September 20, 2011
CO2 Scorecard Misses the Point (Again) on Rebound and Efficiency
By Alex Trembath and Jesse Jenkins
The debate over energy efficiency continues to miss the big picture. Efficiency, which is central to just about every mainstream strategy for addressing climate change, risks being sabotaged by what's known as the "rebound effect." The rebound effect--the phenomenon whereby improvements in the efficiency of energy services leads total energy use to decline and then rebound as consumers re-spend savings on increases in the same or other energy services--seriously undermines climate mitigation models that rely on efficiency for emissions reductions but ignore rebound effects. But those debating the significance of rebound consistently focus almost entirely on end-use energy services in more developed countries, where rebound effects are observed to be the least significant.
Meanwhile, the naysayers and pollyannas in the rebound debate continue to talk past each other. In a response to David Owen's "Prius Fallacy," CO2 Scorecard has issued another shaky takedown of the empirical evidence behind rebound effects, arguing that Prius drivers don't actually drive more than others and that any savings on fuel costs are not sufficiently reinvested to cause substantial rebounds in demand for gasoline or other indirect energy uses.
Unfortunately, as we pointed out over a month ago, CO2 Scorecard and other rebound naysayers continue to focus on precisely the cases where rebound effects matter the least. This is partly Owen's fault, for selecting the so-called "Prius Fallacy" as his central metaphor.
Click here for our introductory FAQ on energy rebound effects.
In February, we explained the fallacy of the Prius Fallacy, pointing out that while it's tempting to use familiar examples of personal energy use to understand rebound effects, "these examples ... are also precisely the cases where rebound effects are the smallest, leading some observers of this debate to conclude rebound is a smaller deal that it truly is."
As we cautioned:
It's easy for each of us to understand why any rebound in driving after the purchase of a more efficient car will probably be fairly small: most of us in the rich nations already drive as much as we need to, or close to it. In economics-speak, our demand for driving is "saturated," and thus is pretty "inelastic" or non-responsive to changes in the marginal price of driving. ...
Unfortunately, all this focus on examples from our personal lives here in the United States -- refrigerators, air conditioners, electronics, driving -- misses the real heart of the rebound debate. Only about one-third of all energy use is consumed in these end-use activities, while the rest of the energy we use is hidden, embedded in the goods and services we consume.
Rather than focus on Prius drivers in California, we should be more concerned with efficiency improvements at steel plants in China and the impacts of efficient lighting in India. As we wrote in February:
With about two-thirds of global energy consumed in the refinement and transport of energy and the production of goods and services and over 90 percent of growth in energy demand spurred by the so-called "Rise of the Rest" in the emerging economies, these two examples should be at the front of our minds as debate spreads across the blogosphere about rebound effects -- the economic dynamics by which energy efficiency improvements lead to a rebound in demand for now-more-efficient energy services (see an FAQ on rebound here).
As it turns out, rebound effects in the sectors of the economy engaged in the production, refinement, and transport of energy and other goods and services can be much larger than for end-use energy consumers, like those California Prius drivers.
"[W]hile more study of rebound effects for efficiency improvements at producing firms (e.g. industry and commerce) is needed," we noted last month, "the literature to date indicates that direct rebound effects may be on the order of 20-70% for these sectors, with additional rebound due to indirect and macroeconomic effects."
Meanwhile, demand for energy in developing economies is growing at torrid rates, and the pursuant rebound effects following gains in the productivity of energy are of higher magnitudes as a result. Let's just say that demand for energy services is far less saturated in the world's emerging economies than it is in California.
Indeed, the peer-reviewed literature to date has estimated direct rebound effects on the order of 40 to 80 percent for end-use consumer energy services like lighting and cooking in the developing world, more than twice that of similar effects in the rich world. Indirect and macro-economic rebound effects may be even more pronounced in emerging economies as well, as improved access to energy services and enhanced energy productivity are key drivers of economic growth.
Back here in the rich world, the direct rebound effects in transportation that CO2 Scorecard focuses on are actually among the most well-documented rebound phenomena in the academic literature, with direct rebound effects typically observed on the order of 10 to 20 percent for automobile drivers in more-developed countries. Those rebound estimates also only account for rebound in vehicle miles travelled, ignoring the fact that most of the gains in vehicle engine efficiency in recent decades have been used to make vehicles heavier and more powerful, rather than conserve fuel.
