WP-013: Kenneth Gillingham, David Rapson, and Gernot Wagner, "The Rebound Effect and Energy Efficiency Policy" (September 2015)

What do we know about the size of the rebound effect? Should we believe claims that energy efficiency improvements lead to an increase in energy use?

The magnitude of the rebound effect is a debate that persists and has important implications for energy efficiency policy. Yet the rebound effect has many facets, and the increasingly voluminous literature has become confusing and difficult to translate into policy relevance.

This paper makes three contributions. First, it introduces the important conceptual distinction between a rebound effect associated with a hypothetical, costless energy efficiency improvement and what’s actually happening in the real world: an energy efficiency policy that comes with benefits yet also with costs, and that may necessitate changes in other attributes of the product, such as weight, size or capacity. There’s plenty of confusion around the two, and even most academic papers aren’t always clear about what they are measuring. Second, the paper presents the most reliable evidence available quantifying the microeconomic rebound. Third, it attempts to clarify the nature of the macroeconomic rebound and discusses how to estimate its size.

The authors find that the existing literature does not provide support for claims that energy efficiency gains will be reversed by the rebound effect. The total microeconomic rebound is, in most cases, on the order of 20 to 40 percent when including all substitution and income effects. Far less is known about the macroeconomic rebound. The authors’ main conclusion is that it is more useful to focus on the economic efficiency of energy efficiency policies in the broadest possible sense than it is to focus on rebound. The rebound effect is only one component that factors into the analysis of an energy efficiency policy. More importantly, it is also a factor that in most cases leads to other societal gains. This is especially true for the one rebound aspect that is the hardest to measure: induced innovation and productivity growth.

Rather than consider the rebound effect as a deterrent from passing energy efficiency policies, policymakers should include these societal gains in the tally of benefits of a policy. The mistake of designing policies to “mitigate” the rebound effect stems from a focus on minimizing energy use, rather than the broader objective of maximizing economic efficiency. In sum, while the energy savings from energy efficiency policies will be reduced by the presence of a rebound effect, the rebound effect itself is welfare-improving. Energy inefficiency can never be good. It’s clear then that a costless energy efficiency improvement is going to conserve energy and increase welfare for the consumer—rebound or not. Real-world energy efficiency policies, of course, come with costs, which need to be weighed against their benefits. That’s precisely the course of action: conduct proper benefit-cost analysis for each policy. In doing so, consider rebound, but don’t let it be a distraction from the broader policy goal.