Economy-wide Rebound Effect Research Articles

Economy-wide rebound and the returns on investment in energy efficiency

In this paper we re-examine the relationship between global Gross Domestic Product (GDP), Primary Energy Use (PEU) and Economic Energy Efficiency (EEE) to explore how investment in energy efficiency causes rebound in energy use at the global scale. Assuming GDP is a measure of final useful work, we construct and fit a biophysics-inspired nonlinear dynamic model to global GDP, PEU and EEE data from 1900—2018 and use it to estimate how energy efficiency investments relate to output growth and hence economy-wide rebound effects. We illustrate the effects of future deployment of enhanced energy efficiency investments using two scenarios through to 2100. The first maximizes GDP growth, requiring energy efficiency investment to rise ~ twofold. Here there is no decrease in PEU growth because economy-wide rebound effects dominate. The second scenario minimizes PEU growth by increasing energy efficiency investment ~ 3.5 fold. Here PEU and GDP growth are near fully decoupled and rebound effects are minimal, although this results in a long run, zero output growth regime. We argue it is this latter regime that is compatible with the deployment of enhanced energy efficiency to meet climate objectives. However, while output growth maximising regimes prevail, efficiency-led pledges on energy use and emissions reduction appear at risk of failure at the global scale.

An economy-wide rebound effect analysis of Kenya's energy efficiency initiatives

Adoption and improvement of energy efficiency is one of the recommended pathways to tackle the problems of growing energy demand and greenhouse gas emissions. However, studies show that rebound effects from energy efficiency improvements can erode anticipated energy savings. This paper elucidates the rebound effect arising from energy efficiency initiatives in Kenya. The study uses Index Decomposition Analysis to assess the drivers of Kenya's total primary energy supply. The paper then adopts the neoclassical growth model in the empirical analysis of energy and carbon rebound effects at the macro-economic level. Cobb-Douglas production function is further applied using Solow growth model and energy as a factor of production to approximate technological progress. Results of decomposition of energy supply show that energy intensity and affluence are the drivers with the most significant effect on energy supply while population has less critical effect. Average energy and carbon rebound effects show partial rebounds of 15.64% and 31.41%, respectively. These results imply that there is need to accelerate the pace of transitioning to green energy as the ultimate solution to minimizing environmental impacts arising from energy use and tackling climate change.

Investigating the cost-effective energy efficiency practices with mitigated rebound: the case of energy intensive industries

The present study aims at finding a practical policy for reducing energy consumption in through simultaneous energy subsidy reduction and energy efficiency improvement. To be a practical solution, the efficiency practices should be chosen from feasible energy efficiency potentials. To mitigate the economy-wide rebound effect, energy price should be increased in accordance with efficiency enhancement.
 The combination of a top-down dynamic general equilibrium model with a bottom-up efficiency improvement module is used to find the set of efficiency practices that should be realized in each period along with the required increase in energy prices. Choosing efficiency practices depends on their costs and on the available funds. The model is applied for the energy-intensive industries in Iran.
 The model results show that over less than ten years, the energy efficiency of electrical and natural gas equipment in energy intensive industries of Iran can be increased by 12.7% and 18.1% respectively. The rebound effect starts with values above 80% and then falls below zero percent which indicates the success of the proposed policy in preventing the rebound effect. Results also demonstrate that the implementation of the policy realizes the 4% reduction in CO2 emissions by 2030 which is Iran's unconditional pledge.

Do energy efficiency improvements reduce energy use? Empirical evidence on the economy-wide rebound effect in Europe and the United States

Increasing energy efficiency is often considered to be one of the main ways of reducing greenhouse gas emissions. However, efficiency gains that reduce the cost of energy services result in energy use rebounding and potential energy use savings being eaten up. Empirical research that quantifies the economy-wide rebound effect while taking the dynamic economic responses to energy efficiency improvements into account is limited. We use a Structural Factor-Augmented Vector Autoregressive model (S-FAVAR) that allows us to track how energy use changes in response to an energy efficiency improvement while accounting for a vast range of potential confounders. We find economy-wide rebound effects of 78% to 101% after two years in France, Germany, Italy, the UK, and the US. This implies that energy efficiency innovations alone may be of limited help in reducing future energy use and emphasizes the importance of tackling carbon emissions directly.

