand substantially. Schipper and Grubb (2000) survey energy-output changes for broad end-use categories in industrial nations and find sector-level rebounds of 5-15%. Within what they describe as a “limited theoretical framework”, they speculate that there are small macro-level rebound effects. Allan et al. (2007) also use a CGE model and find a short-term rebound effect of 55% and long-run effect of 30% for an increase in energy efficiency in production in the UK. However, these results are sensitive to the assumed structure of the labour market, key production elasticities, the time period under consideration and the mechanism through which increased government revenues are recycled back to the economy.

References
Allan, G., N. Hanley, P. McGregor, K. Swales, K. Turner (2007) The impact of increased efficiency in the industrial use of energy: A computable general equilibrium analysis for the United Kingdom, Energy Economics 29: 779–798.
Bentzen, J. (2004). “Estimating the rebound effect in US manufacturing energy consumption.” Energy Economics 26(1): 123-134.
Berkhout, P. H. G., J. C. Muskens, and J. W. Velthuijsen (2000) “Defining the rebound effect.” Energy Policy 28: 425-432.
Brookes, L. (1990). “The greenhouse effect: the fallacies in the energy efficiency solution.” Energy Policy 18: 199-201.
Darwin, R. F. (1992). “Natural resources and the Marshallian effects of input-reducing technological changes. Journal of Environmental Economics and Environmental Management 23: 201-215.
Greening, L. A., D. L. Greene, and C. Difiglio, (2000).”Energy efficiency and consumption - the rebound effect - a survey.” Energy Policy 28: 389-401.
Grepperud, S. and I. Rasmussen (2004). “A general equilibrium assessment of rebound effects.” Energy Economics 26: 261-282.
Haas, R. and P. Biermayr (2000). “The rebound effect for space heating - Empirical evidence from Austria.” Energy Policy 28: 403-410.
Howarth, R. B. (1997). “Energy efficiency and economic growth.” Contemporary Economic Policy 25: 1-9.
Khazzoom, D. J. (1980). “Economic implications of mandated efficiency standards for household appliances.” Energy Journal, 1(4): 21-39.
Lovins, A. B. (1988) Energy saving from more efficient applicances: another view, Energy Journal 10: 157-166.
Saunders, H. D. (1992). “The Khazzoom-Brookes postulate and neoclassical growth.” Energy Journal 13(4): 131-148.
Schipper, L. and M., Grubb (2000). "On the rebound? Feedback between energy intensities and energy uses in IEA countries." Energy Policy 28(6-7): 367-388.
Sorrell, S. and J. Dimitropoulos (2008) The rebound effect: Microeconomic definitions, limitations and extensions. Ecological Economics 65: 636–649.
Sorrell, S., J. Dimitropoulos, M. Sommerville (2009) Empirical estimates of the direct rebound effect: A review. Energy Policy 37: 1356–1371.