The Rebound Effect from Improving Energy Efficiency Naval Postgraduate School April 26, 2012 Kenneth Gillingham Yale School of Forestry & Environmental Studies Origins of the “Rebound Effect” •  Let’s go back to 1865… … when a 29 year old Englishman William Stanley Jevons •  Published the book: “The Coal QuesZon” The “Jevons Paradox” •  “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consump7on. The very contrary is the truth.” •  Jevons conclusion: Even if it improved the efficiency of use of coal, Britain would eventually run out of coal and no longer be a world power •  Len Brookes came to the same conclusion about the US and oil in the 1970s and coined the term “backfire” The New Yorker, December 20 & 27 2010 Breakthrough InsZtute Report, February 2011 Key QuesZons: •  What is the nature of this “rebound effect”? •  What is the evidence on the rebound effect? •  What does it mean for energy imports and policy? Today: Focus on energy efficiency in light duty vehicles The Nature of the Rebound Basic logic: •  Increased efficiency lowers the price of energy services –  People then consume more energy services (subsZtuZon and income effects) Examples: –  (Jevons) increase efficiency of the use of coal, an output like iron becomes cheaper •  People can be expected to demand more iron –  Increase vehicle fuel economy, so it’s cheaper to drive a mile •  People can be expected to drive more Three Categories of Rebound Effect 1.  Direct Rebound Effect –  Lower price of energy services ⇒ use more energy services 2.  Indirect Rebound Effect –  Spend less on energy ⇒ buy more other energy-­‐using goods 3.  General Equilibrium Rebound Effect –  Everyone spends less on energy ⇒ price of energy drops globally ⇒ people in other countries use more energy –  Increase energy efficiency ⇒economic growth(?) What It Means for Policy Energy Use No policy baseline Savings from policy Policy scenario Rebound effect losses Policy scenario without the rebound effect Time Note: Energy services may or may not change across scenarios For Energy Efficiency Policy… What we really want to know is: •  How does energy consumpZon and the level of energy service change relaZve to a scenario in which efficiency does not change? –  Energy consumpZon has consequences for the environment –  More/beker energy services may make people beker off Common Misunderstanding Many are asking the wrong quesZon: •  How does energy consumpZon change aler efficiency improves, relaZve to before improvement? •  Why is this not the right quesZon? –  It’s a bit like comparing apples to oranges –  Or cars to horse-­‐drawn carriages QuanZfying the Rebound Effect •  How to establish a causal link between efficiency improvements and greater than otherwise energy use? –  Must account for new technologies –  Must account for income growth –  You know it is incorrect if you akribute all changes in energy use to energy efficiency •  This can be very difficult… Start with Direct Rebound Effect •  QuanZfying the direct rebound effect of a policy –  How does the use of the good increase? –  This is a mix of a subsZtuZon and income effect –  On the margin, really want the elasZcity of energy use with respect to efficiency (e.g., fuel economy) •  Ideally, can extrapolate this out What is Commonly Used •  Most studies use the elasZcity of VMT with respect to the cost per mile of driving –  % change in VMT / % change in cost per mile of driving –  If people respond the same way to a change in fuel economy as they do to a change in gasoline prices, then this is the same as the elasZcity of VMT with respect to fuel economy Review of VMT elasZciZes My Own Research •  For newer cars in California, I find a medium-­‐run elasZcity of VMT with respect to the price of gasoline of -­‐0.15 •  Find some evidence that people respond less to changes in fuel economy than changes in gasoline prices •  Run a feebate policy to get a beker sense of the responsiveness to a change in fuel economy –  Not all people will change the car they buy due to a policy –  Find an elasZcity of VMT with respect to fuel economy of 0.06 To Get a Sense of the Values ElasZcity value My esZmate Pavley Fed 2012 Rule Alliance of Auto Manufacturers Time frame of the study What about Indirect Rebound? •  Re-­‐spending of freed-­‐up income… Suppose the efficiency increase was costless. –  Energy services are one of the most energy intensive uses of income, while most consumer goods are less energy intensive –  On average the re-­‐spending is not likely to exceed the raZo of energy expenditures to GDP (~9% in 2007 based on EIA data) Suppose the efficiency increase was costly –  Then there would be even less freed-­‐up income, so an even smaller indirect rebound effect •  Tough to know the energy intensity of the next thing people will buy if they have extra income Billions
Total US Expenditures on Energy Consumption (2007): $1.233 Trillion
$600
Retail Electricity
Biomass
$500
Petroleum
2007 US GDP:
$14 Trillion
$14,000 Billion
Natural Gas
Coal
$400
About 4%
of GDP
About 1.8%
of GDP
$300
$200
$100
$0
Residential
Commercial
Industrial
Transportation
Electricity includes non-­‐primary energy costs of electric system. Source: EIA (2007) How People Spend Their Money U.S. Household Expenditures ($/yr) U.S Carbon IntensiGes (tCO2/$) Source: Chris Jones, UC-­‐Berkeley Carbon Calculator (CO2 is key reason for wanGng less energy consumpGon) General Equilibrium Rebound Effect This depends enZrely on the supply and demand for oil. Thought experiment: •  The market for oil is vast and global – nearly 90 million barrels/day (IEA 2012) •  U.S. motor gasoline use is roughly 8 million barrels/day (EIA 2012) •  Suppose we decreased gasoline use by 1 million barrels/day (1.1% decrease in global use) What happens? GE Rebound Effect Thought Experiment •  Oil supply is relaZvely inelasZc: suppose 0.1 elasZcity •  Suppose the global oil market is perfectly compeZZve –  Then 1.1% drop in US demand suggests 11% drop in price •  But the oil market needs to re-­‐equilibrate •  Oil demand may be slightly more elasZc: -­‐0.4 –  This implies a roughly 4% increase in oil demand –  Bokom line: <5% GE rebound effect Result higher if OPEC exerts significant market power What About Induced Growth? •  Some have argued that energy efficiency policy “induces economic growth” and thus uses more energy –  Ayres (2005) –  Sorrell (2009) –  Barker et al. (2007, 2009) –  Saunders (2011) •  Some of these studies even predict “backfire” using Computable General Equilibrium (CGE) models •  The basic link “efficiency ⇒ growth” is olen modeled either opaquely or with likle economic basis. •  I view the results thus far with cauZon Back to Energy Efficiency Policy Several ways for policy to improve energy efficiency: •  Policy intervenZon – standards, tax consumpZon –  We would expect a rebound effect to occur –  The evidence so far points to a relaZvely small one, maybe on the order of 20% -­‐ 30%. –  “Backfire” is very unlikely –  Given other unaddressed externaliZes, the rebound may not make everyone much beker off •  Policies to create behavioral change – e.g., social norms –  If preferences are actually changed, then we should expect no rebound effect Key Takeaways •  The “rebound effect” clearly exists –  It may or may not be such a bad thing –  The direct rebound effect is likely to be dominant (~20%) –  The indirect rebound effect is likely to be small (<10%) –  The general equilibrium rebound effect is likely to be small •  What does this mean: –  “Backfire” is extremely unlikely –  But, we should take the rebound effect into account in calculaZng the effects of different energy efficiency policies Acknowledgements: Jim Sweeney and the late Lee Schipper