How large is the economy-wide rebound effect in middle income countries? Evidence from Iran

Recent research suggests that the economy-wide rebound effect is near 100% in several high-income countries. Is it similarly large in middle-income countries? Iran is a middle-income country that is also a large oil producer. We estimate the economy-wide rebound effect for Iran using a structural vector autoregressive model and quarterly data from 1988:3 to 2018:1. We identify the structural shocks by independent component analysis, a statistical identification technique that does not require us to impose restrictions based on economic theory on the model. The results show that in response to an energy efficiency shock energy use falls initially but returns to near its original level over time. The economy-wide rebound effect in Iran is 84% after 6 years and its confidence interval includes 100%. This implies that policies that encourage energy efficiency innovation will have limited long-term impact on energy use.

Do rebound effects matter for Switzerland? Assessing the effectiveness of industrial energy efficiency improvements

In energy policy, efficiency improvements are conventional means for reducing industrial energy use as well as related environmental and climate externalities. Unfortunately, the effectiveness of energy efficiency improvements in reducing energy use is known to be limited by rebound effects. These rebound effects arise from economic and behavioral responses to the energy efficiency improvements themselves. In this paper, we show that their magnitude critically depends on the substitutability (or complementarity) of energy with different types of capital. These relationships between energy and capital must, hence, be carefully modelled in the context of rebound assessments. To this end, we develop a new, recursively dynamic computable general equilibrium model for Switzerland, which differentiates the capital stock into capital that is substitutable and capital that is complementary with energy. With this model, we simulate average economy-wide rebound effects of 38%; Sector-specific average rebound effects range from negative rebound effects for energy supply sectors to 48% for the energy-intensive manufacturing industry. The sector-specific results crucially depend on the energy and capital intensities of the respective sectors. A sensitivity analysis shows that our more sophisticated representation of capital lowers the simulated rebound effects. Conversely, existing rebound assessments with a homogenous capital stock may overestimate rebound effects. Nonetheless, both economy-wide and industrial rebound effects in Switzerland remain substantial. When devising energy efficiency policies, it is thus essential to evaluate the expected rebound effects and to compensate for them with complementary policies, such as energy and carbon taxes.

Analysis of the Economy-Wide Rebound Effect of Water Efficiency Improvement in China Based on a Multi-Sectoral Computable General Equilibrium Analysis

The effectiveness of water efficiency improvement is restricted by the water rebound effect by which anticipated water resource saving from improved water efficiency may be partly or wholly offset or even surpassed by an increase in water demand. The economy-wide rebound effect of water efficiency improvement in China is poorly understood. This study explored the economy-wide rebound effect of water efficiency improvement in China based on a multi-sectoral computable general equilibrium model. The results suggested that water efficiency improvement could effectively reduce water consumption in producing sectors and benefit economic growth and employment. However, the decrease in water consumption was much lower than the volume of water efficiency improvement, which indicated that the rebound effect partly offset water savings caused by water efficiency improvement. We observed a larger reduction in water consumption in the long run, which indicated a smaller rebound effect and a more significant effect in saving water resources in the long term. Notably, the total rebound effect in the short-run closure was much larger than that in the long-run closure, and the effect from the production side was much smaller. Hence, the economic-wide rebound effect is primarily derived from the incremental water consumption by households, investors, and governments.

Decomposition and measurement of the rebound effect: The case of energy efficiency improvements in Spain

The rebound effect caused by energy efficiency improvements demands greater attention from energy policymakers as it represents an important obstacle to energy consumption reduction measures. Despite the emerging literature about the rebound effect, no studies to date have managed to break down it. To do so, this study introduces the disruptive innovation of replacing the Logarithmic Mean Divisia Index method used in previous literature with Structural Decomposition Analysis. Based on Input-Output tables, a re-spending model allows us to assess the Indirect Rebound Effect for 14 productive sectors. Finally, Structural Decomposition Analysis enables us to determine the Economy-Wide Rebound Effect caused by energy efficiency improvements. As far as we are aware, no other study to date has done so. Spain is used as a case study for the 2000–2014 period. Major findings indicate that total rebound effect varies from nearly to 10% to around 50%. The part of rebound explained by Direct rebound effect is around 10%. Indirect rebound effect shows values between 1.2% and 1.8%. Finally, Economic wide rebound effect varies from −4.51% to around 40% but without showing a clear trend for the period considered. The novelty of this study is that it attempts to break the overall rebound effect down to the direct, indirect, and economic wide rebound effect by combining the Cobb-Douglas production function and decomposition techniques.

