Do sticky energy prices impact the time paths of rebound effects associated with energy efficiency actions?

There is broad consensus in the policy and academic communities regarding the importance of energy efficiency actions in reducing energy requirements and subsequent greenhouse gas emissions. However, there is also a requirement to understand the extent to which the technically possible energy savings from exogenously introduced efficiency improvements might be eroded by knock-on economic effects which will further change energy use. These effects strongly influence the way this ‘rebound’ phenomenon evolves over time. While economy-wide drivers of rebound effects are well understood, there has been some controversy over the relative sizes of the short- and long-run rebound effects associated with energy efficiency improvements. Theoretical analysis predicted that rebound effects would always be greater in the long run than in the short run. However, numerical general equilibrium simulations have contradicted this result. A principal driver of the simulation results is the fully flexible response of energy supply prices to shifting demand. However, in practice, there are a number of reasons for arguing that energy prices are likely to be ‘sticky’. In this paper we systematically explore the effects of energy price stickiness on the evolution of rebound effects. We find that price stickiness is an important determinant of the time path of rebound effects and of their relative size in the short and long runs. Moreover, there is considerable variation in the scale of rebound effects through time, especially where short-run rebound is lower than its long-run counterpart. However, the most significant overall finding is that rebound reflects the system-wide interaction between energy producing and energy using sectors.