Jesse Jenkins and Harry Saunders explain why energy demand will not decrease even if we find ways to use it more efficiently.

In energy planning circles, efficiency is often viewed as an inexpensive way to reduce energy consumption and greenhouse gases. Governments and NGOs prominently adopt efficiency policies, while the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPPC) estimate that efficiency measures can greatly reduce emissions, therefore helping to stabilize our global climate. This focus on efficiency is particularly prominent in the world’s emerging economies, where getting more out of less energy is seen as a key path to both sustainable growth and reduced climate risk.

Yet recent research (including ours) highlights a powerful but largely overlooked economic phenomenon that requires a global rethink of energy efficiency and its role in climate mitigation and sustainable development strategies: the “Rebound Effect.”

Acknowledging the reality of rebound effects requires a reassessment of one of the core assumptions of conventional energy and climate analysis: the idea that efficiency improvements lead to a linear, direct, and one-for-one reduction in overall energy use.  Widely cited reports by McKinsey and Company as well as strategies delineated by the IEA and IPCC ignore feedbacks between improvements in energy efficiency and economic activity or demand for energy services. Therefore, they typically conclude that a given percent gain in efficiency is assumed to lead simply and directly to an equal percent reduction in total energy use.

The problem is that, as any economist will tell you, the economy is actually anything but direct, linear, and simple, especially when responding to changes in the relative price of goods and services. When goods, services or inputs to production get cheaper, consumers and firms use more of them, find new cost-effective uses for them, and then re-invest any savings in other productive activities. These concepts may be familiar to some readers; they are often labeled “the Jevons’ Paradox,” after the British economist who first noted the mechanism in 1865. In reality though, there is nothing paradoxical about rebound at all.

Economists would never assume, for example, that a ten percent improvement in labor productivity – aka a “labor efficiency” improvement – would reduce overall demand for labor in the economy by ten percent.

At the scope of the individual factory or assembly line, improving labor productivity may mean the plant can get by with fewer laborers on the shop floor. Yet higher labor productivity also lowers product costs and increases demand for those products, while opening up new markets that were not previously profitable. Productivity frees up money to re-invest in other areas of production, and it creates new jobs in other areas of business. All of these dynamics cause a ‘rebound’ in labor demand.

At the macroeconomic level, it is widely understood that improving labor productivity drives economic growth, creates new profitable ways to utilize labor, and generally increases rather than decreases overall employment.

Despite the simplified assumptions common to energy forecasting and analysis, the reality is that energy isn’t different from labor, or materials, or capital. Improving energy productivity triggers ‘rebounds’ in demand for energy services, just as labor productivity triggers ‘rebounds’ in employment.

Through an economic lens, one can see that any truly cost-effective energy efficiency measure will lower the price of services derived from fuel consumption, such as heating, cooling, transportation, and various industrial processes. Lower prices lead consumers and industries alike to demand more of these services. Other indirect and economy-wide effects result as well, as consumers re-spend money saved through efficiency on other energy-consuming goods and services, and industrial sectors adjust to changes in the relative prices of final and intermediate goods. Meanwhile, any net improvement in energy productivity contributes to economic growth.

Collectively, these economic mechanisms drive a rebound in demand for energy services that can erode much – and in some cases all – of the expected reductions in total energy use, along with much-hoped-for reductions in greenhouse gas emissions.

Furthermore, recent research indicates that rebound effects are likely to be most pronounced in the areas of the economy that have received the least focused study to date: The productive sectors (including industry and agriculture), and the world’s emerging economies.

Rebound likely to be largest where least studied

As it turns out, rebounds are generally smallest in exactly the situations that have received the most research to date: end-use consumer energy services in wealthy, developed economies. This includes efficiency improvements in personal transportation, home heating and cooling, and appliances.

Consumers in the world’s wealthy nations already fully enjoy most energy services, or come close to it. A consumer gains little, for example, from heating his or her home above a comfortable room temperature, even if the efficiency of home heating improves. Here, the direct increase in demand for end-use energy services due to the decrease in their apparent price is therefore relatively modest and commonly erodes 10-30% of the initial energy savings or less.  Additional rebound due to indirect and macroeconomic effects can somewhat increase the net effect.

