E2e Scholars Acknowledge the Importance of Rebound

Gillingham et al.’s latest working paper is emblematic of the great progress realized in recent years to squarely confront the challenge of energy efficiency rebound by an ever-widening cadre of serious scholars.

Three elements of their paper stand out as warranting applause: one is the endorsement of the long-held insight that rebound carries with it positive economic welfare benefits, and that attempts to “mitigate” rebound are ill advised. Two, the authors do not attempt to minimize the policy importance of the rebound effect. And three, they highlight a new and critical distinction between rebounds arising from exogenous efficiency gains and policy-induced efficiency gains.

In light of these heartening developments, it seems borderline petty to take issue with any of the authors’ contentions. But perhaps such would be kindred to the critiques they themselves offer in pursuit of advancing understanding of this complex issue. Accordingly, I’ll make bold to offer a few of my own:

Like countless others, the authors make too much of the distinction between rebounds less than 100 percent and the condition known as “backfire.” It is true that rebounds less than 100 percent mean energy efficiency gains stand to dampen energy demand, whereas backfire means such gains will increase energy demand outright. But crucially, this obscures the fact that the overwhelming majority of global energy demand projections relied on by policy makers either ignore or radically understate rebound effects, thus understating future energy demand. The disturbing upshot is that we have less time than is commonly believed to devise climate change mitigation solutions.

The authors fall victim to the persistent misconception that rebound effects can be understood largely by attending to the behaviors of end-use consumers. In fact, some two-thirds of energy used globally is consumed by producers, not by households (ie, household direct and indirect use and personal transportation). Yet it is in the productive sector (industry, commerce, commercial transportation) that rebounds are most likely to have the largest effect, acting on by far the largest component of energy use. There, the key drivers are producers’ capability to substitute among inputs, and the role of capital and labor productivity gains –– mechanisms the authors unfortunately overlook.

The authors appear overly selective in the studies they cite. Numerous high-quality studies report much higher magnitudes of rebound (eg, Fouquet, Fouquet and Pearson, Tsao et al., Luke et.al). While admittedly not available to the authors as it has only just been released, Sharma et al. report economy-wide rebounds for Malaysia, China, India, and Korea well in excess of 100 percent (backfire). Backfire appears to be a real phenomenon, especially in developing countries. The Breakthrough Institute report Energy Emergence reinforced this important idea, making the understanding of backfire essential for policy makers.

There are some technical issues with the authors’ analysis of past contributions. For one, they aver that Saunders 1992 analysis “by construction…finds that backfire will occur.” In fact, this paper shows that backfire occurs only given high values of the elasticity of substitution for producers. Also, because the authors treat production-side rebound as only arising from “sectoral reallocation,” they neglect the analysis of Saunders 2013 (although they cite it), which shows that within each of 30 US productive sectors (no inter-sectoral mechanics involved), rebounds range from 19 percent to 120 percent, with an overall weighted average of 62 percent. This state-of-the-art econometric analysis uses the most general “structure” ever used for rebound analysis (the flexible Translog function), which minimizes their complaint that models are “driven by the structure of the model.” Moreover, this analysis measures and takes full account of all non-energy factor technology gains –– a far more significant driver than consumer end-use tradeoffs –– overcoming their objection that causal relationships between energy efficiency and energy use cannot be determined without considering energy use drivers “due to some other factor.”

All that said, the Gillingham et al. paper is a refreshing for its plain attempt to engage this important question head on, not shrinking from the thorny dilemmas it poses. For this, policy makers and rebound analysts owe them a debt of gratitude.