As it stands, economic growth continues to outpace energy efficiency improvements, and energy use continues to grow overall. The global economy has been growing at the rate of roughly 3 percent per year. Historically, there has been roughly 1 to 1.5 percent improvement in energy use per unit of economic output (energy intensity or productivity) each year. For energy efficiency gains to outstrip the increase in energy demand driven by the growing economy, the economy must improve energy intensity/productivity by at least 3 percent per year, roughly doubling or tripling the historic rate of improvement. Efficiency advocates argue that if we work harder at capturing energy efficiency opportunities, we can more than double or triple this rate of efficiency improvement and bend global energy use downwards. That’s a big task, and there at least two factors make this challenge even harder: 1) a large portion of changes in energy intensity over time can be attributed to structural changes in the economy, as economies shift from agricultural to industrial to services-oriented.37 These aren’t the technical improvements energy efficiency policies are concerned with, and these trends are hard to accelerate or affect through policy; 2) rebound makes the doubling/tripling goal even more challenging, as it means efficiency feeds back into energy consumption and economic growth (increasing both) and makes the horizon we’re reaching toward recede even further.
Rebound effects are part of the reason that energy use is still growing, even as the economy gets more and more efficient. True, economic growth drives up energy use, even as we get more efficient. But those two terms – economic growth, and energy efficiency – are related, and rebound effects describe the relationship between the two. Part of the reason the economy continues to grow is because below-cost energy efficiency improvements grow the supply of energy services and increase the productivity of the economy – we get more economic activity and income and welfare out of the same amount of energy – and productivity improvements are a key driver of economic growth. Some economists argue that the supply of energy services is a key enabling force in economic growth: think about the impact of electric motors, industrial lasers, computing, automation, and all of the other ways in which we use energy to greatly improve the productivity of our economy.35 Efficiently expanding the supply of energy services may thus be one of the principal factors determining the rate of economic growth in rich and poor nations alike. That said, there are definitely other factors driving economic growth, including improvements in the productivity of other inputs to the economy, such as labor, capital, and other materials.
At the economy-wide, macroeconomic scale, the aggregate impacts of widespread energy efficiency improvements can lead to substantial rebound effects. As producers and consumers respond in turn to various cascading changes in the price of goods and services, the pace of economic growth quickens, and market prices for fuels may fall, driving further rebound. A number of ‘Computable General Equilibrium’ (CGE) models generally show rebound at the scale of a national economy at 40 to 60 percent for developed economies, and 50 percent to much greater than 100 percent (‘backfire) for developing economies. These studies look at national economies and thus ignore global, macroeconomic impacts beyond national borders, which can add additional rebound in energy consumption. ‘Integrative modeling’ found that if the world adopted all of the “no regrets” energy efficiency policies suggested by the IEA, then rebounds effects would erode more than half of expected savings (52 percent) in the long-term. There are also several reasons to think this is may be a conservative estimate.
Rebound effects in firms depend principally on the ability of firms to take better advantage of now-cheaper energy services. This is especially true for new productive capacity. If long-term substitution is high, rebound effects can be substantial. In addition, output effects contribute to rebound for energy intensive firms with a high elasticity of demand for their products (that is, where consumers are very responsive to changes in the price of their products and demand more product as prices fall). Improvements in energy productivity at firms can also contribute to greater economic activity and growth, driving up energy demand overall. In general, rebound effects are higher for efficiency in productive sectors of the economy than for end-use consumer efficiency. This is notable, because two-thirds of the energy consumed in the United States is consumed in the productive sectors of the economy and “embedded” in the non-energy goods and services purchased by consumers.32 In China, India, and many other developing economies, an even greater share of energy is consumed for productive activities.
Rebound is particularly high in productive sectors of the economy – such as electric power or steel production – and sectors where efficiency improvements can motivate significant consumption increases and “frontier effects,” or whole new energy services.29 While further study of rebound effects for efficiency improvements at production firms is needed, the literature to date indicates that direct rebound effects in developed countries may be on the order of 20 to 70 percent for industrial sectors, with additional rebound due to indirect and macroeconomic effects. In developing countries, rebound in industrial sectors may be on the order of 50 to 90 percent.
No. Rebound and backfire effects are both most important and least understood in emerging economies. Rebound effects are almost certainly larger in poorer, developing nations. In terms of efficiency improvements in end-use consumer energy services in developing nations, direct rebound effects are likely to be much higher than in richer nations, possibly reaching at least as high as 100 percent. Rebound is higher because demand for energy services is far from saturated and more elastic, and the cost of energy services is often a key constraint on the enjoyment of energy services. This is important because growing demand in developing nations is the principal driver of energy demand growth worldwide. Long-term price elasticities of demand also tend to be higher during early stages of development. Since expanding the supply of energy services is a key constraint on economic activity in developing nations, the macroeconomic impact of efficiency improvements in developing economies is likely to be more significant, helping developing economies grow faster (and thus consume more energy).
In rich, developed nations, if we improve the efficiency of end-use consumer energy services, like cars, home heating and cooling, or appliances, the literature indicates that direct rebound effects are typically on the scale of 10 to 30 percent of the initial energy savings. Additional indirect and macroeconomic effects may mean total rebound erodes roughly one-quarter to one-half of expected energy savings.22 Rebound is smallest in cases when demand for the energy service in question is already saturated (that is, we use as much of it as we would care to use), and highest in cases where the cost of the energy service is a key constraint on fulfilling demand for that service.
Not usually. Combined rebound effects drive total economy-wide increases in energy demand with the potential to erode much (and in some cases all) of the expected reductions in energy consumption. In certain cases, efficiency improvements will “backfire,” driving a rebound in energy that fully compensates for the initial energy savings, increasing energy demand overall. Think of it this way: for every two steps forward we take in energy savings through efficiency, rebound effects take us one (and sometimes more) steps backwards. On the other hand, rebound effects equate to a net increase in consumer and social welfare, and thus should not necessarily be viewed negatively.
Rebound effects differ in scale depending on the type of energy efficiency improvements, and in which part of the economy they occur. Over 100 academic studies have examined the empirical evidence, conducted modeling inquiries, and otherwise tested the scale of rebound effects. While there is much more work to be done to determine the precise scale and impact of rebound effects in different circumstances, the conclusion is that rebound effects are significant and cannot be ignored in energy and climate analysis and policymaking.
The magnitude of rebound effects determines how effective efficiency improvements are at contributing to lasting reductions in total energy use (and therefore greenhouse gas emissions). Energy efficiency is frequently cited as the single greatest contributor to emissions reduction. The problem is that all of these estimates are based on an assumption: that energy efficiency reduces energy demand in a linear, direct, and one-to-one manner. An X% gain in efficiency leads to an equivalent X% reduction in total energy use. The economy is anything but direct, linear, and simple, especially when responding to changes in the relative price of goods and services. If we don’t accurately and rigorously account for rebound effects, we risk over-relying on energy efficiency to deliver lasting reductions in energy use and greenhouse gas emissions, and we might fall dangerously short of climate mitigation goals.