Abstract: This article compares eight production/cost functions used or potentially useful for exploring how energy efficiency gains affect energy consumption. We show the practitioner's choice of function can inadvertently pre-determine results, and make recommendations as to which functions are flexible enough to prevent this. We also show pre-selected factor substitution elasticities can similarly pre-determine results. To aid the comparison we decompose the energy consumption “rebound” effect into intensity and output/income effects, which also delivers insight into the mechanisms of rebound. We conclude by recommending practitioners restrict themselves to either the Gallant (Fourier) or the Generalized Leontief/Symmetric Generalized Barnett cost functions as being sufficiently “rebound flexible.” The Translog cost function may be suitable given certain conditions and a particular form of the CES (Solow) function is a possible, but problematic, candidate. Along the way, the article provides a general methodology for similarly examining any arbitrarily-defined constant returns to scale production or cost function.
Abstract: The energy price shocks of the 1970s are usually assumed to have increased the search for new energy saving technologies where eventual gains in energy efficiencies will reduce the real per unit price of energy services and hence, the consumption of energy will rise and partially offset the initial reduction in the usage of energy sources. This is the ‘rebound effect’, which is estimated for the US manufacturing sector using time series data applying the dynamic OLS method (DOLS). When allowing for asymmetric price effects the rebound effect is found to be approximately 24% for the US manufacturing sector.
••01 Jan 2004
Abstract: externality An economically significant effect of an activity, the consequences of which are borne (at least in part) by parties other than the party who engages in the activity, and which are not accounted for through trade. diffusion The gradual adoption of new process or product innovations by firms and individuals. innovation The initial market introduction or commercialization of new process or product inventions. invention The development and creation of a prototype new idea, process, or piece of equipment. market barriers Disincentives to the diffusion and/or use of a good, such as high costs or prices, which may or may not represent market failures. market failures The failure of private markets to provide certain goods at all or at the most desirable level, typically arising from a situation in which multiple parties benefit from a good without decreasing one another’s benefits, and in which those who have paid for the good cannot prevent others from benefiting from it. technological change The process of invention, innovation, and diffusion whereby greater and/or higher quality outputs can be produced using fewer inputs. This article reviews economic concepts relevant to decision making about energy efficiency investments and related policy choices. We describe economic perspectives on the process of energy-saving technological change, the distinction between market failures and market barriers in energy-using product markets, and the important role that discounting plays in this area.
Abstract: This paper uses a computable general equilibrium (CGE) framework to investigate the conditions under which rebound effects may occur in response to increases in energy efficiency in the UK national economy. Previous work for the UK has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. The research reported in this paper involves carrying out a systematic sensitivity analysis, where relative price sensitivity is gradually introduced into the system, focusing specifically on elasticities of substitution in production and trade parameters, in order to determine conditions under which rebound effects become a likely outcome. The main result is that, while there is positive pressure for rebound effects even where (direct and indirect) demands for energy are very price inelastic, this may be partially or wholly offset by negative income, competitiveness and disinvestment effects, which also occur in response to falling energy prices. The occurrence of disinvestment effects is of particular interest. These occur where falling energy prices reduce profitability in domestic energy supply sectors, leading to a contraction in capital stock in these sectors, which may in turn lead to rebound effects that are smaller in the long run than in the short run, a result that runs contrary to the predictions of previous theoretical work in this area.
Abstract: This paper explores two linked theses related to the role energy in economic development, and potential sources of increased energy efficiency for continued growth with reduced greenhouse gas (GHG) emissions. The first thesis is that, while reduced GHG emissions are essential for long-term global sustainability, the usual policy recommendation of increasing energy costs by introducing a carbon tax may be relatively ineffective under current market structures and have an unnecessarily adverse impact on economic growth. Our second thesis is that there exists a practical near-term strategy for reducing GHG emissions while simultaneously encouraging continued technology-driven economic growth. Moreover, this strategy does not require radical new technologies, but rather improved regulation or—more precisely—better deregulation of the electric power sector. In respect to the first of our two theses, this paper addresses a deficiency in neoclassical economic growth theory, in which growth is assumed to be automatic, inevitable and cost-free. We challenge both the assumption that growth will continue in the future at essentially the same rate (“the trend”) as it has in the past, and the corollary that our children's children will inevitably be richer and better able to afford the cost of repairing the environmental damages caused by current generations [  Simon et al., The state of humanity. Cambridge MA: Blackwell Publishers Ltd.; 1995].