The Rebound Effect

Working on an article for New Palgrave. Here is a draft of the section on the rebound effect:

The Rebound Effect

Energy saving innovations reduce the cost of providing energy services such as heating, lighting, industrial power etc. This reduction in cost encourages consumers and firms to use more of the service. As a result energy consumption usually does not decline by as much as the increase in energy efficiency implies. This difference between the improvement in energy efficiency and the reduction in energy consumption is known as the rebound effect. Rebound effects can be defined for energy saving innovations in consumption and production. In both cases the increase in energy use due to increased use of the energy service where an efficiency improvement has happened is called the direct rebound effect. For consumer use of energy estimated rebound effects are usually small typically in the range of 10-30% (Greening et al., 2000; Sorrell et al., 2009). 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. In the case of energy efficiency improvements in industry the rebound effect at the firm level could be large as the form could greatly increase their sales as a result of reduced costs. However, under perfect competition for an industry supplying domestic demand it is much harder for the industry as a whole to expand output and so the direct rebound effect would be more limited. Rebound effects are likely to be larger for export industries that have more opportunity to expand production (Grepperud and Rasmussen, 2004; Allan et al., 2007; Linares and Labandeira, 2010).

As a result of the reduction in the cost of the energy service consumers will demand less of substitute goods and more of complementary goods. These include other energy services. Firms will make similar changes in their demands for inputs. There will also be additional repercussions throughout the economy – non-energy goods whose demand has increased require energy in their production; the fall in energy demand may lower the price of energy (Gillingham et al., 2013; Borenstein, 2015) increasing energy use again; and the efficiency improvement is a contribution to an increase in total factor productivity, which tends to increase capital accumulation and economic growth that results again in greater energy usage (Saunders, 1992). These additional effects are called indirect rebound effects, though the latter two may be treated separately as “macro-level rebound effects” (e.g. Howarth, 1997). Direct and indirect rebound effects together sum to the economy-wide rebound effect.

Estimates of the economy-wide rebound effect are few in number (e.g. Turner, 2009; Barker et al., 2009; Turner and Hanley, 2011) and vary widely (Stern, 2011; Saunders, 2013; Turner 2013). At the economy-wide level “backfire”, where energy use increases as a result of an efficiency improvement, or even “super-conservation” where the rebound is negative are both theoretically possible (Saunders, 2008; Turner, 2009). It is usually assumed that the indirect rebound is positive and that the economy-wide rebound will be larger in the long run than in the short run (Saunders, 2008). Turner (2013) argues, instead, that because the energy used to produce a dollar’s worth of energy is higher than the embodied energy in most other goods, the effect of consumers shifting spending to goods other than energy will mean that the indirect rebound could be negative and the economy-wide rebound may also be negative in the long run. Borenstein (2015) presents further arguments for negative rebounds.

All evidence on the size of the economy-wide rebound effect to date depends on theory-driven models, which have limited empirical validation. Turner (2009) finds that, depending on the assumed values of the parameters in a simulation model, the rebound effect for the UK can range from negative to more than 100%. Barker et al. (2009) provide the only estimate of the global rebound effect, estimating the rebound from a set of IEA recommended energy efficiency policies at 50%.

References

Allan, G., Hanley, N., McGregor, P., Swales, K., Turner, K. 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.

Barker, T., Dagoumas, A. and Rubin, J. 2009. The macroeconomic rebound effect and the world economy. Energy Efficiency 2: 411-427.

Borenstein, S. 2015. A microeconomic framework for evaluating energy efficiency rebound and some implications. Energy Journal 36(1): 1-21.

Gillingham, K., Kotchen, M. J., Rapson, D. S. and Wagner, G. 2013. The rebound effect is overplayed. Nature 493: 475-476.

Greening, L. A., Greene, D. L. and Difiglio, C. 2000.Energy efficiency and consumption - the rebound effect - a survey. Energy Policy 28: 389-401.

Grepperud, S. and Rasmussen, I. 2004. A general equilibrium assessment of rebound effects. Energy Economics 26: 261-282.

Howarth, R. B. 1997. Energy efficiency and economic growth. Contemporary Economic Policy 25: 1-9.

Linares, P. and Labandeira, X. 2010. Energy efficiency: Economics and policy. Journal of Economic Surveys 24(3): 583-592.

Roy, J. 2000. The rebound effect: some empirical evidence from India. Energy Policy 28: 433-438.

Saunders, H. D. 1992. The Khazzoom-Brookes postulate and neoclassical growth. Energy Journal 13(4): 131-148.

Saunders, H. D. 2008. Fuel conserving (and using) production functions. Energy Economics 30: 2184–2235.

Saunders, H. D. 2013. Historical evidence for energy efficiency rebound in 30 US sectors and a toolkit for rebound analysts. Technological Forecasting & Social Change 80 (2013) 1317-1330.

Sorrell, S., Dimitropoulos, J., Sommerville, M. 2009. Empirical estimates of the direct rebound effect: A review. Energy Policy 37: 1356–1371.

Stern, D. I. 2011. The role of energy in economic growth. Annals of the New York Academy of Sciences 1219: 26-51.

Turner, K. 2009. Negative rebound and disinvestment effects in response to an improvement in energy efficiency in the UK economy. Energy Economics 31: 648-666.

Turner, K. 2013. “Rebound” effects from increased energy efficiency: a time to pause and reflect. Energy Journal 34(4): 25-43.

Turner, K. and Hanley, N. 2011. Energy efficiency, rebound effects and the Environmental Kuznets Curve. Energy Economics 33: 722-741.