Definition and Implications of the Rebound Effect
The ‘rebound effect’ (or take-back effect) is the term used to describe the effect that the lower costs of energy services, due to increased energy efficiency, has on consumer behavior both individually and nationally. Put simply, the 'rebound' effect is the extent of the energy saving produced by an efficiency investment that is taken back by consumers in the form of higher consumption, either in the form of more hours of use or a higher quality of energy service.
For instance, if a 18W compact fluorescent bulb replaces a 75W incandescent bulb, the energy saving should be 76%. However, it seldom is. Consumers, realizing that the lighting now costs less per hour to run, are often less concerned with switching it off; in fact, they may intentionally leave it on all night. Thus, they ‘take back’ some of the energy savings in the form of higher levels of energy service (more hours of light). This is particularly the case where the past level of energy services, such as heating or cooling, was considered inadequate.
The rebound effect is a phenomenon based on economic theory and long-term historical studies, but as with all economic observations its magnitude is a matter of considerable dispute. Its significance for energy policy has increased over the last two decades, with the claim by energy analysts in the 1970s, and later by environmentalists in the late 1980s, that increasing energy efficiency would lead to reduced national energy consumption, and hence lower greenhouse gas emissions. Whether this claim is feasible depends crucially on the extent of the rebound effect: if it is small (less than 100%) then energy efficiency improvements will lead to lower energy consumption, if it is large (greater than 100%) then energy consumption will be higher. Note the use of the relative terms ‘lower’ and ‘higher’: what exactly they are relative to has often been left unstated and has been a cause of much confusion in energy policy debates. Sometimes it refers to current energy consumption, at other times to a reduction in the future rate of growth in energy consumption.
The claim that increasing energy efficiency would lead to reduced national energy consumption was first challenged by Len Brookes in 1979, in his review of Leach's pioneering work, A Low Energy Strategy for the UK, when he criticized Leach's approach to estimating national energy savings because of its failure to consider macroeconomic factors. This was followed in the early 1980s by similar criticism by Daniel Khazzoom of the work of Amory Lovins. The criticism of Brookes and Khazzoom was given the name of the Khazzoom-Brookes (KB) postulate by the economist Harry Saunders in 1992. The KB postulate (sometime referred to as ‘Jevons paradox’) may be described as: those energy efficiency improvements that, on the broadest considerations, are economically justified at the microlevel lead to higher levels of energy consumption at the macrolevel than in the absence of such improvements.
The debate grew more intense in the early 1990s, spurred by global warming concerns and policy debate over the role of energy efficiency. It was conducted most in the pages of the academic journals Energy Policy and Energy Journal, but also spread to the pages of The New York Times in late 1994 and the leading UK science magazine New Scientist in 1998. It culminated in two special issues of journals in 2000, devoted to aspects of the rebound effect, Energy Policy, edited by Lee Schipper, and Energy and Environment, edited by Horace Herring, to which many of the protagonists in this debate contributed. There is no dispute that the rebound effect exists, what is at the core of the conflict is its magnitude, and the two opposing positions can be summarized as:
- Energy use is higher than if there had been no efficiency response - a position maintained by Len Brookes, and under some circumstances by Harry Saunders.
- Energy use is lower than if there had been no efficiency response - a position maintained by Lee Schipper and his colleagues.
Each side has supported its case with a mix of theoretical argument and empirical observations, based on historical data on energy use. A key problem in resolving the two positions is that it is not possible to run a ‘control’ experiment to see whether energy use is higher or lower than if there had been no efficiency improvements - there is after all only one past. Attempts to estimate the overall magnitude of the rebound effect, using theoretical economic models based on neoclassical growth theory, have again proved inconclusive with the results dependent on assumptions about the elasticity of substitution of energy for other factors of production - the greater the elasticity the greater the rebound. A further problem is that the rebound effect differs by energy end-use and sector of the economy, and also that the response at the micro-economic level (the consumer) is different than that at the macro-economic (the national economy). Also, the rebound effect can vary between countries, depending on energy costs and unmet demand for energy services; thus it may be considerably higher in developing countries than in the USA.
