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A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications

Abstract:
Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a "rebound" effect. I present a theoretical framework that parses rebound into economic income and substitution effects. The framework leads to new insights about the magnitude of rebound when goods are not priced at marginal cost and when consumers are imperfect optimizers, as well as the role of technological progress in rebound. I then explore the implications of this framework with illustrative calculations for improved auto fuel economy and lighting efficiency. These suggest that rebound is unlikely to more than offset the savings from energy efficiency investments (known as "backfire"), but rebound likely reduces the net savings by roughly 10% to 40% from these energy efficiency improvements.

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Energy Specializations: Energy Efficiency; Energy Efficiency – Transportation End-use ; Energy Efficiency –  Other; Transportation – Other; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
Q59 - Environmental Economics: Other
Q49 - Energy: Other
L99 - Industry Studies: Utilities and Transportation: Other
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Conservation, Energy services, Energy efficiency gap, Fuel economy, Lighting efficiency, Takeback, Backfire

DOI: 10.5547/01956574.36.1.1

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Published in Volume 36, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.