So as our literature review, "Energy Emergence," meticulously summarizes, direct rebound effects in transportation are observable, quantifiable, and quite uncontroversial. We'll take the peer-reviewed literature over CO2 Scorecard's back-of-the envelope calculations, and we encourage the CO2 Scorecard folks to debate the numerous academic researchers whose findings have reliable contradicted their blog posts.
The CO2 Scorecard authors also exhibit a curious confusion regarding indirect rebound effects - the relative increases in energy use following re-spending of dollars saved from automobile efficiency on other non-driving products and services.
Some rebound proponents have argued that dollar spent on energy has a two- or three-fold multiplier effect. It is hard to see how that is possible--if up to 8% of our GDP accounts for energy use, it already includes the energy component of the rest of the 92% of the GDP. Both direct and indirect energy use within the economy are included in the 8% share. Adding a two- or three-fold multiplier on top of that would lead to phantom accounting.
There is little in the way of a solid theory or verifiable empirical estimate that proves the existence of multiplier effect in this particular context. And even if we give the benefit of the doubt to the proponents of rebound and assume the existence of multiplier effect, the share of the $1500 savings will on average account for rebound worth $201 (13%) and $301 (20%) for two- and three-fold multipliers respectively.
We're surprised by CO2 Scorecard's blanket dismissal of the uncontroversial concept of fiscal multipliers. Dollar savings from efficiency gains will be spent on some combination of goods and services, after which those dollars will not simply vanish from the economy, instead being re-spent on other goods and services with their own respective energy inputs.
If a Prius driver saves $100 on gas, and if on average 8 percent of every dollar goes towards energy use, both direct and indirect, then that driver would end up re-spending $8 of that savings on new energy consumption. As those dollars bounce about in the economy, and are earned and re-spent by various actors, you could easily end up with $2 to $3 of economic activity for every original dollar saved by the Prius driver, of which $16-$32 dollars would go to energy consumption -- or a re-spending rebound effect of 16-32 percent, in dollar terms. Its not hard to see then how the macroeconomic multiplier effect of saving $100 on energy use then re-spending it in the economy can lead to indirect rebounds much larger than 8 percent.
Add that indirect re-spending effect on top of a 10-20 percent direct rebound for driving, and it's also easy to see how total rebounds from fuel efficiency even in rich countries can erode about one-quarter to one-third or more of the initial energy savings.
Again, these are increasingly uncontroversial findings. But most mainstream observers continue to miss the point. A recent piece in Wired issued this unfortunate assessment of the Prius Fallacy:
[We] modern folk spend very little on energy -- only around 9 percent of GDP in the US. Plus, if we save money through energy efficiency, we don't immediately spend those savings solely on more energy. We spend it on more food or movies or clothes, where energy accounts for only a small part of creation costs. As a result, economist James Barrett calculates, rebound probably decreases total amount of energy saved by at most 30 percent."
If that doesn't sound like a big deal, consider that the global climate mitigation strategies of the International Energy Agency, Intergovernmental Panel on Climate Change, and others all rely centrally on energy efficiency to drive down energy use and carbon reductions. Efficiency efforts make up about half of all emissions reduction efforts in the IEA's global low-carbon roadmap, for example. So even if rebound effects globally averaged as little as those for Prius drivers in the wealthy United States, we could easily lose as much as 17 percent of all global emissions reductions - equivalent to the IEA's assumed contribution from all renewable energy sources combined (see graph).
Given that rebound effects in emerging economies and productive sectors are likely to be much larger, this is a very conservative estimate of the full import of rebound effects.
Unfortunately, the folks at CO2 Scorecard continue to miss the point, offering pretty shaky analyses that add very little to the already well-established and fast growing academic literature on rebound effects.
CO2 Scorecard apparently finds it easier to debunk Owen's Prius Fallacy, itself an unfortunate analogy that incorrectly locates the key challenges posed by rebound effects within relatively saturated energy demands like driving. In doing so, they attempt to defend a naïve overreliance on energy efficiency measures in the effort to mitigate global carbon emissions, a naivety that is unsupported by the peer-reviewed academic literature and could dangerously underemphasize the degree to which the world needs to develop clean, cheap alternatives to polluting fossil energy technologies.