Association for Public Policy Analysis & Management

Energy efficiency policy can improve the economic productivity of fossil fuel resources while simultaneously reducing the environmental impact of their usage. However, the net benefits of energy efficiency policy are not easily identified a priori. Jevons (1865) was the first to observe this by noting that energy consumption tends to increase following an energy efficiency improvement, a phenomenon known as the rebound effect. In particular, Jevons was concerned with the impact of industrial technological progress on economy-wide energy consumption. The existing rebound literature, however, is confined to estimating the rebound effect in a microeconomic, partial equilibrium setting, where the prices of non-energy goods and services in the economy are held fixed in the wake of energy-augmenting technological progress. In contrast to the partial equilibrium framework, an economy-wide setting that aligns with Jevons’ original description allows the prices and consumption of non-energy goods and services to adjust in response to an efficiency improvement.

In this paper, we develop a novel general equilibrium model of the economy to identify the underlying mechanics of the economy-wide rebound effect. The economy-wide, indirect channels for energy savings are considerably more complex than their partial equilibrium counterparts. By extending a workhorse input-output model of the economy, we show economy-wide energy savings from an energy efficiency improvement are determined by upstream and downstream interactions between sectors within the supply and distribution chains of industrial goods and services. These direct and indirect linkages between industries in the economy’s production network have the effect of propagating energy efficiency shocks throughout the economy, triggering re-allocation of inputs in upstream and downstream industries. As re-allocation occurs along these linkages, sectors reduce the direct and indirect energy inputs required for production, generating what we call the rebound multiplier effect. Moreover, we show this rebound multiplier effect is determined by the structure of the economy’s production network.

Motivated by the predictions of the theoretical model, we collect input-output tables for 48 states in the United States. The data are disaggregated to more than 400 industries and contain detailed information on the input-output relationships between energy and non-energy sectors. Using the data, we construct a computable general equilibrium (CGE) model to simulate economy-wide energy savings from industrial energy efficiency shocks. The CGE model is calibrated for each state, and economy-wide energy savings are calculated using the calibrated CGE model. Using these calculations, we compare the simulated energy savings with the predictions of the theoretical model to estimate the magnitude of the rebound multiplier for different regions and industries in the United States.

This is the first study in the literature to estimate the magnitude of the rebound multiplier effect and has several important policy implications. When developing energy technology policy in practice, analysts and policymakers should carefully consider the topology of an economy’s production network to maximize the efficacy of energy policy. For instance, energy efficiency policies targeted at sectors with similar energy intensities may have very different effects depending on the how the sectors are positioned within regional production networks.