Supply constraints on rebound effects of increased energy efficiency: negative multiplier and disinvestment effects

Policies that aim to use increased energy efficiency to reduce energy use may not achieve the desired results due to the likelihood of rebound effects. Research from our current ESRC-funded project on this topic was presented in an article in the last issue of Fraser Economic Commentary titled, ‘Energy Efficiency and the rebound effect’ (Turner, 2009a). As explained there, the rebound effect occurs when an energy efficiency improvement causes a decrease in the effective or implicit price of energy as an input to production (or consumption) – i.e. the cost of energy required per unit of activity falls as efficiency improves.1 Moreover, if there is local production/distribution of energy (or energy services) the reduction in demand for energy as efficiency improves will put downward pressure on the actual (local) energy price.