THE JEVONS' PARADOX AND THE FAILURE OF ENERGY EFFICIENCY POLICIES Jaume Freire González 6 th UPC International Seminar on Sustainable Technology Development Master for Sustainability Vilanova i la Geltrú (Barcelona), 25 th June 2013

1. Introduction 2. Empirical evidence 3. Direct rebound effect 4. Indirect rebound effect 5. Case study: estimations for Catalonia 6. Instruments to control the rebound effect 7. Conclusions Outline

INTRODUCTION ENERGY EFFICIENCY, THE JEVONS’ PARADOX AND THE REBOUND EFFECT

Introduction Energy policy How… Energy security Environmental issues - Reducing GHG - Renewable energies - Energy conservation - Energy efficiency - Etc.

Introduction European Energy policy Climate and energy 20/20/20 targets of the European Union: - 20% reduction in EU greenhouse gas (GHG) emissions from 1990 levels - Raising the share of EU energy consumption produced from renewable resources to 20% - 20% improvement in the EU's energy efficiency (understood as consumption per unit of GDP)

Is energy efficiency working?? (conventional wisdom): A factor is not taken into consideration: the “rebound effect”. This makes the potential energy savings produced by an energy efficiency improvement not to become (totally or partially) effective. “Backfire” happens when the efficiency improvement paradoxically leads to an increase of the energy consumption. JEVONS’ PARADOX “… It’s wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth....…every improvement of the engine when effected will only accelerate anew the consumption of coal…” William Stanley Jevons (1865), The Coal Question Introduction Energy efficiency

Introduction 1.Direct rebound effect: an energy efficiency improvement of an energy service produces a reduction of the effective cost of the service, which increases its demand. 2. Indirect rebound effect: the reduction of the cost of an energy service can produce changes on the demand of other goods, services, and factors, which also require energy to be produced. 3. Economy-wide effects: the reduction of the cost of an energy service reduces the price of intermediate and final goods adjusting prices and quantities throughout the economy. These improvements may reduce energy prices that may boost economic growth and, again, increase the energy consumption. Energy efficiency

Introduction Don’t worry, it’s energy efficient lighting! Going by my new low-consumption car is cheaper than train!

Source: based on Sorrell, S. (2007). The rebound effect: an assessment of the evidence for economy- wide energy savings from improved energy efficiency. UK Energy Research Centre. October, Types of rebound effect Estimated energy savings Economy-wide effects Indirect rebound effect Direct rebound effect Effective energy savings

EMPIRICAL EVIDENCE REBOUND EFFECT

There is consensus among energy economists about the existence of rebound effect, but not about its extent. Two positions: -Rebound effect < 100% - The efficiency improvement leads to energy savings -Rebound effect > 100% “backfire” – The efficiency improvement leads to an increase of final energy consumption Initial energy consumption Efficiency improvement Final energy consumption Rebound effect Expected energy consumption Initial energy consumption Efficiency improvement Final energy consumption Rebound effect Expected energy consumption Empirical evidence of rebound effect

Why is there disagreement about the extent of the rebound effect? 1. Authors use different definitions of rebound effect, with different definitions about related issues such as the relevant limits of the analyzed system. 2. Empirical evidence about the rebound effect is limited, ambiguous and inconclusive, so it is opened to a wide variety of interpretations. 3. Some fundamental assumptions about how the economy operates are in discussion. These can affect substantially the rebound effect estimations. Empirical evidence of rebound effect

Empirical evidence of rebound effect I Empiric literature about rebound effect is based on six basic typologies of studies: 1.Evaluation studies 2.Econometric studies 1.Elasticity of substitution studies 2.Computerized General Equilibrium modeling studies 1.Macroeconometric studies 2.Energy, productivity and growth studies Direct rebound effect Indirect rebound effect and economy- wide effects

Direct rebound effect estimations for end uses in USA households: Source: Greening, L. A., Greene, D. L. i C. Difiglio (2000). Energy efficiency and consumption - the rebound effect - a survey. Energy Policy, 28, 389–401. Other countries: Empirical evidence of direct rebound effect

Empirical evidence Source: Greening, L. A., Greene, D. L. i C. Difiglio (2000). Energy efficiency and consumption - the rebound effect - a survey. Energy Policy, 28, 389–401. Dimitropoulos, J. (2007). Energy productivity improvements and the rebound effect: An overview of the state of knowledge. Energy Policy, 35 (12), Indirect rebound effect / economy-wide:

DIRECT REBOUND EFFECT SOME ECONOMIC DEFINITIONS

Direct rebound effect Key issues on direct rebound effect (I): 1.Identification and measuring the “useful work” of energy service. 2.Identification and measuring energy efficiency data. “Khazzoom equation” Price of energy service (or energy) as a key variable 3.Attributes of energy service: sometimes the Cost remains the same but attributes increase. 4.“Marginal consumers”: new consumers. Before the efficiency improvement they could not afford the service.

Direct rebound effect Key issues on direct rebound effect (II): 5.Satiation: direct rebound effects will be higher among low income groups, since these are further apart from satiation in their Consumption of individual energy services. 6.Efficiency and costs: rebound will be higher if new devices are cheaper, and lower if they are more expensive: Governmental subsidies to change cars or appliances. 7.Irreversibility of efficiency improvements: when energy prices increase consumers invest in energy efficient appliances that remain in further periods.

