The macro-economic rebound effect and the UK economy. Final report to Defra

Abstract:

The study examines the macroeconomic rebound effect for the UK economy, arising from UK energy efficiency policies and programmes for 2000-2010. The work explores the relationships between energy efficiency, energy consumption, economic growth and policy interventions using a well-established and highly detailed macroeconomic model of the UK economy. The work has been carried out in response to a call from the UK Department for Environment, Food and Rural Affairs (Defra), with the support of Defra's energy-efficiency policy team. As the focus of this study is to assess the magnitude of the macroeconomic rebound effect, the projections given in the report should not be taken as forecasts of future UK economic or environmental performance, e.g. the projections given here will differ from those in the 2006 Climate Change Programme.

This study contributes to the House of Lords debate on the rebound effect by examining the macro-economic rebound effect on the UK economy from energy efficiency policies and programmes for final energy users, using an energy-environment-economy model of the UK economy. The policies are targeted at improving market performance in energy efficiency through improving information, reducing or removing barriers and correcting for market failures. The modelling allows for the existence of these potential improvements. No assumption is made that the economy is in equilibrium or at full employment of resources. The effects are disaggregated by industry, households, transport and commerce. The study focuses on the macroeconomic implications of energy efficiency policies and programmes, and does not provide an evaluation of their likely effectiveness at a micro level. The macroeconomic rebound effect is investigated using a macroeconomic model of the UK economy (MDM-E3), together with a review of the literature and expert analysis.

The main modelling results of this study are given in Chapter 6, presented as the difference between a base case, which includes all the above energy efficiency policies, and a reference case, without these policies. Overall, we find that the policies lead to a saving of about 8% of the energy which would otherwise have been used by 2010 and a reduction in CO₂ emissions of 10% (or 14 mtC) by 2010, which is higher than the official projections. There are also positive macroeconomic effects: firstly lower prices and lower inflation, as the production system requires fewer inputs to produce the same output; and secondly higher output and growth, partly the consequence of the lower inflation, as households spend more in response to their higher imputed income when their energy bills are reduced for the same level of energy services provided. We find a 0.3 percentage point (pp) reduction in the annual growth rate of prices for 2005-10 and a 0.1pp increase in the annual GDP growth rate for 2005-10.

We find that the macroeconomic rebound effect arising from UK energy efficiency policies for the period 2000-2010 is around 11% by 2010, averaged across sectors of the economy. When this is added to the (assumed) direct rebound effect of around 15%, this gives a total rebound effect of around 26% arising from these policies. The decomposition of these effects is interesting. The largest direct rebound effects are for the road transport and household sectors, whereas the largest indirect and economy-wide rebound effects are for the energy-intensive and other industry sectors, with small direct, indirect and economy-wide rebound effects for the commerce sector. Thus, the findings of our study support the argument that energy efficiency improvements, for both consumers and producers, stimulated by policy incentives do not give rise to a large macroeconomic rebound effect.

This report contains an executive summary, and is divided into the following sections:

1. Introduction
2. Methodology
3. Review of Literature on Macroeconomic Rebound Effect
4. Basic Structure of MDM-E3 Modelling
5. Description of Policies and Scenarios
6. Results
7. Scenario and sensitivity analysis
8. Conclusions

• Annex 1. Description of energy efficiency policies and related modelling assumptions
• Annex 2. MDM-E3 as an Energy-Environment-Economy Model
• Annex 3. Questions raised by Defra
• Annex 4. Workshop on 'Macroeconomic Rebound Effect and the UK economy'
• Annex 5. Illustrative model for energy savings

Publication Year:

2006

Publisher:

Department for Environment, Food & Rural Affairs

DOI:

No DOI minted

Author(s):

4CMR, Cambridge Econometrics CE Ltd, and Herring, H.