What are “rebound effects?”

A “rebound effect” is when an improvement in energy efficiency triggers an increase in demand for energy. When the efficiency of an energy consumptive activity improves, the cost of the service derived is lowered. Individuals and firms respond to price changes in two general ways: 1) Increase the use of that energy service to increase outputs or incomes. For example, a low-income resident may now heat his or her home more often or more areas of the home after weatherizing because it is now more affordable to heat. 2) Rearrange the factors of production, or goods and services consumed, to substitute now-cheaper energy services for other goods or services (maintaining the same level of output or income). For example, a more efficient heat plant may enable a chemicals plant to raise temperatures in industrial processes to extract high quality product from poorer quality inputs (substituting energy for materials) or to reduce process times (substituting energy for labor). Likewise, lower energy prices will increase total factor productivity, increasing economic growth and attendant energy consumption; this is called “economy-wide” rebound.