However, all agree that the rebound effect is closely linked to the elasticity of substitution, which is a component of the widely measurable phenomenon of price elasticity. The higher the observed price elasticity of energy services, the greater is the rebound effect. This leads to the paradoxical position than any imposition of energy or carbon taxes, in the hope of reducing energy use, would have its impact severely blunted by the rebound effect, if consumers have a high price elasticity.
Price Elasticity Effects
Rebound effects are due to the increased use of energy services caused by the reduction in their effective price due to greater efficiency (price elasticity) and can be divided into five categories of effects:
- direct effects due to the desire of consumers to use more of any commodity due to its lower price
- income-related effects due to the fact that, with lower energy price, more income is available to spend on energy
- product substitution effects due to the inclination to substitute energy services for other final consumption goods when energy services become less expensive than other final goods
- factor substitution effects due to the inclination to substitute other factors of production (capital, labor, materials, time…) for energy in the production of final goods
- transformational effects due to long term changes in the economy caused by changes in technology, consumer preferences and even social institutions bought about by the substitution of energy for other factors of production.
The effect of perceived lower costs on energy use is termed ‘price elasticity’ - the ratio of the % change in energy use to % change in energy price. Price elasticities vary by commodity and over time, depending on the ability of consumers to respond to price changes, either through changes in behavior, substitution of alternatives or technical change. It is important to distinguish price induced efficiency gains from non-priced induced gains, as the former are caused by factor substitution, and may involve costs to the economy (such as was caused by the oil prices rises in the 1970s and may result from the imposition of energy taxes). Non-priced induced gains are due to technological improvements and the rebound effects from them are the cause of most concern to energy analysts.
Much evidence on the magnitude of the direct rebound effect comes from US transportation studies where there is good statistical data on miles traveled per vehicle and petrol consumption. The results indicate that the number of vehicle miles traveled will increase (or rebound) by between 10% and 30% as a result of improvement in fuel efficiency. Similar results are obtained for domestic energy services, such as space heating (Table 1). However, the long run price elasticity is considerably higher as the ability of consumers to respond to changes in prices is much greater: for private transport in Europe the rebound (or long run price elasticity) is estimated at 30-50%.
Expansion of service demand can also take the form of consumer preference for higher levels of quality, comfort and performance. For instance the oil price rises of the 1970s stimulated R&D on more efficient car engines giving cars with high mpg; when oil prices fell in the late 1980s car manufacturers could offer consumers more powerful and better equipped cars (like the SUV: luxury 4 wheel drive jeeps) with the same fuel costs but lower mpg. Here consumers appear to take the possible savings in the form of higher levels of performance or quality. Another area where consumers ‘trade up’ is substituting energy for time: faster cars and planes, ‘labor’-saving domestic appliances, fast food, and private rather than public transport.
An important impact of the effect of higher efficiency, and consequent lower cost of energy services, is on marginal consumers - those who could not previously afford the service. The appliance market, such as for air conditioning, will expand as the cost of energy service fall, the magnitude depending on the elasticity of service demand. This is because consumers’ choice of the efficiency of an equipment depends on factor costs, and more efficient equipment will increase the demand for the service because of lower marginal costs per unit of service.
The second effect on consumers of lower energy costs is the ‘income effect’ - their ability to spend the monetary savings on other goods and services in the economy, which will contribute to economic growth. On what they will spend this ‘discretionary income’ depends on their current income levels: those on low incomes will use it for ‘basic’ goods; those on higher incomes on ‘luxury’ services. However, almost all goods and services involves some energy consumption in their production, distribution and consumption, and their energy intensity does vary markedly. However, Schipper argues that the income effect is very low: as only 5 to 15% of income saved is respent on indirect energy use (with air travel at the high end).
This question of what the monetary saving is spent on is crucial to the concept of ‘sustainable consumption’ - that is consumption which has low environmental impact, i.e., having low material and energy content.
