The rebound effect

Energy efficiency improvements often do not deliver reductions in energy use. For example, when a householder installs better insulation, the energy savings are sometimes much less than would have been predicted. Sometimes this is because the insulation was badly fitted, but it is often because the householder runs the heating at a higher temperature when the house is better insulated. This is called the ‘rebound’ effect: when it becomes cheaper or more effective to use energy, people use more of it.

The many studies into this effect have produced a wide variety of different estimates for the size of this effect. Most cluster between 10 and 30%. This means that energy efficiency improvements generally result in a large net benefit. But these studies only capture the direct effect on consumers and businesses. A study from the UK’s Energy Research Centre shows that the economy-wide impact may be much larger. For example, lower heating bills may mean that householders are rich enough to take more flights. At an even higher level of abstraction, better economy-wide energy efficiency (through, say, improvements in steel-making technologies) may encourage more rapid economic growth, which in turn raises energy use.

Some economists think that the economy-wide rebound from energy efficiency gains is very large – perhaps over 100%. A figure over 100% suggests that total energy consumption rises after energy efficiency improvements. The tentatively stated view of a new report by the UK Energy Research Centre is that the true number is somewhat lower than this and may be around 50%, although it could be a great deal higher.

Government projections for the impact of energy saving measures never take the rebound effect into account. Policy-makers trying to reduce global emissions need to adjust their thinking to reflect the much lower than expected efficacy of energy saving programmes.

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For several decades economists tended to believe that as societies grew richer, they improved energy efficiency and consumed fewer goods that took large amounts of fossil fuel energy to make. This seems a reasonable view: in most industries the productivity of energy use is improving, often at 2% or more a year. Similarly, developed societies are tending to reduce the fraction of carbon intensive products in their national income. In the rich world we need less and less steel and concrete for each extra unit of GDP.

Nevertheless, energy consumption continues to rise quite strongly. The last edition of Carbon Commentary suggested that after adjusting for the effect of the growing trade deficit with China, UK CO2 emissions are rising as fast as GDP. There is, in fact, no obvious ‘decoupling’ of growth and energy use.

This is an extremely serious issue. If growth in the richest countries continues to require big increases in energy use, we can be almost sure that the position in developing states is even worse. Continued growth in these countries will probably embed very rapid increases in energy availability. Indeed, the evidence is that the growth in world energy use is running at more than 3% a year, substantially higher than forecast in the central IPCC models. The rebound effect – direct and indirect – may be an important part of the reason.

Direct rebound effects
Studies – usually by engineers, not economists – routinely note that energy efficiency improvements do not result in the expected reductions in energy consumption. The most quoted case studies report on home heating:

  • Insulation improvements make it cheaper to heat a house. So homeowners run the thermostat at a higher level.
  • Efficient central heating boilers make it easier to heat every room, and not just the living areas.

The direct rebound effects of better heating efficiency are probably between 10 and 30% in advanced countries. The Energy Research Centre paper suggests that there will generally be bigger effects in poorer households. Three years ago, when fuel prices were at their cheapest, the top 30% of UK households were said to devote an average of 1.3% of their total expenditure to gas and electricity. The rich already run their whole house at 21 degrees in winter, so a better boiler does not increase heating levels.

But poor pensioners previously lacking the money to heat the house properly will often take the benefit of cavity wall insulation in higher internal temperatures. Studies of poorer households around the developed world usually show some households actually increasing their energy use after insulation has been installed. For these people, the rebound is greater than 100%. Assistance targeted to those in ‘fuel poverty’ sometimes produces very disappointing results if energy saving is seen as the main objective. On the other hand, the impact on internal temperatures can be profoundly beneficial. The UK government’s ‘Warm Front’ insulation programme claims a 2.8 degree increase in bedroom temperature among the ‘fuel poor’, taking the level above the minimum 16 degrees recommended for respiratory health.

The same results can be seen in transport use. Improvements in the fuel efficiency of cars do seem to leak through into greater car use. Checking on causality is very difficult: does someone buy a new car and then use it more because it is cheaper to run, or did they buy the car because they expected their travel needs to increase? Did the purchaser buy a car with a slightly bigger engine than they would otherwise have done because fuel economy standards have improved? We cannot easily tell. Nevertheless, some – probably small – part of improvements in fuel efficiency seems to be taken back in greater petrol use.

In many areas of life – not just domestic temperatures in winter or in the car we buy – we routinely trade-off energy costs with our time or our comfort. If it is cheap to drive the car to the supermarket, we are more likely to do so. If drying clothes is a chore, then as we get richer we are more likely to use the tumble dryer. These effects are enhanced by growing energy efficiency, but the rebound is likely to be greatest among poorer groups.

