Costs of Energy Efficiency Mandates Can Reverse the Sign of Rebound

58 Pages Posted: 1 Apr 2019

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Chi Ta

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

Improvements in energy efficiency reduce the cost of consuming services from household cars and appliances and can result in a positive rebound effect that offsets part of the direct energy savings. We use a general equilibrium model to derive analytical expressions that allow us to compare rebound effects from a costless technology shock to those from a costly energy efficiency mandate. We decompose each total effect on the use of energy into components that include a direct efficiency effect, direct rebound effect, and indirect rebound effect. We investigate which factors determine the sign and magnitude of each. We show that rebound from a costless technology shock is generally positive, as in prior literature, but we also show how a pre-existing energy efficiency standard can negate the direct energy savings from the costless technology shock – leaving only the positive rebound effect on energy use. Then we analyze increased stringency of energy efficiency standards, and we show exactly when the increased costs reverse the sign of rebound. Using plausible parameter values in this model, we find that indirect effects can easily outweigh the direct effects captured in partial equilibrium models, and that the total rebound from a costly efficiency mandate is negative.

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Suggested Citation

Fullerton, Don and Ta, Chi, Costs of Energy Efficiency Mandates Can Reverse the Sign of Rebound (March 2019). NBER Working Paper No. w25696. Available at SSRN: https://ssrn.com/abstract=3363432

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Chi Ta

University of Illinois at Urbana-Champaign ( email )

1408 W. Gregory Dr.
Urbana, IL 61801
United States

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