What’s the deal with the ‘rebound effect’?
“David,” nobody has been asking, “what is this ‘rebound effect’ I keep hearing about? And does it matter?” Well, nobody, I have heard your questions and I’m here to answer them.
In fact, I’m going to write three posts about this. In the first, I’ll briefly describe what rebound effects are and the controversy over them. In the second, I’ll explore the policy implications (and — spoiler alert — conclude that there aren’t many). And in the third, I’ll explain some of my dissatisfaction with the terms of the debate. It’s going to be totally awesome.
Need less, use less: The basic theory of energy efficiency
The most important thing to keep in mind when discussing energy is that we don’t use energy. Think about it: If I handed you a chunk of coal or a barrel of oil, would you have any use for it? No. We use heat and refrigeration (“hot showers and cold beers,” as Amory Lovins says). We use lighting and lawn-mowing and driving and texting and electro-sonic toothbrushing. We use the services that we derive from energy, which nerds call energy services.
It takes energy to get energy services, of course, but the amount of primary energy needed to produce a given level of energy service is not fixed. It’s possible, through cleverness or technological innovation, to get the same level of energy service using less energy. That’s energy efficiency — more energy service from less primary energy.
If demand for an energy service is steady, but its efficiency increases by 10 percent, then the amount of energy devoted to it will decline by exactly 10 percent. Or if demand for the energy service is increasing, the energy devoted to it will be 10 percent less than it otherwise would have been.
At least that’s the theory. And it’s a theory dear to climate hawks. In every plan or scenario for reducing climate pollution, energy efficiency plays a central role. In many scenarios, 50 percent or even more of the greenhouse gas reductions needed by mid-century are expected to come from energy efficiency. A lot is riding on it.
Ceteris ain’t paribus: Energy efficiency in the real world
So what happens if we increase the energy efficiency of an energy service in the real world?
First, note that when an energy service becomes more efficient, it also becomes less expensive. Say I trade in my old car in for a Prius, which is 20 percent more fuel efficient. Among other things, that means I spend (roughly) 80 percent what I used to spend to drive how much I used to drive.
That’s money in my pocket I didn’t have before. What do I do with it?
One thing I might do with it is buy more gas, i.e., drive more. In other words, I might respond to the lower cost of an energy service by increasing my demand for the service. The amount of primary energy I use for driving, which fell when I bought my Prius, would rebound back upward. That is the direct rebound effect.
Or, I might use the extra money to, say, buy an iPad. Thing is, manufacturing and operating an iPad requires energy. So even if the energy I devote to driving drops, my total energy use could rebound back upward. That is the indirect rebound effect.
(The same basic story applies to businesses. If their energy costs go down through energy efficiency, they invest some of the savings in more production, thus bumping their energy use back up.)
Stepping back, there’s the question of economy-wide rebound effects. If we drive energy efficiency across the entire economy, then we lower what’s called the energy intensity of the economy, that is, how much primary energy it takes to get a unit of GDP. When the economy as a whole is more energy efficient, it takes less energy to create wealth.
What is the macroeconomic effect of a drop in energy costs? The same effect we’d expect from a drop in labor costs or capital costs: faster growth. And insofar as stimulating growth means increasing energy use, that will wipe out some of the energy-saving gains of the efficiency.
Take an example: When Eli Whitney invented the cotton gin, it saved a ton of human labor. That labor wasn’t simply banked, it was put to other uses. By increasing the labor efficiency of separating cotton fibers, the cotton gin stimulated economic growth. Energy efficiency does the same thing. That is its great selling point, but also the very reason it wipes out some of its own energy savings.
Much ado: the rebound controversy
You’ll notice that I’ve used almost no numbers. I haven’t given any sense of how significant rebound effects are. Do they wipe out 1 percent of efficiency’s energy savings? 10 percent? 50 percent? All? More than all?
Good question. I don’t think anyone would dispute that rebound effects exist. But as to their size and significance there is a great deal of dispute.The academic literature is extensive, yet empirical studies of rebound effects in action are few and limited, so the results are generally tentative and inconclusive.
A literature review commissioned by the European Union found “clear recognition of the rebound effect’s existence,” with rebound levels anywhere from 10 to 80 percent, depending on … all sorts of stuff: the type of energy service under investigation (food, energy, etc.), income levels (direct rebound is much higher in poorer countries, where the cost of energy services is a real constraint on their use), time, location, and various nerdy economist metrics like price elasticity and substitutability. In other words, the devil’s in the details. In particular, “indirect and economy wide rebound effects are difficult to define, measure and counteract.”
Jesse Jenkins at the Breakthrough Institute did a similar literature review with somewhat stronger and less equivocal conclusions. Rebound effects, he says, erase “much and in some cases all of the expected energy savings” of energy efficiency. (There’s an FAQ on the report as well.)
There are plenty of rebound skeptics around, though, who say the effects are too small to matter much (see Amory Lovins and NRDC’s David Goldstein). For a thorough recounting of the recent back-and-forth about this, the Rocky Mountain Institute has a nice summary article with lots of links.
So, there are the basics on rebound effects. They definitely exist. In some cases (e.g., commercial transport), they can be quite high. But they are devilishly difficult to measure precisely and vary based on specific circumstances. Even more difficult is pinning down the total, economy-wide rebound effect, which is, when contemplating climate policy, what really matters.
What do we do with all this? What are the implications for policy?
I happen to think that contemplating rebound effects leads us into all sorts of fascinating conceptual issues, and eventually to the issue of all issues: growth. I’ll get into that in my third post. But in my second, I’ll argue that, contrary to the tenor of the controversy, there actually aren’t that many short- or mid-term policy implications. In particular, no matter what your take on rebound effects, energy efficiency remains a vital policy goal. More on that tomorrow.