A computable general equilibrium analysis of the relative price sensitivity required to induce rebound effects in response to an improvement in energy efficiency in the UK economy

In recent years there has been extensive debate in the energy economics and policy literature on the likely impacts of improvements in energy efficiency. This debate has focussed on the notion of rebound effects. Rebound effects occur when improvements in energy efficiency actually stimulate the direct and indirect demand for energy in production and/or consumption. This phenomenon occurs through the impact of the increased efficiency on the effective, or implicit, price of energy. If demand is stimulated in this way, the anticipated reduction in energy use, and the consequent environmental benefits, will be partially or possibly even more than wholly (in the case of ‘backfire’ effects) offset. A recent report published by the UK House of Lords identifies rebound effects as a plausible explanation as to why recent improvements in energy efficiency in the UK have not translated to reductions in energy demand at the macroeconomic level, but calls for empirical investigation of the factors that govern the extent of such effects. Undoubtedly the single most important conclusion of recent analysis in the UK, led by the UK Energy Research Centre (UKERC) is that the extent of rebound and backfire effects is always and everywhere an empirical issue. It is simply not possible to determine the degree of rebound and backfire from theoretical considerations alone, notwithstanding the claims of some contributors to the debate. In particular, theoretical analysis cannot rule out backfire. Nor, strictly, can theoretical considerations alone rule out the other limiting case, of zero rebound, that a narrow engineering approach would imply. In this paper we use a computable general equilibrium (CGE) framework to investigate the conditions under which rebound effects may occur in the Scottish regional and UK national economies. Previous work has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. Here, we carry out a systematic sensitivity analysis, where we gradually introduce relative price sensitivity into the system, focusing in particular on elasticities of substitution in production and trade parameters, in order to determine conditions under which rebound effects become a likely outcome. We find that, while there is positive pressure for rebound effects even where (direct and indirect) demand for energy is very price inelastic, this may be partially or wholly offset by negative income and disinvestment effects, which also occur in response to falling energy prices.

The Rebound Effect with Energy Production: A Partial Equilibrium Analysis

Rebound is the extent to which improvements in energy efficiency fail to translate fully into reductions in energy use because of the implicit fall in the price of energy, when measured in efficiency units. This paper discusses aspects of the rebound effect that are introduced once energy is considered as a domestically produced commodity. A partial equilibrium approach is adopted in order to incorporate both energy use and production in a conceptually tractable way. The paper explores analytically two interesting results revealed in previous numerical simulations. The first is the possibility that energy use could fall by more than the implied improvement in efficiency. This corresponds to negative rebound. The second is the finding that the short-run rebound value can be greater than the corresponding long-run value.

The Importance of Revenue Sharing for the Local Economic Impacts of a Renewable Energy Project: A Social Accounting Matrix Approach

As demand for electricity from renewable energy sources grows, there is increasing interest, and public and financial support, for local communities to become involved in the development of renewable energy projects. In the UK, “Community Benefit” payments are the most common financial link between renewable energy projects and local communities. These are “goodwill” payments from the project developer for the community to spend as it wishes. However, if an ownership stake in the renewable energy project were possible, receipts to the local community would potentially be considerably higher. The local economic impacts of these receipts are difficult to quantify using traditional Input-Output techniques, but can be more appropriately handled within a Social Accounting Matrix (SAM) framework where income flows between agents can be traced in detail. We use a SAM for the Shetland Islands to evaluate the potential local economic and employment impact of a large onshore wind energy project proposed for the Islands. Sensitivity analysis is used to show how the local impact varies with: the level of Community Benefit payments; the portion of intermediate inputs being sourced from within the local economy; and the level of any local community ownership of the project. By a substantial margin, local ownership confers the greatest economic impacts for the local community.

Rebound and disinvestment effects in oil consumption and supply resulting from an increase in energy efficiency in the Scottish commercial transport sector

In this paper we use an energy-economy-environment computable general equilibrium (CGE) model of the Scottish economy to examine the impacts of an exogenous increase in energy augmenting technological progress in the domestic commercial Transport sector on the supply and use of energy. We focus our analysis on oil, as the main type of energy input used in commercial transport activity. We find that a 5% increase in energy efficiency in the commercial Transport sector leads to rebound effects in the use of oil-based energy commodities in all time periods, in the target sector and at the economy-wide level. However, our results also suggest that such an efficiency improvement may cause a contraction in capacity in the Scottish oil supply sector. This ‘disinvestment effect’ acts as a constraint on the size of rebound effects. However, the magnitude of rebound effects and presence of the disinvestment effect in the simulations conducted here are sensitive to the specification of key elasticities of substitution in the nested production function for the target sector, particularly the substitutability of energy for non-energy intermediate inputs to production.

Negative rebound and disinvestment effects in response to an improvement in energy efficiency in the UK economy

This paper uses a computable general equilibrium (CGE) framework to investigate the conditions under which rebound effects may occur in response to increases in energy efficiency in the UK national economy. Previous work for the UK has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. The research reported in this paper involves carrying out a systematic sensitivity analysis, where relative price sensitivity is gradually introduced into the system, focusing specifically on elasticities of substitution in production and trade parameters, in order to determine conditions under which rebound effects become a likely outcome. The main result is that, while there is positive pressure for rebound effects even where (direct and indirect) demands for energy are very price inelastic, this may be partially or wholly offset by negative income, competitiveness and disinvestment effects, which also occur in response to falling energy prices. The occurrence of disinvestment effects is of particular interest. These occur where falling energy prices reduce profitability in domestic energy supply sectors, leading to a contraction in capital stock in these sectors, which may in turn lead to rebound effects that are smaller in the long run than in the short run, a result that runs contrary to the predictions of previous theoretical work in this area.

The Committee on Climate Change: A policy analysis

Domestic action on climate change is increasingly important in the light of the difficulties with international agreements and requires a combination of solutions, in terms of institutions and policy instruments. One way of achieving government carbon policy goals may be the creation of an independent body to advise, set or monitor policy. This paper critically assesses the Committee on Climate Change (CCC), which was created in 2008 as an independent body to help move the UK towards a low carbon economy. We look at the motivation for its creation in terms of: information provision, advice, monitoring, or policy delegation. In particular we consider its ability to overcome a time inconsistency problem by comparing and contrasting it with another independent body, the Monetary Policy Committee of the Bank of England. In practice the Committee on Climate Change appears to be the ‘inverse’ of the Monetary Policy Committee, in that it advises on what the policy goal should be rather than being responsible for achieving it. The CCC incorporates both advisory and monitoring functions to inform government and achieve a credible carbon policy over a long time frame. This is a similar framework to that adopted by Stern (2006), but the CCC operates on a continuing basis. We therefore believe the CCC is best viewed as a "Rolling Stern plus" body. There are also concerns as to how binding the budgets actually are and how the budgets interact with other energy policy goals and instruments, such as Renewable Obligation Contracts and the EU Emissions Trading Scheme. The CCC could potentially be reformed to include: an explicit information provision role; consumption-based accounting of emissions and control of a policy instrument such as a balanced-budget carbon tax.