Sound Energy Policy Should Consider Rebounds

This post is part of a blogging series by economics students at the Presidio Graduate School's MBA program. You can follow along here.

By: David Groves
When a device's energy efficiency increases, it becomes cheaper to operate. This can encourage people to use it more, negating some of the expected reduction in greenhouse gas (GHG) emissions from the improved technology. Rebounds, as this is referred, can be significant enough to merit consideration in emissions-related decisions, particularly since it has been posited that they can fully offset improvements gained through efficiency technologies.

In a piece from the December 20, 2010 edition of The New Yorker called The Efficiency Dilemma (subscription required), David Owen describes Jevons' Paradox, the condition when an increase in energy efficiency leads to an increase in total energy consumption. The author describes observations made by William Stanley Jevons, a 19th Century British economist, which showed how the more efficient use of coal in Britain's iron industry led to a drop in its price, leading to an overall increase in coal consumption. Owen then provides examples of how this paradox is prevalent in contemporary energy consuming markets, such as refrigeration and air conditioning.
Since improving energy efficiency is one of the primary tools employed to mitigate greenhouse gas emissions, the widespread occurrence of Jevons' Paradox could have significant implications for anyone working in the rapidly emerging sustainability field. If this paradox is commonplace, it could be a body blow to the fight against global climate change.

Fortunately, Owen's logic is flawed, as can be demonstrated using a simple thought experiment. Imagine everyone in the U.S. drove 10 miles per day in cars that averaged 10 miles per gallon. Now imagine all those guzzlers were traded in for 20 mile-per-gallon cars. It is safe to assume that, because it is now twice as cheap to drive, people would increase their miles traveled. But for Jevons' Paradox to apply, driving would have to more than double (because fuel efficiency doubled) to more than 20 miles per day. While a rebound should be expected where people do start driving more, consumers  would not, on average, spend more than 100% of the savings on gas, as this would act to make them poorer than when they were driving their less fuel-efficient cars.

This analysis illustrates why Jevons' Paradox rarely—if ever—exists in the real world, as the logic can be applied to disprove other instances where it might be present—including in Owen's air conditioning and refrigeration examples. This should serve as relief to those working to lessen the coming impacts of climate change. Per capita increases in energy consumption are driven primarily by increases in wealth, not energy efficiency.

But while rebounds are only very rarely greater than 100%, they can be significant enough where they should be considered when crafting public policy. For example, where a technology saves time and produces something in high demand—like a dishwasher—reducing its operating costs could lead to an overwhelming increase in its usage, making efficiency gains less significant.

Therefore, when attempting to regulate a technology for emissions purposes, policy-makers should consider whatever is known about the size and extent of its rebound effect. In most cases, rebounds will be low and thus should have little influence over the policy. Increasing Corporate Average Fuel Economy standards for vehicles, for example, is an efficient mechanism for lowering transportation-related GHG emissions because the rebound on vehicles has been estimated to average around 20%. Conversely, the rebound effect of an air conditioner can be as high as 50%, meaning there is not as much emissions-reduction-bang for the buck. The Department of Energy's Energy Star program, which subsidizes the production and purchase of efficient appliances, could be revised to better target devices that display low rebound effects. In the space-cooling market, policy may be more effective through other means, such as a public education campaign to encourage homeowners to raise their summer thermostats by a few degrees.

In the end, encouraging technologies that improve energy efficiency will remain a vital tool in efforts to lessen our GHG emissions, but this might not always be the most effective instrument to employ. Policy makers should consider anticipated rebound effects when designing emissions mitigation programs. If not, for every two steps forward, we may end up unnecessarily taking one step back.

David Groves is an MBA candidate at Presidio Graduate School in San Francisco.