Solutions Journal: Spring 2011—The “Rebound Effect”: A Perennial Controversy Rises Again

There’s an old economic theory that becomes a bone of contention about once a decade. It goes like this: when energy efficiency rises, people and industry use more energy—a phenomenon called “rebound.” In an extreme form sometimes called “backfire,” rebound doesn’t just reduce but nullifies or reverses gains in efficiency.

Backfire was identified in 1865 by British economist William Stanley Jevons, who noted that efficient coal-fired steam engines so accelerated the Industrial Revolution that coal use rose, so it’s often called “Jevons’ Paradox.”

Lately some advocates of this hypotheses have claimed that backfire is frequent if not inevitable. They assert that energy efficiency can’t be expected to save much if any energy or carbon in the long run and is not therefore an effective mitigator of climate change (although they acknowledge that it does increase productivity and improve economic growth). This has provoked a strong response from many supporters of efficiency measures, including Amory Lovins, who consider that many of the arguments of backfire supporters are based on thin data and faulty conclusions.

The good news is that this lively debate demonstrates that strong support for efficiency has entered the mainstream. We at RMI believe that rigorous examination of all aspects of efficiency is fundamentally a good thing and of course welcome all voices to the conversation. Many of the key elements of this controversy are summarized below.

Jevons’s old idea gained legs again in December 2010, when The New Yorker ran an article by David Owen, titled “The Efficiency Dilemma,” suggesting the theory could apply to modern civilization on an economy-wide level.

Owen illustrates rising energy use in a variety of areas, notably refrigeration and space cooling. He details how his family went in 1954 from a “tiny, uninsulated freezer compartment” to a more modern model in the 1960s, while the 1954 freezer was put in the basement “mostly as a warehouse for beverages and leftovers” (later joined by a standalone freezer). Owen also notes that while fridges became 28 percent more efficient in 1993–2005, the average air-conditioned household saw energy use for cooling rise by 37 percent. Owen writes, “As Losing Our Cool [a book by Stan Cox] clearly shows, similar rebound effects permeate the economy,” later noting that “all such increases in energy-consuming activity can be considered manifestations of the Jevons paradox.” In short, Owen claims that those activity increases were caused by energy efficiency.

Rebound is not fully appreciated, he suggests, because “…Most modern studies of energy rebound are ‘bottom-up’ by necessity: It’s only at the micro end of the economics spectrum that the number of mathematical variables can be kept manageable. But looking for rebound only in individual consumer goods, or in closely cropped economic snapshots, is as futile and misleading as trying to analyze the global climate with a single thermometer.”

Not so fast, note a handful of energy analysts.  Dr. David Goldstein of the Natural Resources Defense Council (NRDC) posted a devastating critique questioning Owen’s conclusions on NRDC’s blog, “Switchboard.” Dr. Michael Levi of the Council on Foreign Relations and RMI Chief Scientist Amory Lovins also argue that Owen correlated more affluent lifestyle, not energy efficiency, to an increased use of energy, and that anyhow, correlation doesn’t prove causality. Rebound is a real phenomenon, they agree, but it’s nowhere near as big as Owen might suggest, and it’s absurd to blame economic growth on energy efficiency.

“Owen confuses rebound with wealth effects, like richer people’s buying cheap, inefficient air conditioners in uncomfortably inefficient buildings,” writes Lovins in a response published by The New Yorker on January 17th. “Efficiency makes comfort cheaper but hardly affects that purchase, because future energy savings are poorly understood, diluted by capital cost, and heavily discounted—the same reasons efficiency is underbought.”

Dr. James Barrett, chief economist at the Clean Economy Development Center, offers his own response to the article in his blog “Rebounds Gone Wild.” Barrett adds some real data to Owen’s argument on household cooling. His data show that per-capita real income rose 30 percent (meaning people “buy more stuff, including cool air”), homes got 16 percent bigger (more space to cool), and central air conditioning doubled, while the average central air conditioner use got only 11.5 percent more efficient. Thus air conditioning used more energy not because of greater efficiency but despite it.

“All of the increase in energy consumption for air conditioning is easily explained by factors completely unrelated to increases in energy efficiency,” Barrett writes. “All of these things would have happened anyway. Without the increases in efficiency, energy consumption would have been much higher…. It’s easy to be sucked in by stories like the ones Owen tells. The rebound effect is real and it makes sense. Owen’s anecdotes reinforce that common sense. But it’s not enough to observe that energy use has gone up despite efficiency gains and conclude that the rebound effect makes efficiency efforts a waste of time, as Owen implies. As our per capita income increases, we’ll end up buying more of lots of things, maybe even energy. The question is how much higher would it have been otherwise.”

Barrett concludes by quoting Yogi Berra, who said of a restaurant, “Nobody goes there any more. It’s too crowded.”

“The notion,” says Barrett, “that we could get so efficient at using energy that we’d end up using more is about as valid as the idea that a restaurant could get so crowded that it was empty.”

On the heels of The New Yorker article, The Breakthrough Institute (TBI), a California nonprofit, kicked off a technical email conversation about rebound engaging more than 30 participants, mostly energy analysts and some noted journalists. It ran intensively, with over 100 posts, in the last week of January. TBI then released a report called “Energy Emergence: Rebound and Backfire as Emergent Phenomena” (backfire is rebound greater than 100 percent).

The report, described by TBI as a “review” of the literature, states in its opening lines, “Rebound effects are real and significant, and combine to drive a total, economy-wide rebound in energy demand with the potential to erode much (and in some cases all) of the reductions in energy consumption expected to arise from below-cost efficiency improvements.”