Most probably the greatest effect (in the long term) of lower costs of energy services is on the direction and pace of technical change and innovation in the economy. New goods and services will be introduced to take account of the possibility of lower costs, and mass markets will be created by the continuing fall in operating costs bought about by efficiency improvements. As Len Brookes comments (1998):
It is inconceivable that we should have had the high levels of economic output triggered by the industrial revolution if energy conversion had stayed where it was at the beginning of the nineteenth century. Energy productivity and the productivity of other factors of production fed on one another with rising energy efficiency contributing to rising productivity of other factors of production - labor and capital - and rising output contributing to rising energy efficiency by way of embodied technical progress. Without this interactive process we should not have had, in the meantime, the very large increases in energy consumption alongside large improvement in energy conversion efficiency...
An illustration of these very large increases in energy consumption and energy efficiency due to technical change is given below for public lighting in Great Britain for the period 1920-1995. This sector is chosen because there are good statistical series for electricity consumption, lamp efficiency and road mileage. These statistics show an increase of over thirty fold in electricity consumption for public lighting, 20 fold in lamp efficiency, but less than 50% in road mileage. The net result of this increase in consumption and efficiency since the early 1920s, is for the light intensity, in terms of lumens per mile, to have increased over four hundred times, and to have increased four fold since 1960. Over the same period, energy intensity, in terms of MWh per mile, increased 25 fold with a 250% increase since 1960. (Figure 1).
Thus it seems that most of the tremendous increase in lamp efficiency has been taken in the form of higher levels of service, both in more miles illuminated and in higher illumination levels, not in the form of lower consumption. Interestingly, both consumption and efficiency seems to have leveled off in the 1990s, whereas during a period of rapid growth in consumption from 1960-80, lamp efficiency increased by 50%.
This process of technical change is aided by manufacturers who continually seek efficiency improvements in order to lower consumer costs and create new mass markets. In conjunction with this, utilities welcome efficiency improvements to lower the cost of their product: better to sell much at a low profit margin than little at a high margin. The massive expansion of [[electricity[[ consumption in the 20th century was fueled by the continual decrease in electricity prices, bought about by a near ten fold increase in generation efficiency, which spurred the development of new electrical goods and services: electric lighting in the 1900s, domestic refrigeration in the 1930s; TV in the 1950s; microwaves and videos in the 1980s, computers and the internet in the 1990s.
How much the improvement in energy efficiency per se stimulates economic growth is again the subject of much discussion, and is further explored in the section below on ‘Empirical evidence’.
Key contributors in the debate over the rebound effect are economists, who seek to identify through economic theory and mathematical models the conditions under which the rebound effect may be greater than 100% (a state termed ‘backfire’). Debate by economists over the effect of efficiency improvements is longstanding, and current economists all acknowledge the work of one of the founding fathers of energy economics, Stanley Jevons, who in his classic work The Coal Question, first published in Great Britain in 1865, argued that "it is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth".
Jevons pointed out that "the reduction of the consumption of coal, per ton of iron, to less than one-third of its former amount, was followed, in Scotland, by a ten fold increase in total consumption, between the years 1830 and 1863, not to speak of the indirect effect of cheap iron in accelerating other coal-consuming branches of industry".
Thus Jevons laid the foundation for the idea that the rebound effect (in energy markets) could be greater than 100%, sometimes referred to as the ‘Jevons paradox’. The conditions under which it may occur are explored by the Austrian economist Franz Wirl, and the US economists Harry Saunders and Richard Howarth, using extensive mathematical notion. Wirl, in his book The Economics of Conservation Programs, argues that the extent to which more efficient appliance raises the service demand depends on elasticity of service demand, as he remarks:
The most important consequent is that (ceteris paribus) a more efficient appliance raises service demand such that actual conservation falls short of an engineering efficiency comparison. Indeed 'conservation' in the sense of improving energy efficiency may raise energy demand, if demand for service is elastic.
He demonstrates that while higher prices reduces unambiguously demand, the impact of efficiency is ambiguous and that an improvement in efficiency need not lower consumption. He argues A necessary and sufficient condition for excluding this so-called conservation paradox is that service demand is inelastic, which in turn is equivalent to the requirement that the elasticity of marginal benefit is less than -1.
He concludes that the exclusion of his conservation paradox requires a price-inelastic service demand, as for price-elastic services an efficiency improvement by 1% will lower the cost of the service by 1% too, which will induce an expansion of the service of above 1%. Hence the expansion of service more than outweighs the conservation due to the efficiency improvement. Thus for the rebound effect to be less than 100%, Wirl concludes the elasticity of marginal benefit has to be less that -1, i.e., elasticity of service demand is less than 1, that is, inelastic.
