Computation of economic rebound effect in different sectors of the U.S. economy

Abstract

Economic rebound effect is the phenomenon in which price reduction in products and services, induced by energy efficiency increase will cause more consumption leading to an "eat away" of the potential decreases in energy usage. Several researchers have expressed their views on the existence of the effect and the related consequences of such an effect in the micro economic scale. It is recognized that the microeconomic rebound effect will depend on how the price of a good will vary when an efficiency increase is brought about and also on how the quantity consumed may vary when the price changes by a certain amount. A mathematical formulation for this effect is then developed and the two parameters required are found separately for two relevant sectors of the economy. In the first case, the rebound effect is evaluated for the US Aluminum production sector taking into consideration both primary and secondary production. Several models for determining the price elasticity of demand are developed and the share of energy cost in total costs is also found in order to estimate the rebound. The values indicate very low rebound effect in the aluminum industry. A similar trial is conducted for system wide U.S air travel and the rebound estimates are arrived at. Low to moderate take back is observed in this case due to the increased price elasticity unlike the aluminum case where a very low price elasticity of demand pulled down rebound values. In the final sections of the report, discussions including the future trends in rebound effect in the wake of the higher fuel prices and low cost product introduction etc are made. A qualitative description of the macroeconomic rebound effect is also made and conclusions regarding the presence and significance of this effect are drawn. In summarizing it is inferred that even if the rebound effect is statistically significant, it cannot be big enough to completely mask the gains in efficiency improvement. Hence efficiency improvement is inferred as a definite method to decrease energy usage despite the fact that it has its own effectiveness limit set by the rebound.