Household behavior and the rebound effect

Abstract

This paper studies the rebound effect from a dynamic general equilibrium perspective, where how household’s decisions about consumption, investment and labor supply change in response to energy efficiency gains are crucial for assessing their effects on energy demand. The paper considers three types of energy efficiency gains: In the production of energy, in the energy consumed by households, and in the use of energy as an input by firms. A clear and significant rebound effect in the long-run is observed following an efficiency improvement in the production of energy, and in a lesser extent, in the case of the use of energy as an input in the final goods production sector. By contrast, in the case of the consumption of energy by households, the effect depends on the elasticity of substitution between energy services and the rest of goods. Finally, the paper also studies the dynamics of energy demand over the business cycle by considering stochastic energy efficiency shocks.