Direct and Indirect Rebound Effects for U.S. Households With Input-Output Analysis

Brinda A. ThomasPh.D. Candidate, Engineering & Public Policy Dept.

Carnegie Mellon Universitybrindat@cmu.edu

Climate and Energy Decision-Making CenterAnnual Meeting

21 May 2012

Energy Efficiency Opportunities for Carbon Mitigation are Substantial & Cheap

Efficiency contributes 66% of CO2 abatement in 2020 and 52% of CO2 abatement in 2030

IEA 20092

Economic, Technical & Behavioral Limits to Energy Efficiency

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• Energy Efficiency “gap” (Jaffe and Stavins, 1994, Howarth and Sanstad, 1995, Sorrell et al., 2004)

• Engineering vs. Actual Conditions for Efficiency (Vine et al., 1994)

• Rebound Effects– Households or firms may increase energy service demand due to

• Direct Rebound: the lower price of energy services with efficiency• Indirect Rebound: re-spending energy cost savings and embodied energy• Macroeconomic Effects

– Basic definition: 1 – (Actual Savings/Potential Savings)– Measured by various elasticities (% in demand wrt % in price)

• Stakeholders include policymakers, utilities, program evaluators, and analysts involved with– State and federal energy efficiency policies, utility demand-side management

programs, and dynamic/forecasting models of energy demand

Rebound = Direct (Own-Price Elasticity) + Indirect (Cross-Price Elasticity )

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Direct + Indirect Rebound Effect Model

Assumptions1.Each fuel provides a single energy service2.Basic elasticity properties hold (Engel Agg., Cournot Agg. & Slutsky Decomp.)3.Compensated (constant-utility) cross-price elasticities for all goods are constant4.Ignoring capital costs of efficiency (overestimate: Henly et al., 1987)

Expected Efficiency Savings = % reduction in household energy expenditures = EsssI

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Dubin et al. (1983)Greening et al. (2000)Greene (2011)

Dubin et al. (1983)Greening et al. (2000)Greene (2011)

2004 U.S. Consumer Exp. Survey2004 U.S. Consumer Exp. Survey EIO-LCA 2002 model

www.eiolca.netEIO-LCA 2002 modelwww.eiolca.netHouthakker and

Taylor (1966, 2010)Houthakker and Taylor (1966, 2010)

Rebound Effects Vary by Unit of Analysis

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Rebound in Primary Energy & CO2e varies by fuel

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Error bars from uncertainty in direct rebound (± 3 - 11%) & in indirect rebound due to income elasticity functional form (± 1 - 2%)

Summary of Findings• 71-82% of expected efficiency savings can be achieved after

accounting for direct and indirect rebound effects– 10-20% direct and 5-11% indirect rebound effects, depending on fuel– Electricity and gasoline efficiency have lower rebound effects than natural

gas, depending on prices and budget shares

• Indirect rebound does not appear to be bounded by the energy share of GDP (Schipper and Grubb, 2000)

– We overestimate the rebound effect by ignoring effects possible higher capital costs of efficient appliances and vehicles

• Rebound highly sensitive to energy prices and electricity grid mix• States with high energy prices and cleaner electricity have higher

% rebound effects

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• Policies explicitly designed to counter rebound effects may not be needed– Difficult to target higher energy prices only to those households

making efficiency investments – this might impose even more barriers to efficiency investments

– A carbon price at the social cost of carbon ensures that rebound effects – and energy consumption in general – yield net social benefits

• Study of rebound effects allows for:– improved targeting of efficiency policies (by fuel and end-use)– better assessments of the cost-effectiveness of energy efficiency

investments– Improved forecasts of energy demand in scenarios with large

investments in energy efficiency

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Policy Implications

Thanks to Ines Azevedo, M. Granger Morgan, Scott Matthews, Karen Turner, Zeke Hausfather, and Chris Weber for useful discussions.

Funding by:

Contact Info: Brinda Thomas, brindat@cmu.edu

Acknowledgements

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