Wirl observes that the rebound from efficiency improvements on electricity demand works through increasing the service demand. However, in practice some of this feedback may not lead to a physical expansion of the service demand but to an upgrading of, e.g., cars with more features and power-larger and faster. He makes a crude assessment of this rebound effect, arguing that it is small for energy services close to saturation levels (and with low marginal costs) such as hi-fi or TV but larger for services with substantial marginal costs, e.g., space heating, air conditioning, transport and perhaps lighting. However in the former case the absolute conservation potential is small, while in the latter the potential is large. This reflects the fact that consumers are more sensitive (and responsive) to end uses having a large energy cost. Thus Wirl concludes the rebound effect seems important for services with a significant conservation potential but negligible for services with a minor conservation potential in terms of kWhs.
Work by Saunders and Howarth, using neo-classical growth theory, seeks to identify the conditions under which ‘backfire’ (rebound effect of greater than 100%) occurs. The results are sensitive to the choice of production function, and for some functions depend on the assumptions made about the elasticity of substitution between energy and other factors. The use of the Cobb-Douglas production function, with the assumption of an elasticity of substitution of 1, validates the KB postulate, though many energy analysts question its conceptual underpinnings which rest on neo-classical economic principles. In contrast, Richard Howarth uses a Leontieff production function which assumes zero elasticity of substitution, and he argues, based on this model, that improved energy efficiency cannot give rise to increased energy use except under implausible assumptions.
Work by Saunders just lists the cases and circumstances under the KB postulate is or is not validated. He is currently developing a simple economic model (or “first order” tool) that will allow economists to take an arbitrary specified new efficiency technology and deploy it against an arbitrary specified production function to generate a prediction of the resulting change in fuel use, including possible rebound effects. Preliminary results show that energy efficiency technologies that enhance other factors of production may produce ‘backfire’, and that there is a marked difference in rebound between industrial sectors, and between the same industries in different countries.
The impact of energy efficiency technologies in stimulating the use of other factors of production has been termed the ‘Cashmir effect’, with the observation that a technical fix to improve energy productivity can produce a bonus in materials productivity. As Ronald Sutherland comments, “energy efficiency increases, not as a direct effort to reduce energy use, but as a result of overall productivity improvements in all inputs. In economic terms capital and energy appear to be complements not substitutes”.
To resolve this issue is no easy task. Richard Howarth remarks:
Sorting out the empirical dimensions of the Khazzoom-Brookes hypothesis...would require detailed models that merge engineering approaches to energy efficiency, microengineering studies of the demand for energy services, and macroeconomic models of savings and investments. The construction of such models is an ambitious task...
A number of studies have been done to determine the impact of improved efficiency on energy use. In the US, a major study for energy processes over the period 1880-1970 was done by Sam Schurr, while Lee Schipper and his colleagues have done much pioneering work on energy trends for OECD countries on a sectorial level for the period 1970-1995.
However, the problem is in measuring energy efficiency as its two indicators—energy intensity (energy use per unit output) and the energy coefficient (the output elasticity of energy consumption)—can give false signals. Schurr maintained that allying capital and labor inputs with new injections of energy into economic systems can increase the productivity of both capital and labor. This results in a fall in energy intensity due to a larger denominator in the shape of higher economic output. This can deliver a false message when in fact there has been no change in the efficiency of conversion of fuel to useful heat and work. Nevertheless it is accepted that there is a steady long-term trend in efficiency improvement in the economy, due to the 'vintage effect', that is, the tendency for new plants and appliances to be more efficient than those they replace. Thus it is limited by the rate of stock turnover and the rate of additions to stock, generally due to economic growth.
Schurr's empirical findings were that for the period 1920-1953 new technologies, often using electricity, not only raised the productivity of labor and capital but also improved energy productivity - that is, they reduced energy intensity. Energy efficiency improved at the same time as energy consumption rose and economic output increased. But total output grew at a faster rate than energy intensity declined, so total energy consumption increased. It was only in exceptional circumstances, such as the 1979 oil price hike, that energy productivity exceeded multifactor productivity - which actually fell at that time due to economic recession.
