Abstract
We develop a stylized general equilibrium model to estimate changes in economy-wide energy consumption following an exogenous costless improvement in energy efficiency. We use the model to calculate the rebound effect, which determines how behavioral changes offset energy efficiency improvements. We use the framework to decompose the rebound effect into partial and general equilibrium components. In our theoretical analysis, we identify key drivers of the general equilibrium rebound effect, including a composition channel, an energy price channel, a growth channel, and a labor supply channel. Based on numerical simulations with a parameterized version of the model, we show that both general and partial equilibrium components of the rebound effect can be substantial. We thus caution against hopes to resolve adverse impacts of fossil fuel use such as climate change via energy efficiency improvements from costless technological advances.
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