Methodological issues of direct rebound effect Some definitions of direct rebound effect are available in the literature. They are useful to make econometric estimations:

To obtain these definitions two important hypothesis are assumed: 1.Symmetry: Consumers have the same responses to energy price decreases than to energy efficiency improvements. Realistic: an energy efficiency improvement is equivalent to a reduction in the cost of energy 2.Energy efficiency is not affected by energy price changes: Realistic in periods of stability or decrease in energy prices Not realistic in periods of increase in energy prices, where prices lead to energy efficiency improvements Methodological issues of direct rebound effect II

INDIRECT REBOUND EFFECT METHODOLOGICAL ISSUES

Indirect rebound effect Energy efficiency in households Direct rebound effect Indirect rebound effect

Indirect rebound effect and energy Input-output analysis When changes in consumption patterns by households take place, the overall energy consumption of the economy can be estimated: e h is the total energy consumption of the economy caused by households consumption E is a vector of sectorial energy intensities (I-A) -1 is the Leontief inverse matrix y h is the final demand of households reflecting the consumption pattern of households The indirect rebound effect in households can be obtained by changing the consumption pattern of households ( ) through the re-spending effect in an energy Input-output model. Energy

Re-spending model Direct rebound effect Income elasticity of demand indirect rebound effect

CASE STUDY ESTIMATIONS FOR CATALONIA

Estimations for Catalonia Variables and data used: 1.Electricity consumption in households 2.Electricity prices 3.Gas prices 4.Climatic variables: Heating and cooling degree-days 5.Familiar income Panel data of 43 Catalan municipalities, period

Econometric models estimated: Fixed effects model: Error Correction Mechanism model (ECM) in diferencies: Estimations for Catalonia

Estimated direct rebound effect for a set of energy services that use electricity in households: Short term: 36%: Long term: 49%: Initial energy consumption Efficiency improvement Final energy consumption Direct rebound effect Expected energy consumption 10% 6.4% Potential savings Real savings Initial energy consumption Efficiency improvement Final energy consumption Direct rebound effect Expected energy consumption 10% Potential savings Real savings 5.1% 10% Direct rebound effect estimations

Energy Input-output model Total production (€) Leontief inverse matrix Households final demand (€) CONSUMPTION PATTERN Total energy consumption (MWh) Energy intensity (MWh/€) Input-output tables of Catalonia 2005 (IDESCAT) Electricity sectorial consumption in Catalonia 2005 Energy balances (Ministrerio de Industria, Turismo y Comercio – Government of Spain) Data Methodology: LEONTIEF MODEL

Indirect rebound effect estimations

INSTRUMENTS TO CONTROL THE REBOUND EFFECT

Instruments for rebound effect At the political level we can identify three broad categories of measures (Ouyang et al., 2010; Ehrhardt-Martinez and Laitner, 2010; Maxwell et al., 2011): 1. Awareness, information and consumer behavior -Campaigns -Voluntary measures 2. Regulatory instruments -Improve consumer information (LCA labeling) -Reduce the energy intensity of economic sectors by limits in the use of resources (Schneider, 2008) or on pollutant emissions (Sorrell, 2007), objectives, etc. 3. Economic instruments -Taxes (environmental taxation)/energy prices policies. -Grants considering re-spending effects.

Economic instruments Focusing on the direct rebound effect, a tax that would completely counteract the cost reduction caused by the improvement of energy efficiency. That is, the cost would cause widespread useful work remained constant: Considering the indirect rebound effect, the purpose of taxation would not tamper with the consumption patterns of households, so the spending power after the improvement of energy efficiency should be equal before the improvement: The public spending from this taxes would also produce a re-spending effect should be considered: it is necessary to allocate it to less intensive energy sectors to minimize the rebound effect.

CONCLUSIONS

Conclusions 1.There is consensus on the existence of the rebound effect. Not on its magnitude. 2.Direct rebound effect for energy services in households would be less than 100% (but it increases in the long term). 3.Estimations for Catalonia are consistent with estimations about the same energy services in other industrialised countries. 4.Indirect rebound effects can be addressed through an energy Input- output analysis of the changes in consumption patterns derived from an energy efficiency improvement. 5. Energy efficiency improvements are a key part of the strategy to reduce energy consumption and address global warming, but as we have shown, the fact that promote energy efficiency without additional measures, not necessarily produce energy savings nor reduces pollution.

Conclusions 6. Rebound effect is rarely taken into account in official analyses of potential savings from energy efficiency improvements. The only case is the UK government's 15% reduction of energy savings expected from isolation measures in households. 7. Energy policies do not consider the rebound effect, so they may be not effective at reducing resources consumption and pollutant emissions. 8. Environmental taxation would be a useful tool to compensate the rebound effect. 9. It is necessary a reformulation of energy policies. Policy measures are needed to support efficiency, but additional measures are needed to control the rebound effect. 10. Relationships between technological progress, economic structure and resource consumption are more complex than "traditionally" have been considered.

Jaume Freire González Thanks for your attention