Other work examining US energy data is by Bill Hogan and Dale Jorgenson, who looked at time series data on energy intensity for large number of sectors and found that there is a trend of increasing energy intensity, once price effects are carefully taken out.
The extent to which energy efficiency stimulates economic activity, and hence increased energy use, is contentious but the effect is probably small. An examination of trends in energy intensity in International Energy Agency (IEA) countries for the period 1970-1995 by Schipper and Grubb concluded that feedback effects were small in mature sectors of mature economies and only potentially large in a few cases. Their thesis is that the improvement in efficiency per se is only a small part of the reason why total energy use may have increased.
They remark that of course the scale of the system keeps increasing with population, household formation, and the climb of incomes and sectorial output, and thus energy use had increased. However, energy efficiency improvements, as measured by lowered energy intensities, almost always led to lower use than otherwise and that such energy efficiency improvements do restrain energy growth.
The assumption that a major part of the rebound effect will automatically manifest itself as increased output or activity levels, and thus be visible through higher energy intensities, may be incorrect. The rebound could, as Wirl points out, be taken in the form of higher quality, performance and comfort. A key problem in resolving the KB postulate, which is at heart a standard empirical question, is that it is not possible to run historical "control" experiments on society to see whether energy use is higher or lower than if there had been no efficiency gains. This means straightforward observation of visible macroeconomic variables, such as energy intensities, can not provide much explanation. Instead, it may be more useful to use more sophisticated econometric tools, such as generalized technology production and cost functions, to analyze macro or sectorial level statistical data.
Improving energy efficiency has become, in many countries, a key part of the national strategy to tackle ‘global warming’, and is founded on the belief that it would lead to reduced national energy consumption, and hence lower greenhouse gas emissions. There is a long policy history of seeking national improvements in energy efficiency as a solution to environmental problems, but ultimately efficiency gains have been used to encourage economic growth and progress rather than to reduce consumption. The end result has been that economic growth has outpaced the rate of efficiency increase, and total energy consumption has increased. For instance, in the UK between 1965 and 1998 'efficiency' (as expressed by energy intensity - a rough proxy) doubled - a Factor 2 improvement. However, GDP rose by 147%, so total energy consumption rose by a quarter. Thus at current rates of efficiency improvement, it is perfectly feasible for there to be a Factor 4 (or four-fold) improvement in the next century. But as the UK Royal Commission on Environmental Protection comments:
There will continue to be very large gains in energy and resource efficiency but on current trends we find no reason to believe that these improvements can counteract the tendency for energy consumption to grow. Even if energy consumed per unit of output were reduced by three-quarters or Factor Four, half a century of economic growth at 3% a year (slightly less than the global trend for the past quarter century) would more than quadruple output, leaving overall energy consumption unchanged.
This unequal race between energy efficiency and economic growth is well-appreciated by many environmental economists and sociologists concerned with resource consumption. For instance, Mathias Wackernagel and William Rees in their book Our Ecological Footprint explicitly make the point that technological efficiency may actually lead to increased net consumption of resources. They conclude:
Ironically then, it is precisely the economic gains from improved technical efficiency that increase the rate of resource throughput. Micro-economic reality demands that these efficiency gains be used to short-term economic advantage. Far from conserving natural capital or decreasing ecological footprints, this leads to higher consumption.
Promoting energy efficiency may not necessarily be the best way to save energy or reduce pollution. For it may actually encourage energy consumption by conveying the message that consuming increasing amounts of energy is acceptable as long as energy is consumed by technologies that have been deemed efficient. Mithra Moezzi, a US energy analyst, believes that what is required is changes in consumer perception and behavior, and that over-reliance on technical solutions is mistaken. For instance, she advocates that more emphasis should be given to absolute, rather than relative, energy consumption in energy labels and standards. A bigger refrigerator maybe more 'efficient' but also consumes more than a smaller one. She remarks:
The standards and guidelines inherent in energy policies reveal moral and technical judgements about what is 'good’ and what is possible. When evaluating any particular standard, guideline, or other message related to energy conservation or efficiency, it is critical to consider not only "energy saved" in a narrow sense, but what underlying messages are being conveyed and how they might affect the cultural perceptions of efficiency and consumption in short and long terms. By choosing specifications that reflect absolute rather than solely relative consumption, policies may encourage an ideological as well as practical shift in perceptions of energy use.
