Thursday, June 3, 2021

Do Energy Efficiency Improvements Reduce Energy Use? Empirical Evidence on the Economy-Wide Rebound Effect in Europe and the United States

We have just posted a new working paper on RePEc and SSRN extending our structural vector autoregression methodology for estimating the economy-wide rebound effect and applying it to several European countries as well as the United States. I coauthored the paper with Anne Berner at University of G├Âttingen, Stephan Bruns at Hasselt University, and Alessio Moneta at the Sant'Anna School of Advanced Studies in Pisa. 

We developd this approach as part of our DP16 Australian Research Council funded project on energy efficiency. This is a multivariate time series model using time series for energy use, GDP, and the price of energy. The model allows us to control for shocks to GDP and the price of energy but to model the responses of those variables to the energy efficiency shock. 

We estimate the effect of an energy efficiency shock on the use of energy. Initially, energy use falls, but we found using U.S. data that it then ends up bouncing back to almost where it started. This means that the rebound effect is around 100%. Energy efficiency improvements don't end up saving energy in the long run. That paper has now been published in Energy Economics.

This new paper extends this research in two ways:

1. We control for a wide array of macroeconomic variables that might affect our key variables of interest. In order to squeeze all that information into our model, we carry out a factor analysis and use the first two principal components. This time series model incorporating these factors is called a Structural Factor-Augmented Vector Autoregressive (S-FAVAR) model. The extracted principal components for our five countries are shown in this figure:

2. We apply the model to five countries rather than just the United States. The downside is that we ended up with much shorter time series, only covering 2008-2019.

We also use a Kalman filter method to derive monthly GDP series for the European countries. The choice of countries was restricted by the availability of reliable energy data. As we didn't have separate monthly primary electricity data for the European countries, our energy variable for these countries is just fossil fuels.

Our results are quite similar to our previous U.S. study:

The graph on the left shows how energy use changes over time following an energy efficiency shock. In all countries, it bounces back a lot. It seems like there is more chance of permanent energy savings in the UK than in the other countries. On the other hand, in the long run, the 90% confidence interval of the rebound effect overlaps 100% in all countries. So, energy savings aren't large and may be zero in the long run.

Of course, despite including more information, the results depend on a lot of assumptions. Most importantly, we are talking about an improvement in energy efficiency that is uncorrelated with shocks to the GDP such as total factor productivity improvements. It's possible that the rebound to shocks that are correlated to TFP shocks, if they exist, is quite different. Also, energy efficiency policies that get consumers and firms to do costly things to save energy theoretically have negative rebound. They should end up saving even more energy than is mandated. Given our results, these don't seem to be that important, but we shouldn't say that such policies won't save energy.