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The Rebound Effect in Energy-Intensive Industries: A Factor Demand Model with Asymmetric Price Response

Abstract:
The purpose of this paper is to estimate industry-specific direct rebound effects and to relate these effects to industry energy efficiency programs. The rebound effect represents economic behavior that will offset energy savings from energy efficiency improvements. The paper focuses on four energy intense sectors in Sweden; pulp and paper, iron and steel, chemical, and mining, during 2001–2012. We apply a factor demand model that allows for asymmetric energy price responses, i.e. that firms respond differently to increasing and decreasing energy prices. The results show considerable rebound effects. For electricity and non-fossil fuels, efficiency improvements could even ‘backfire’. To mitigate this effect, policies, such as voluntary energy efficiency programs, should be combined with an increase in energy taxes if the ambition is to reduce overall energy use.

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Keywords: Asymmetric price responses, Energy efficiency, Factor demand model, Own-price elasticities, Voluntary Energy Efficiency Programs, Rebound effect

DOI: 10.5547/01956574.42.3.adah

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Published in Volume 42, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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