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The Rebound Effect: Real, but Not Very Large

August 7, 2014

As the energy efficiency of products, homes, and businesses improves, it becomes less expensive to operate them. The rebound effect postulates that people increase their use of products and facilities as a result of this reduction in operating costs, thereby reducing the energy savings achieved. Periodically, some analysts raise questions about the rebound effect, arguing that it is a major factor that needs to be accounted for when analyzing energy efficiency programs. The most recent example is a report by the Institute for Energy Research, an organization that primarily works on oil, gas, coal, and electricity markets. In order to address these recurring arguments, today ACEEE released a white paper entitled The Rebound Effect: Large or Small? The paper is written in a “question and answer” format designed to summarize what we know, what we do not, and—given what we know—how large the rebound effect is likely to be. The paper examines both direct and indirect rebound effects.

Direct rebound is the impact of a purchase of an efficient product by purchasers’ use of that product. For example, a car buyer may drive an efficient car more often than an inefficient one or a homeowner who weatherizes his/her house may use a portion of the savings to increase the temperature in the house in the winter to increase comfort.

Indirect rebound, on the other hand, reflects the impact of re-spending the money that consumers and businesses save from improved energy efficiency. It can also include the fact that as factories and other parts of the economy get more efficient, production costs may be lower, freeing up funds to expand the factory and increasing demand for products. An example of the former is a household that cuts its heating bill and takes back a little of the savings on higher thermostat settings, but then spends the remaining money saved on eating out or buying a new flat screen television. An example of the latter is that efficiency improvements in aluminum smelting can reduce the price of aluminum, thereby fostering increased aluminum sales that requires additional energy consumption in its production.

There have been more than 100 studies published that attempt to estimate rebound effects, many of which we examined for our paper. We found that while there is some uncertainty, available evidence indicates that direct rebound effects will generally be 10% or less. Estimates of higher direct rebound effects are primarily based on studies of consumer responses to changes in energy prices, but as shown by Greene for vehicles, this is different from consumer response to changes in energy efficiency. There is a need for a study on home weatherization that attempts to separate out price and rebound effects to see if they are similar or different. Rebound is probably higher for weatherization of low-income homes since prior to weatherization some of these households could not afford to keep their homes as warm as they would have liked. And rebound may be higher during shoulder periods where use of heating or cooling is optional.

We found that there are larger uncertainties about the size of indirect rebound effects and more careful studies are needed. From the evidence that is available, the most likely estimate is that indirect rebound effects are on the order of 11%, increasing both energy use and the level of economic activity. This 11% estimate comes from a study by Barker and Foxon that used a sophisticated macroeconomic model to examine the impact of a number of United Kingdom energy efficiency policies over the 2000-2010 period. The study estimated that indirect rebound was 11% by 2010, with higher effects (15%) in energy-intensive industries and lower effects for commerce (5%), road transport (6%), and households (10%). Unfortunately, there are no similar studies of the U.S., although such a study would be useful.

Other studies, using different methodologies, come up with different answers, both higher and lower. At the high end, a variety of Computable General Equilibrium (CGE) models have been used. However, such models are based upon a number of standard assumptions from neo-classical economics (perfect competition, constant returns to scale in production, consumers always work to maximize their utility) that are poorly supported by empirical evidence. In particular, the possibility of ”win-win” policies, such as those aimed at encouraging energy efficiency, cannot be fairly modeled if an economy is assumed to be at an optimal equilibrium, a key assumption of these models.

In conclusion, we found that there are both direct and indirect rebound effects, but these tend to be modest. Direct rebound effects are generally 10% or less. Indirect rebound effects are less well understood but the best available estimate is somewhere around 11%. These two types of rebound can be combined to estimate total rebound of about 20%. We examined claims of “backfire” (100% rebound), but they do not stand up to scrutiny. Furthermore, direct rebound effects can potentially be reduced through improved approaches to inform consumers about their energy use in ways that might influence their behavior. And indirect rebound effects, which appear to be linked to the share of our economy that goes to energy, may decline as the energy intensity of our economy decreases.

Overall, even if total rebound is about 20%, then 80% of the savings from energy efficiency programs and policies register in terms of reduced energy use, which benefits the environment and public health. And the 20% rebound contributes to increased consumer amenities (like more comfortable homes), as well as to a larger economy and more jobs. Therefore, these savings are not “lost,” but put to other generally beneficial uses.

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