Rebound effect with energy efficiency determinants: a two-stage analysis of residential electricity consumption in Indonesia

This study aims to estimate the economy-wide rebound effect using the determinants of household energy demand in Indonesia. Identifying the size of the rebound effect is essential for the government's energy efficiency and carbon emission reduction programs. The estimation of the rebound effect uses a two-stage analysis with panel data of every province in Indonesia from 2002 to 2018. We employ the Input Demand Function of the Stochastic Frontier Analysis to measure the energy efficiency of residential aggregate in Indonesia. In the second stage, we adopt the dynamic panel data model to estimate the economy-wide rebound effect. The estimated dynamic panel data model reveals that the magnitudes of the short-run and long-run rebound effects were 87.2% and -45.5%, respectively. In other words, a 1% increase in household energy efficiency results in a reduction in energy consumption of 0.13% in the short term and 1.45% in the long term. Our research also discovers that a backfire rebound effect exists in provinces with high energy efficiency. Therefore, we prove to backfire claims that improving energy efficiency will increase energy use. Henceforth, energy efficiency programs in the household sector still need to be implemented, followed by increasing technological innovation and improving housing policy.

Economy-wide rebound makes UK’s electric car subsidy fall short of expectations

Environmental policies often underperform due to so-called rebound effects, namely behavioural and systemic responses to technical change leading to additional consumption and environmental damage. While evidence of rebound is abundant, studies generally focus on technical changes that are neither associated with specific technologies nor their production costs, making it difficult to connect these changes with the policies governing them. To overcome this limitation, this study proposes to combine a technology-rich model based on life cycle assessment and a behaviour-optimising model for the global economy based on computable general equilibrium modelling. This approach allows to quantify policy-induced economy-wide rebound effects for four relevant environmental impacts: climate change, acidification, photochemical ozone formation, and particulate matter. We apply this approach to evaluate the effectiveness of the United Kingdom’s subsidy on electric cars. The results show notable economy-wide rebound effects associated with this subsidy: over or close to 100% (no environmental benefits) for acidification and particulate matter impacts, and a lower, yet notable, magnitude for climate change (~20–50%) and photochemical ozone formation (~30–80%) impacts. The results also show the important role of macro-economic effects from price changes, particularly how the shift from petrol to electricity triggered additional demand for cheaper petrol.

Estimating the economy-wide rebound effect using empirically identified structural vector autoregressions

The size of the economy-wide rebound effect is crucial for estimating the contribution that energy efficiency improvements can make to reducing greenhouse gas emissions and for understanding the drivers of energy use. Existing estimates, which vary widely, are based on computable general equilibrium models or partial equilibrium econometric estimates. Using a structural vector autoregressive (SVAR) model, we identify the dynamic causal impact of structural shocks, including an energy efficiency shock. The identification method is based on independent component analysis. In this manner, we are able to estimate the rebound effect with a minimum of a priori assumptions. We apply the SVAR to U.S. monthly and quarterly data, finding that after four years rebound is around 100%, which implies that in the long run no energy is saved.

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

Improving energy efficiency is often considered to be one of the keys to reducing greenhouse gas emissions. However, efficiency gains also reduce the cost of energy services and may even reduce the price of energy, resulting in energy use rebounding and potential energy use savings being eaten up. There is only limited empirical research quantifying the economy-wide rebound effect that takes the dynamic economic responses to energy efficiency improvements into account. We use a Structural Factor-Augmented Vector Autoregressive model (S-FAVAR) that allows us to track how energy use changes in response to an energy efficiency improvement while accounting for a vast range of potential confounders. Our findings point to economy-wide rebound effects of 78% to 101% after two years in France, Germany, Italy, the U.K., and the U.S. These findings imply that energy efficiency innovations alone may be of limited help in reducing future energy use and emphasize the importance of tackling carbon emissions directly.