Society has generally preferred technical or economic solutions, and scientists and engineers have instead emphasized the technical possibilities of a shift to less resource-intensive types of consumption (and also the development of non-fossil energy sources). One solution they advocate is the concept of service efficiency which may be defined as providing a maximum of useful energy services to consumers using the minimum of materials and energy use. There is an extensive literature on this concept and many attempts to design new types of machines that deliver energy services using innovative combinations of market goods and services and household labor.
Service efficiency in itself is not a panacea for sustainable consumption as the gains are easily offset by an increase in the number and variety of products consumed. Also, as research into the cultural aspects of consumption has shown, it is necessary to understand how and why we consume. This is why innovations that are meant to be efficient, and to reduce the need for resources, often have the opposite effect. As F-J Radermacher, a German sociologist remarked:
The trap that we have fallen into again and again over the course of technical progress consists of our always using progress on top of whatever went before (the rebound effect). This effect predicts that market forces and humanity's apparently unlimited capacity for consumption will use new technology to convert more and more resources into more and more activities, functions, services and products.
It is often argued that information technologies, such as computers will reduce material and energy consumption through substituting ‘virtual’ for real experiences and goods. But as Finnish sociologists Heiskanen & Pantzar ask:
...will the information super-highway do away with the urge to travel?...Will consumers actually substitute one good for another, or will they want to have it all: the television on, the newspaper on the table, and electronic news pointlessly self-scanning as the consumer of all this information dozes on the couch?
They make the comparison with claims made in the early 1980s about the paperless office, which never happened and actually turned out to be the opposite with office paper consumption increasing.
A key debate about energy efficiency is about the extent of the 'rebound': to what extent does energy use increase due to efficiency improvements? Does greater efficiency lead to higher or lower energy use than there would have been without those improvements? This debate, however, is difficult to resolve, as it is with all macroeconomic arguments, since we cannot conduct such (economic) experiments on society. Thus the rebound argument is contentious and difficult to prove either way. However, it may be possible in the long-term through good empirical research based on sound theoretical tools to reach strong conclusions about whether it is true (or untrue) in certain places, at certain times, or under certain conditions, and thus determine its overall economy-wide impacts, though we will never have absolute scientific certainty.
Nevertheless, the school of argument that links improvements in energy efficiency with increased energy consumption-the Khazzoom-Brookes postulate-have a strong claim based on the historical record dating back to the Industrial Revolution, and the tremendous economic growth that has followed ‘Factor 10’ efficiency improvements in the steam engine and other power devices. To what extent energy efficiency technologies stimulated economic growth is uncertain, and economic history, evolutionary economics, and institutional economics could shed more light on this issue than theoretical models based on neo-classical growth theory. The KB postulate could be rooted in the vast structural change in technologies, lifestyles, and social institutions that characterized the last two centuries, rather than a future world determined to reduce, or at least curtail energy use. We need not repeat past patterns of economic growth and energy use, particularly if we practice ‘sustainable consumption’ and emphasize quality of output and increased leisure time rather than quantity of output.
The rebound effect is strongly influenced by the difference in substitution potentials (elasticities) among all the factors (energy, labor, capital, and materials) and these change over time. It is very likely that energy efficiency technologies that enhances other non-energy factors will generate substantial rebound, which will be the case in many industries. It will take some time and much research before it is known definitively whether the KB postulate is valid, and the result is unlikely to be clear-cut. It is likely that energy end use, industrial sectors and even countries will all vary in the extent of the rebound. Some undoubtedly will show ‘backfire’, some just modest rebound, and some may even show ‘super-conservation’ that is a negative rebound with energy use decreasing more than the efficiency increases (Saunders 2005).
The task before energy researchers is thus to establish exactly where energy efficiency will be most effective, rather than just promote energy efficiency as the solution to global warming, and this is currently being investigated by the UK Energy Research Centre.
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