However, the consumption of end-use services in the world’s wealthy nations is far from indicative of broader trends across the global economy.

In fact, recent research indicates that the largest rebound effects are typically found elsewhere: in the productive sectors of the economy that consume the bulk of energy in any nation, and in the world’s emerging economies, home to the vast majority of future energy demand growth.

Emerging economies

In contrast to conditions in wealthy nations, demand for energy services is still on the rise throughout the developing world. After all, roughly one-third of the global population still lacks sufficient access to even basic modern energy services. Demand can therefore be far more elastic (responsive to changes in price), and rebound effects much larger than in developed economies.

Very few studies have carefully examined rebound dynamics in developing economies, but those that have find direct rebound effects alone to be on the order of 40 to 80 percent for end-use consumer energy services, such as lighting and cooking fuel; more than twice as large as the equivalent rebounds found in wealthier nations.

Expanding access to modern energy services is also a principal driver of development. Whether such services are provided by burning more fuels, burning them more efficiently, or both (the most likely scenario), the outcome is the same: greater economic activity and expanding welfare, which in turn demands more energy.

Energy analysts must therefore be very careful in generalizing experiences or intuitions about rebound effects in rich, developed nations to the larger bulk of the global population living in developing economies. The shadow of Jevons’ Paradox still looms large over much of the developing world.

Productive sectors

We need far more study of rebound effects in the productive sectors, such as industry, commerce and agriculture, especially since roughly two-thirds of global energy is consumed in the production, transportation, refining and processing of goods and services. The literature to date indicates that direct rebound effects are much larger in the productive sectors than in end-uses – on the order of 20-70% for productive sectors, at least within a United States context – with additional rebound due to indirect and macroeconomic effects.

Rebound effects in productive sectors depend principally on the ability of firms to rearrange their factors of production (labor, capital and equipment, and various materials) to better take advantage of now-cheaper energy services. If, over the long-term, it is relatively easy for firms to substitute increasingly efficient energy services for other production factors, direct rebound effects can be substantial. This is especially true for decisions related to the construction of new productive capacity – and so we should again expect more pronounced rebound in the fast-growing productive sectors of emerging economies. Additional mechanisms add to the scale of rebound, as consumers demand more of now-cheaper products and economic productivity overall improves.

Rethinking efficiency in climate mitigation; reaffirming efficiency for development

So where does rebound leave us?

Conventional climate mitigation strategies count on energy efficiency to do a great deal of work. The IEA, for example, estimates that efficiency measures could account for roughly half of the emissions reductions needed in a global climate stabilization scenario published by the agency before international climate negotiations in Copenhagen in December 2009.

Yet from a climate or resource conservation perspective, rebound effects mean that for every two steps forward taken through greater efficiency, rebounds can take us one (or more) steps back. This is particularly true throughout the developing world and in the productive sectors of the global economy. A clear understanding of rebound effects therefore demands a fundamental re-assessment of energy efficiency’s role in global climate mitigation efforts.

Continued failure to accurately and rigorously account for rebound effects, risks an over-reliance on the ability of efficiency to deliver lasting reductions in energy use and greenhouse gas emissions. Without a greater emphasis on the other key climate mitigation lever at our disposal – the decarbonization of global energy supplies through the deployment and improvement of low-carbon energy sources – the global community will fall dangerously short of climate mitigation goals.

At the same time, however, we can re-affirm the role of energy efficiency efforts in expanding human welfare and fueling global economic development.

Unlocking the full potential of efficiency may very well mean the difference between a richer, more efficient world, and a poorer, less efficient world. The former is clearly the desirable case – even if the world consumes more or less the same amount of energy in either scenario.

The pursuit of any and all cost-effective efficiency opportunities should thus continue as a key component of an efficient course for global development and modernization, even as we reconsider the degree to which these measures can contribute to climate mitigation efforts.