The rebound effect on energy efficiency improvements in China’s transportation sector: A CGE analysis

Energy use is becoming more efficient due to technological innovations. We focused on the transportation sector in China to develop a national multisector computable general equilibrium (CGE) model for analyzing the rebound effect from an improvement of 10% in the energy efficiency. We compared the size of the energy rebound effect at both the macroeconomic and sectoral levels in different transportation modal subsectors, namely rail, road, water, and air travel. The findings showed that the magnitude of the rebound effect varies across the transportation modes. This is particularly true for the air transportation sector, which has an economy-wide rebound effect of 30.1% and an own-sector rebound effect of 74.6% because of a sharp increase in the export demand for air transport services. We also quantitatively evaluated the contribution of energy efficiency improvement in the transportation sector to China’s economic growth and carbon reductions and found a positive dividend effect on the economy as well as the environment. The modeling results suggest that improving overall transportation energy efficiency by 10% generates an economy-wide welfare gain of approximately 29 billion yuan, while 19 billion yuan are attributable to a more efficient road transportation subsector. Furthermore, to offset the effects of these mode-specific rebound effects, we simulated the effectiveness of different policies and solutions. These included economic instruments in the form of energy, environmental, and carbon taxes, household transport consumption structure adjustments, and energy structure adjustments. This study revealed that combining these sustainable development policies offers opportunities for economy-wide multisectoral improvements in energy savings, emissions reduction, and economic benefits.

The desirability of transitions in demand: Incorporating behavioural and societal transformations into energy modelling

Quantitative systems modelling in support of climate policy has tended to focus more on the supply side in assessing interactions among technology, economy, environment, policy and society. By contrast, the demand side is usually underrepresented, often emphasising technological options for energy efficiency improvements. In this perspective, we argue that scientific support to climate action is not only about exploring capacity of “what”, in terms of policy and outcome, but also about assessing feasibility and desirability, in terms of “when”, “where” and especially for “whom”. Without the necessary behavioural and societal transformations, the world faces an inadequate response to the climate crisis challenge. This could result from poor uptake of low-carbon technologies, continued high-carbon intensive lifestyles, or economy-wide rebound effects. For this reason, we propose a framing for a holistic and transdisciplinary perspective on the role of human choices and behaviours in influencing the low-carbon transition, starting from the desires of individuals and communities, and analysing how these interact with the energy and economic landscape, leading to systemic change at the macro-level. In making a case for a political ecology agenda, we expand our scope, from comprehending the role of societal acceptance and uptake of end-use technologies, to co-developing knowledge with citizens from non-mainstream and marginalised communities, and to defining the modelling requirements to assess the decarbonisation potential of shifting lifestyle patterns in climate change and action.

How large is the economy-wide rebound effect?

The size of the economy-wide rebound effect is crucial for estimating the contribution that energy efficiency improvements can make to reducing greenhouse gas emissions and for understanding the drivers of energy use. Economy-wide rebound from an energy efficiency improvement includes changes in the use of energy to produce complementary and substitute goods or inputs and other flow-on effects that affect energy use across the economy as well as the direct rebound due to energy users using more of an energy service that has become less costly as result of improved energy efficiency. Jevons first argued in 1865 that improvements in energy efficiency increase total energy use, and in recent decades researchers have argued for and against this “backfire” hypothesis. Theory provides some guidance on the factors affecting rebound but does not impose much constraint on the range of possible responses. Historical evidence suggests that the improved energy efficiency of recent technology has not reduced energy use because consumption has shifted to more energy-intensive goods and services. Simulations and econometric research have produced mixed results. Some recent general equilibrium studies find large rebound, around 100%, but more research is needed to confirm or refute these findings.

Comparing energy and material efficiency rebound effects: an exploration of scenarios in the GEM-E3 macroeconomic model

This paper uses the GEM-E3 macroeconomic computable general equilibrium model to calculate the magnitude of greenhouse gas (GhG) emission rebound effects across a range of efficiency scenarios in the automotive sector supply chain. The scenarios are technically feasible as they are designed using bottom up information from the iron and steel industry. Rebound effects occur when efficiency improvements reduce prices, stimulating demand and offsetting some of the environmental benefits that would otherwise be had. This paper allows energy, material and product-service efficiency rebound effects to be compared for the first time. The results suggest that there is a greater risk of rebound effects for downstream emissions abatement strategies that save embodied emissions: 85% of the emissions savings in the product-service efficiency scenario and 77% of emissions in the material efficiency scenario are offset by economy-wide rebound effects. This compares to 7% in the energy efficiency scenario. These findings show that, in the current policy environment in which GhG emissions remain relative unconstrained, improvements in material efficiency that are particularly good at spurring growth are also likely to carry the greatest rebound effects. The conclusions of this paper are not purely dependent on the chosen macroeconomic model, but are a function of the underlying value structure along supply chains: downstream efficiency improvements that save embodied emissions involve greater potential monetary savings per unit GhG avoided, spurring rebound effects.

