Rebound effects and green growth – An examination of their relationship in a parsimonious equilibrium input-output-framework

Abstract

Attempts to curb pollution or reduce resource consumption while maintaining growth and thus to achieve what is often referred to as green growth are frequently compromised by rebound effects. That is, the reduction of emissions or resource consumption is less than what would be expected from a technical perspective. Rebound effects may occur because greater efficiency makes the use of a resource cheaper in economic terms and thereby more widespread, or because the demand for green products induces additional demand for brown products. The focus of the present research is to examine from a theoretical-cum-simulation perspective the latter aspect, and the resulting possibility that firms may invest in additional capacity for producing brown rather than green products, even if, initially, there is increasing demand for green products. Such effects could be termed macro-level rebound effects in that there occurrence and significance depends on the properties of the production system as a whole. The purpose of the paper is to develop a parsimonious framework, combining a simple input-output model with some standard macroeconomic relationships between savings, consumption and investment within which macroeconomic rebound effects can be analysed. In doing so, the paper purports to show, undertaking a Monte-Carlo study, that in a broad range of technological configurations, green growth may be feasible in the sense that macroeconomic rebound effects are unlikely to occur. However, depending on the structure of the economy (i.e. depending on the extent to which sectors are green) this result must be qualified: the more sectors exist where green capital is equally productive, the higher is the likelihood of rebound effects. Moreover, it is mainly the productivity of using a good for its own production which determines the likelihood of rebound: The lower the productivity, the higher the likelihood that an increase in the production of that capital good will be eaten up to a large extent by the resulting input requirements of the same industry.