The report goes on to state, “As this literature review demonstrates, multiple rebound effects operate at varying scales and their combined effect results in a complex, non-linear interdependence among the economic activity (GDP), energy demand (E), and energy intensity/productivity (E/GDP) terms of our formula: improvements in energy efficiency do not translate into straightforward reductions in E/GDP, but rather drive multiple mechanisms that feed back into and drive corresponding changes in both economic activity and energy demand. Relying then on a linear, direct, and one-to-one relationship between below-cost energy efficiency improvements and reductions in energy demand (and thus carbon emissions), as is common in contemporary energy and emissions forecasting and analysis, will consistently produce overestimates of the net energy savings and emissions reductions potential of such efficiency measures, with potentially dangerous consequences for climate change mitigation efforts.”

Our deeper analysis of this report and its sources found that it relies most heavily on literature that actually notes major uncertainties in the size of rebound—notably the UK Energy Research Center’s (UKERC) 2007 report The Rebound Effect.  That volume’s opening paragraphs explain, “The available evidence for all types of rebound effect is far from comprehensive. The evidence is better for direct effects than for indirect effects, but even this focuses on a small number of consumer energy services, such as home heating and personal transportation, within developed countries. Both direct and indirect effects appear to vary widely between different technologies, sectors and income groups and in most cases they cannot be quantified with much confidence. However the evidence does not suggest that improvements in energy efficiency routinely lead to economy-wide increases in energy consumption. At the same time the evidence suggests that economy-wide rebound effects will be at least 10 percent and often higher. Rebound effects therefore need to be factored into policy assessments.”

Critics of TBI’s sweeping assertions generally agree that rebound effects are real but generally much smaller than TBI asserts.  In a response to another blog on NRDC’s Switchboard, RMI Senior Fellow Dr. Jonathan Koomey explains the first of these two effects.

First, there is what he calls “end-use” rebound, which is what microeconomists have called the rebound effect. When a device becomes more efficient, people use it a bit more because it’s cheaper. “In practice the size of this effect is zero or very small,” Koomey says, “except in a small number of cases, like space heating or autos when it’s modest (10–30 percent).”

Then there’s what he calls the “respending effect,” when the money saved from efficiency gets respent on other things. According to Koomey, this effect is in practice capped at 6–8 percent, the fraction of GDP that is energy related. “This is a macro effect that is independent of specific end-uses—if energy is saved from efficiency, then it is either respent or reinvested, and that will have some (small) effect on aggregate energy demand. If it is reinvested into efficiency, of course, then the result is different, but if it is spent, the 6–8 percent number is probably a good round-numbered quantification of the effect,” says Koomey.

Finally, there’s a rebound effect Koomey calls BTI. “Others posit that takes place because of the substitution of energy for other factors of production within firms, because energy services are cheaper inside those firms,” he explains. “I still haven’t figured this one out, but that’s what we’re initially focusing on in our discussions.”

This last effect depends on the “elasticity of substitution”—a measure of how readily firms substitute energy for capital and labor. Having reviewed more than 200 studies of this quantity, a UK Energy Research Center report found, “The extensive empirical literature in this area is both confused and inconclusive and provides an insufficient basis for the assumed parameter values within energy-economic models.” It adds that “more than three decades of empirical research [fail] to reach a consensus on whether energy and capital may be considered as ‘substitutes’ or ‘complements’…While this [confusion] may be expected if the degree of substitutability depends upon the sector, level of aggregation, and time period analyzed, it is notable that several studies reach different conclusions for the same sector and time period, or for the same sector in different countries….Moreover, the relationship between the elasticity of substitution and the rebound effect turns out to be far from straightforward…. In addition, since most empirical studies measure something quite different from the parameters within energy-economic models, the empirical basis for those models is further called into question….”

For now, the “big” rebound debate has quieted and become a structured exploration between the TBI camp, Koomey, Lovins, and other experts in several countries, but it will undoubtedly heat up again as their inquiries do or don’t reach conclusions. While most credible energy experts agree that rebound is a real phenomenon, the question remains: Can it be as big as suggested by Owen and TBI?

“The normal burden of proof is on those advocating the existence of some unexpected and novel effect to show the underlying causal mechanisms that lead to that result, so the assumptions can be peer-reviewed,” notes Koomey in a brief comment on the TBI report. “I can’t prove that large rebounds don’t exist, just like I can’t prove that black swans don’t exist in the absence of a perfectly accurate universal census of swan colors, but if someone brings me a black swan, the problem is solved. And that’s what those of us skeptical about large rebound effects continue to request: Bring us a black swan!”

RMI and TBI agree efficiency is an important economic stimulant. If you think economic growth is good, as most economists do, then saving energy (and carbon) while also stimulating the economy is a welcome bonus, not a disadvantage: you get the economic growth with less, little, no, or negative energy growth, depending on how far and how fast you boost efficiency.

In our view, energy efficiency offers the all-important advantage of carbon reduction, and it can complement policy efforts (such as carbon caps or fuel taxes) that might deliver the same or better services with less total energy use. Certainly, it can bring energy use to a level where renewable energy can contribute more and sooner. Done right, energy efficiency will help us get to a richer, fairer, cooler, safer world. And its record so far is impressive.

“Energy savings have…offset 81 percent of the energy consequences of U.S. economic growth since 1975, and effectively ‘fuel’ half of today’s G.D.P.,” Lovins wrote in his New Yorker letter. “In eleven of the past thirty-four years, U.S. energy use fell; in nine of those eleven, savings grew faster than G.D.P. Paying attention to energy efficiency could achieve this every year—as we did with oil from 1977 to 1985, when G.D.P. rose 27 percent while oil use fell 17 percent.”