Energy Saving Innovations and Economy-Wide Rebound Effects

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The proposed project seeks to estimate the energy and carbon savings from various types of energy efficiency improvement within the UK, and to investigate how these may be offset by various types of rebound effect. It seeks to expand and add value to the growing research on the topic of rebound effects, including in particular the research that currently being conducted by the Centre on Innovation and Energy Demand (CIED). Rebound effects occur where the potential energy savings from efficiency-enhancing innovations are partially (or wholly) offset by a variety of economic responses to cheaper energy services. For example, if a household installs a condensing boiler that uses less gas to produce a given amount of hot water, this may encourage them to heat their homes for longer and/or to a higher temperature, thereby offsetting some of the potential energy savings. This is termed a direct rebound effect. In addition, any money saved on gas bills will be spent on other goods and services, such as buying a new TV. This changed and additional consumption may involve direct energy use by the household, but also indirect use of the energy that is 'embedded' in all goods and services from different stages of their supply chain, both in the UK and abroad. These are termed indirect rebound effects. Moreover, shifts in consumption patterns may also change the demand for locally produced and imported goods relative to exports, thereby impacting on economic activity, prices, incomes, energy consumption and carbon emissions in a range of markets and regions. These are termed economy wide rebound effects. Similar mechanisms apply to cost-effective energy efficiency improvements by producers, such as steel manufacturers. Energy efficiency improvements lower the marginal cost of energy services, thus encouraging increased use of those services by the producer. Lower input costs permit reductions in output prices, which will in turn increase output, boost productivity and improve competiveness both in the sector where efficiency improves and down-stream (e.g. in white goods manufacture). This will encourage increased activity and energy use throughout the economy. Again, a variety of indirect and economy-wide rebound effects will come into play as prices and incomes adjust and as production and consumption decisions change. The net effect of these various mechanisms may be very significant and could potentially undermine achievement of the objectives of UK energy efficiency policies.However, while the existence of such effects is well established, the evidence on the size of these effects remains limited, contradictory and controversial. The lessons learned have also proved to difficult to communicate to policy and stakeholder audiences, with the result that rebound effects continue to be widely ignored and/or misunderstood.The current CIED research applies a range of techniques to estimate the direct rebound effects for individual energy services. However, this is only a part of the story - and potentially just a small part. The proposed project will add value to this activity by: first, extending the focus from individual sectors and services to the whole UK economy; second, by including the impacts on energy use and emissions along international supply chains; and third, incorporating a much wider range of economic mechanisms. It will investigate the impacts of improved efficiency in both industrial and household energy use, focusing in particular on the role of investment and energy supply decisions in determining different elements of rebound. The central aim is to clarify and advance the knowledge and evidence base regarding the source, nature, determinants and magnitude of direct, indirect and economy-wide rebound effects from different types of energy-saving innovations in different sectors. Moreover, the project aims effectively to communicate the implications of the results to various audiences.