Tracking the sources of rebound effect resulting from the efficiency improvement in petrol, diesel, natural gas and electricity consumption; A CGE analysis for Iran

Rebound Effect (RE) has been resulted in energy saving failing short of expectations from energy efficiency improvement (EEI) policy. Measuring RE resulting from the EEI has attracted the attention of many economists and politicians; however, tracking the factors sourcing RE has been addressed by a few studies. The main purpose of this study is to track and quantify the factors sourcing the RE resulting from 5%, 7%, and 10% EEI shocks at macro and sector levels in Iran. Using a Computable General Equilibrium (CGE) model, the economy-wide rebound effect (EWRE) was decomposed at a macro-level for 15 production sectors and final demand separately and the RE of production sectors has been decomposed for substitution and output effects separately. Findings show that the EEI shocks have resulted in positive growth in macroeconomic variables including investment, employment, and GDP. The results from the decomposition of RE at the macro-level show that, first, households are one of the main sectors sourcing RE, second, sectors that are the largest consumers of energy have the greatest RE. Other results indicate a non-linear variation in RE resulting from different EEI shocks and the dominant role of substitution effect on RE of production sectors in the short-term.

How Large is the Economy-Wide Rebound Effect?

The size of the economy-wide rebound effect is crucial for estimating the contribution that energy efficiency improvements can make to reducing greenhouse gas emissions and for understanding the drivers of energy use. Economy-wide rebound from an energy efficiency improvement includes changes in the use of energy to produce complementary and substitute goods or inputs and other flow-on effects that affect energy use across the economy as well as the direct rebound due to energy users using more of an energy service that has become less costly as result of improved energy efficiency. Jevons first argued in 1865 that improvements in energy efficiency increase total energy use, and in recent decades researchers have argued for and against this “backfire” hypothesis. Theory provides some guidance on the factors affecting rebound but does not impose much constraint on the range of possible responses. Historical evidence suggests that the improved energy efficiency of recent technology has not reduced energy use because consumption has shifted to more energy-intensive goods and services. Simulations and econometric research have produced mixed results. Some recent general equilibrium studies find large rebound, around 100%, but more research is needed to confirm or refute these findings.

Energy taxation policies can counteract the rebound effect: analysis within a general equilibrium framework

The rebound effect reflects the difference between the expected energy savings from energy efficiency, and the real ones, considering the former is higher than the latter. In some extreme cases, some scholars consider energy use can even increase after an energy efficiency improvement. This is due to agents’ behavioural responses. After almost four decades of theoretical and empirical studies in the field, there is a strong consensus amongst energy economists that the rebound effect of energy efficiency exists, although its importance is still being discussed. However, there are few empirical studies exploring its potential solutions. In this research, we empirically assess the effects of energy taxation on the rebound effect. Using a dynamic energy-economy computable general equilibrium (CGE) model of the Spanish economy, we test a global energy efficiency increase of 5.00%, and at the same time, different ad valorem tax rates on energy industries. We find that a tax rate of 3.76% would totally counteract the economy-wide rebound effect of 82.82% we estimate for the Spanish economy. This tax rate would still allow some economic benefits provided by the increase of energy productivity.

Macroeconomic impacts of energy productivity: a general equilibrium perspective

This study aims to enhance our understanding on the macroeconomic effects of autonomous energy efficiency improvement. We adopt a global computable general equilibrium model assuming future energy efficiency improvement until 2040 follows historical trends at a regional level including the USA, European Union, Japan, Russia, China, India, and Brazil over the period of 1995–2009. Results show that the global GDP would increase by 1.3% from 2015 to 2040, without making any regions worse off, if energy efficiency in all economic activities other than energy production gradually reaches 10% higher in 2040 than a baseline scenario. However, economy-wide rebound effects on energy use accumulate over time and vary from 55 to 78% across regions in 2040. The additional energy efficiency improvement by the same percentage for fossil and non-fossil energy pushes a stronger downward pressure on fossil fuel prices than on renewable prices, thus discouraging the share of renewables in the energy mix. We conclude that energy efficiency policy needs to be aligned with renewable and climate targets to control its rebound effect on energy use and related emissions.