Household Demand, Energy Effieciency Improvement and the Rebound Effects

Dr Mona Chitnis, University of Surrey

Steve Sorrell, University of Sussex

Angela Druckman, University of Surrey

Steven Firth, Loughborough University

Improved energy efficiency is widely expected to play a key role in reducing GHG emissions. However, the energy and emissions savings from such improvements may be less than simple calculations suggest, owing to a variety of economic mechanisms that go under the heading of rebound effects. Direct rebound effects result from increased consumption of relatively cheaper energy services: for example, a fuel efficient car lowers the running costs so people may choose to drive further and/or more often in their fuel-efficient car. Indirect rebound effects result from increased consumption of other (normal) goods and services, the provision of which necessarily involves energy use and GHG emissions throughout their life-cycle. For example, any savings on petrol bills may be put towards a foreign holiday, or towards the purchase of a laptop that was manufactured overseas. Re-spending therefore leads to additional energy use and emissions, either within the national economy or overseas, which offset the original energy and emission savings. Energy efficiency improvements lead to both direct and indirect rebound effects and in combination they may be significant. This study estimates the combined direct and indirect rebound effects following energy efficiency improvements that affect electricity, heating fuels and road fuel demand by an average UK household. Rebound effects are estimated in GHGs terms. The study departs from the previous papers by quantifying both the income and substitution effects.

This study uses annual time series data on UK household expenditure and estimates a linear Almost Ideal Demand System (AIDS) model with two-stage budgeting. The econometric estimation procedure employs Iterative Seemingly Unrelated Regressions (ISUR). The rebound calculations combine estimates of the GHG intensity and own-price, cross-price and income elasticities for different categories of household goods and services. The Slutsky equation is used to estimate the relative contribution of substitution and income effects to the total rebound effect.

The preliminary results suggest a rebound effect of 26% for efficiency improvements affecting heating fuels, 17% for efficiency improvements affecting electricity and 35% for efficiency improvements affecting vehicle fuels. In all cases, the income effect provides the largest contribution to the total rebound effect. While the income effect for efficiency improvements affecting heating fuels and electricity are relatively moderate (17%), the improvements affecting vehicle fuels have significantly larger rebound from income effects (44%) because re-spending on gas, with relatively high GHG intensity, has a significant contribution to income effect for this category. For both the substitution effect and the overall rebound effect direct emissions (energy categories) are larger than embodied emissions (non-energy categories) for efficiency improvements affecting heating fuels and electricity but embodied emission dominate the improvements affecting vehicle fuels. For the income effect, embodied emissions are about two to three times larger than the direct emissions for all kind of efficiency improvements.

The results indicate how the rebound effect varies with the type of energy efficiency improvement. Rebound effects appear to be relatively moderate for measures that improve heating and electricity efficiency, but significantly larger for measures that improve vehicle fuel efficiency. This difference largely results from the lower GHG intensity (in tCO2/£) of expenditure on vehicle fuels relative to expenditure on gas or electricity. Overall, our results demonstrate the importance of taking rebound effects into account when estimating the impact of energy efficiency improvements.