Energy efficiency (EE) discussions never get far before someone raises the specter of “rebound.” Rebound is the consumers’ response to an energy efficiency improvement that causes them to increase energy consumption. If your car gets better fuel economy, you may drive it more. If incandescent lights are replaced with efficient compact fluorescents, you feel ok about leaving the driveway and doorway lit up while you are out for the evening.
EE rebound is often treated as a failure. Many in the EE community act as if it is our dirty secret and claim that it is minimal. Some opponents of government policies to support energy efficiency investment argue that rebound is so large that it wipes out the entire energy savings from the investment, an outcome given the evocative name of “backfire”.
I’ve been reading a lot about rebound lately (and am working on a paper on the subject). I’m convinced that EE rebound is quite significant, though it’s very unlikely to make it all the way to backfire in most cases.
But here’s the more important point: Rebound is a good thing. It’s economic value creation. When your car gets better fuel economy, you are better off even if you drive no more. But if you find new valuable uses for the car now that it is cheaper to run, then you are getting even more value out of the car than you would if the improved fuel economy didn’t change your use of it. Likewise, leaving those lights on when you go out has real value. It wasn’t valuable enough when you had the old expensive lights, but with low-cost CFLs, it’s worth lighting your path, so you don’t have to feel around in the dark or risk running over the toys that were left in the driveway. Rebound is a benefit of EE investment, not a drawback. It signals that the investment has made consumers even better off than the simple gain from using less energy when you do the same thing.
If you are worried about GHG emissions, however, that view of rebound may be cold comfort. But take heart: The consumer’s extra gain from rebound can support policies to reduce GHGs. An example:
A new insulation technology would make a home more energy efficient, but would cost about as much as (or maybe even a bit more than) it would save the consumer given their typical thermostat settings. With the greater energy efficiency, however, the consumer keeps the house at a warmer temperature in the winter and cooler in the summer, because the extra comfort is less expensive after the EE improvement. That is extra value to the consumer. If the no-rebound energy savings calculation was about (or not quite) break-even, the extra value from a more comfortable temperature setting makes it a winner for the consumer.
More generally (and speaking in economics now), the consumer surplus gain from rebound means that more complementary policies that decrease GHGs, such as a simultaneous tax increase on electricity, can be adopted while still leaving the consumer better off.
Opposing energy efficiency because it causes rebound makes no more sense than opposing innovations in electronics because they increase energy use. Any value-creating activity is likely to boost energy consumption. The question is how we channel that value creation, and whether we are wise enough to use our newfound wealth to solve society’s most pressing problems, including climate change.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.