Antonios Katris, Christian Calvillo and Jamie Stewart
In energy economics the ‘rebound effect’ is broadly defined as the reduction in expected gains from new technologies that increase the efficiency of resource use, because of behavioural or other systemic responses. In March 2021, a review paper was published in the journal Sustainable and Renewable Energy Reviews that put the rebound effect back in the news. The paper claims that energy savings associated with increased energy efficiency could be cut in half by the rebound effect.
In this blog we explore what the rebound effect means for the economy, energy system modelling and climate targets and why the effects might not all be negative.
What effect does rebound have on modelling the energy system?
Policy makers use a number of models and tools to inform energy and climate change policies. One such tool is bottom-up whole energy system models, which have been widely used to analyse decarbonisation pathways and potential future energy scenarios.
For instance, the Scottish Government uses the Scottish TIMES energy system model to inform its Climate Change Plan which sets out a route map to meet a 75% emission reduction by 2030. Similarly, National Grid uses UK TIMES for its Future Energy Scenarios (FES2020). These models are critical to inform policy needed to meet stretching net zero emission targets.
While these energy system models do take some account of the rebound effect, this is not the case in all energy system models used to map out decarbonisation pathways around the world. If rebound effects are not adequately considered within demand projections or in the efficiency gains expected to be achieved by technologies, the resulting future energy systems may not deliver the emission reductions needed to meet net zero.
Rebound effects can present in different ways depending on the technology or measure being analysed. For example, residential retrofitting technologies (e.g. wall or loft insulation) can significantly reduce heat energy consumption. But due to rebound effects, where for example the household has been under heating their home, the energy savings could be significantly lower than anticipated.
The larger demand for heat than expected or planned might translate to more costly technology investments and/or for the need to offset carbon emissions in other sectors. Considering that reaching net zero CO2 emissions will be extremely challenging, even relatively small unplanned ‘rebounds’ could jeopardise achieving those targets.
Understanding and predicting the rebound effect
At the Centre for Energy Policy we use economy wide models, such as computable general equilibrium models (CGE), alongside energy system models as a way to introduce and understand some of the economic feedback to the energy demand drivers that might result in rebound effects (see our work on using TIMES for energy policy analysis). However, the process of linking the two models is challenging, requiring considerable expertise and effort, and therefore is not always pursued.
A 2013 article by the CEP Director Karen Turner also highlights the issue that there is no single approach in calculating rebound effects. Moreover, systematic sensitivity analysis on our Computable General Equilibrium (CGE) model reveals that rebound effects can vary significantly depending on what we assume regarding the response of export markets to changes in the price of goods and services, and how easy it is for industries to substitute capital for labour, and vice versa, when they produce their output.
Therefore, the new paper that reviews many studies that have looked to understand the rebound effect is a useful addition to the policy and research landscape. Their finding that the rebound effect could on average cut energy savings in half reiterates the importance of understanding how people will interact with the future energy system and the impact that might have on energy demand and the economy.
The upside of rebound
A key learning from our work at the Centre for Energy Policy, is that focussing on rebounds often leads to overlooking the fact that energy efficiency policies are not exclusively energy policies, especially when they target the energy efficiency of residential properties.
For instance, the Scottish Government in the route map for the Energy Efficiency Scotland programme clearly states that one of the objectives of the programme is to remove energy efficiency as a driver for fuel poverty, highlighting the social aspect of this energy efficiency policy. More widely, the International Energy Agency (IEA) in a 2014 publication focussing on energy efficiency identifies 5 key benefits that could be achieved through energy efficiency improvements. It is clear then that energy efficiency improvement is much more than just an approach to reduce energy demand.
One of the drivers of rebound effects is that, for example, households achieve savings in their energy bills, which they can spend on other goods and services. This increased household consumption can help the economy grow creating, among other things, more employment opportunities and savings in the government budget, but at the same time requires the use of additional energy for the extra goods and services to be produced. So, we lose some of the potential energy savings but receive other gains in a wide range of areas.
Moreover, when fuel poor households improve the efficiency of their homes they may end up using more energy than they previously did, maybe even completely eradicating any technically feasible energy savings. This would be reflected by a large rebound, but we should not forget that these households were not adequately meeting their energy needs and that the energy efficiency improvement helped alleviate their fuel poverty.
Most importantly though, rebound is often considered in the context of the current energy system that is still heavily reliant on fossil fuels. Here applying the rebound effect means that we do not reduce the use of carbon-intensive energy as much as expected and meeting emission reduction targets may be more challenging. But as the energy mix gradually changes towards cleaner fuels and generation techniques, using more energy than expected may be less of a problem and could help demand meet supply at times of excess renewable generation for example. This is in fact a positive step as it can help make cleaner energy viable and over time less expensive.
Rebound effect an ongoing challenge for net zero research
It is clear that the rebound effect brings challenges and opportunities for policymakers. Using more energy than energy system models predict presents an issue for meeting stretching international climate targets. However, the rebound effect may also present a range of economic and wellbeing benefits crucial for delivering a fair and prosperous society. Understanding and predicting the impact of the rebound effect across a range of policy areas is a factor that the research community involved in supporting a Just Transition to net zero look set to continue to grapple with for some time yet.