This point is doubly true in developing countries. There, a family may spend a large portion of its entire income on fuel. All available cash goes on kerosene to power a water pump or light the house. The efficiency rebound effect is very likely to be much greater. The (largely anecdotal) commentary on this issue regularly reports that families will increase their energy use dramatically when efficiency is improved. Their need for greater access to energy is so great that the rebound is nearly 100%.

Does the direct rebound effect spread to home appliances? Do we, for example, buy bigger fridges because the energy efficiency of a good refrigerator has doubled in the past ten years? Or do we open the door more often and for longer periods? The evidence is fairly clear that the impact of better fridges is quite small. And even an inefficient fridge only costs £35 a year to run. Few people seem to adjust their behaviour to buy bigger devices as they become better at using electricity. Energy is too cheap for this to have much impact.

So these are the direct rebound effects: greatest in home heating (and cooling) at perhaps 30% for poorer households in the rich world and 10% for the richest homes, less in the case of personal transport in the developed world and negligible in the case of home appliances, but almost certainly higher for all types of energy use in less well-off countries.

All other things being equal, the direct rebound effect is likely to diminish as we become sated with energy use. The rich person buying a new car doesn’t drive it more because it has slightly better fuel economy than his last automobile. The future for indirect rebound effects is much less clear and possibly far less optimistic.

Indirect rebound effects
Early in the industrialisation process, indirect rebound effects were often greater than 100%. To give the most obvious example, the invention of the steam engine, an efficient new way of turning fossil fuels into motive power, increased rather than diminished total energy demand. It did this in two ways: it made it relatively cheaper to use machines rather than human labour and it indirectly caused the economy to grow. The declining real price of valuable energy has been one of the most powerful impetuses generating economic growth, and perhaps this is where the real worry lies. There are two particular concerns which policy-makers need to focus on:

  • The indirect impact of improving energy efficiency on consumption patterns.

As energy efficiency improves, we need to spend less and less of our income on the energy embodied in our goods and services. In 1984, the typical household spent 6% of its income on fuel and power. By 2005, this had fallen to 3%. The other major decline has been in food and drink costs, partly as energy efficiency has improved in the industries supplying us. This has given us spare money to spend on other things, and personal travel and consumer electronics have taken a good share of this extra cash. ‘Leisure services’ now account for 14% of a much larger household income compared to 7% in 1984. As we have got richer, a large fraction of our incremental income has gone on holidays abroad, more TVs, and greater car travel. This is an indirect rebound effect from better energy efficiency. We are choosing to spend the gains on goods and services which are themselves major users of fossil fuel.

The top 20% of British households spend almost nine times as much on transport costs as the bottom 20%. Give more income to the poorest fifth, and you can be reasonably confident that a large fraction will go on buying more transport, with substantial increases in emissions.

  • The embedding of energy in economic growth.

Much conventional economics sees economic growth as arising from improvements in the productivity of capital and labour, as well as increases in the amount of capital equipment applied to productive activities. Because energy is only 4 or 5% of the economy, standard economic theory does not give much thought to the impact of energy efficiency. Rebound effects, direct or indirect, are not even mentioned by the IPCC or the Stern Review. Is this correct? Or is increasing energy use a vital part of the way in which modern economies grow? If this is the case, then trying to maintain world growth rates while cutting energy use represents an extraordinarily difficult problem.

The most revelatory paragraph in the Energy Research Centre study into the wide questions of rebound says as follows:

Taken together, the evidence reviewed in this report suggests that: a) the scope for substituting other inputs for energy is relatively limited; b) much technical change has historically increased energy intensity; c) energy may play a more important role in economic growth than is conventionally assumed and d) economy-wide rebound effects may be larger than is conventionally assumed.

Written in tentative and thoughtful academic language, the review is telling us that there is a possibility that improving energy efficiency will simply enhance the rate of global growth, drawing in more energy use. A possible conclusion from this ERC review is therefore that improved efficiency in energy use is bad for climate change.

This is frightening stuff. The implication is that it is doubly urgent to decarbonise energy sources for we cannot confidently expect that rates of growth of energy use are likely to fall below world GDP growth at any foreseeable future date.

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  1. Peter Page’s avatar

    Your final paragraph is the most important – the real work is to decarbonize our energy economy because we cannot reasonable expect people to reduce energy use, at the cost of comfort and convenience, when there is no economic or regulatory reason for them to do so. Energy efficiency is crucially important to increasing the effectiveness of renewable energy but, as you point out, cannot reduce fossil fuel use sufficiently to get us where we need to go.

  2. Robert Palgrave’s avatar

    Fundamentally, we have to accept that in our developed world, there’s not a great deal you can spend ‘disposable’ income on that doesn’t use energy (either at the point of consumption, or embedded as part of manufacture). As the energy is fossil-fuel derived, our spending of such income is emissions-generating.

    This poses an interesting rebound-type question for cap and trade schemes using personal carbon allowances. If the energy-thrifty can sell their excess allowances, what do they spend the money on that doesn’t consume carbon and therefore require them to buy more credits?

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