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