Reducing rebound without sacrificing macroeconomic benefits of increased energy efficiency

Previous research has shown that increased efficiency in the use of energy triggers price and income effects that result in cost- or demand-led economic expansion processes (depending on whether efficiency improves on the production or consumption side of the economy). However, this generates rebound in energy use at the economywide level that partially offsets expected energy savings in the more efficiency activity. The question we set out to address here is whether economy-wide rebound effects can be reduced without sacrificing macroeconomic benefits. We hypothesise that this may be possible if increased efficiency in production leads to a reduction in the relative price of something that is a substitute for an energy-intensive activity elsewhere in the economy. That is by changing the composition of consumption, for example favouring (low carbon) electricity over gas, or public over private transport. We consider the latter example here by simulating an increase in energy efficiency in the provision of public transport in the UK using a computable general equilibrium (CGE) model. The key assumption in our analysis is that private transport is a competing, and relatively energy-intensive substitute for the more efficient public transport provision. Our key finding is that by varying just one parameter in our CGE model – the elasticity governing the extent to which households are prepared to substitute away from private in favour of public transport as the relative price changes in favour of the latter – we get marked variation in the magnitude of the economy-wide rebound effect with negligible (if any) impact on key macroeconomic impacts. That is, we show that it is possible to maximise both macroeconomic benefits and energy savings the more UK households can be persuaded to switch their transportation needs in favour of more efficient and competitive public transport options.