The Macroeconomic Rebound Effect and the UK Economy Final Report to The Department of Environment Food and Rural Affairs by the Stirling Team.

Abstract:

Improvements in resource productivity have been suggested as both a measure of progress towards sustainable development and as a means of achieving sustainability (Cabinet Office, 2001). The popular interpretation of resource productivity is "doing more with less": that is, of reducing the material or energy requirements of economic activity. However, the presumption of the conventional wisdom" that underlies current policy initiatives is that improving resource productivity will lower the burdens on the environment.

In fact, there has been an extensive debate in the energy economics/ policy literature on the impact of improvements in energy efficiency in particular. This focuses on the notion of "rebound" effects, according to which the expected beneficial impacts on energy intensities are partially, or possibly even more than wholly in the case of "backfire", offset as a consequence of the economic system's responses to energy efficiency stimuli. The "Khazzoom-Brookes postulate" (Saunders, 1992) asserts that improvements in energy efficiency can actually stimulate the demand for energy, thereby nullifying the anticipated environmental benefits of such changes. Jevons (1865) was the first to argue for such an effect, in the context of improvements in the efficiency of coal use. Very recently the House of Lords have acknowledged that energy efficiency improvements alone might not deliver the expected environmental benefits.

In this report we explore the conditions under which the notion that energy efficiency is environment-enhancing would be expected to hold theoretically, and present some empirical evidence from an energy-economy-environment computable general equilibrium (CGE) model of the UK economy.

Rebound and backfire are of considerable potential relevance to climate change policy, since the coupling of reductions in energy use with no penalty in terms of output (the "zero-cost" ideal of the resource productivity enthusiasts) may not in fact be the win-win option suggested, due to induced effects on output and the consequent scale effect on environmental burdens.

Our work shows that energy efficiency measures would generally be expected to generate a less than proportional fall in energy use (rebound). Our own view is that even the presence of backfire would not undermine the case for energy efficiency policy: although it does imply that environmental benefits cannot be guaranteed by such policies alone. Rebound implies that environmental improvements will not be as great as the initial percentage fall in energy use per unit output. However, the extent of rebound is ultimately an empirical issue. Our own empirical analysis suggests the likelihood of significant rebound effects in response to system-wide changes in energy efficiency (of the order of 40%) for the UK as a whole, although this does depend on the precise value of elasticities that govern the ease of substitutability of energy for other inputs. However, there is also typically an accompanying stimulus to economic activity. A clear policy implication is thus that: (i) in general, the coordination of energy policies would be beneficial and (ii) that an increased energy tax may be required to be implemented alongside the energy efficiency improvement.

Our results show some sensitivity of the rebound effect to changes in the parameter values for the elasticity of substitution between energy and non-energy intermediates; for the elasticity of demand for energy, electricity and non-energy sectors and to the costs of policies and the behaviour of the labour market. However, it is difficult to see how energy policy could in itself do much to change these parameters in the "right" direction. Indeed, improvement of information flows and reduction of transactions costs would be likely to increase effective elasticities, not reduce them.

1. Introduction and Background
2. Theoretical analysis of rebound effects
3. Review of empirical evidence to date
4. UKENVI: An energy-economic-environment Computable General Equilibrium model (CGE) of the UK
5. Model simulations and results
6. Implications of rebound effects for energy policies
7. Conclusions

• Appendix 1. UKENVI
• Appendix 2. The construction of the UKENVI database

Publication Year:

2006

Publisher:

Department for Environment, Food & Rural Affairs

DOI:

No DOI minted

Author(s):

Allan, G., Hanley, N., McGregor, P.G., Swales, K.J. and Turner, K.