General Equilibrium Rebound from Energy Efficiency Innovation

Energy efficiency improvements “rebound” when economic responses undercut their direct energy savings. I show that general equilibrium channels typically amplify rebound by making consumption goods cheaper but typically dampen rebound by increasing demand for non-energy inputs to production and by changing the size of the energy supply sector. Improvements in the efficiency of the energy supply sector generate especially large rebound because they make energy cheaper in all other sectors. Quantitatively, improving the efficiency of U.S. non-energy supply sectors by 1% would reduce U.S. energy use by 0.58%, with rebound of 28%. General equilibrium channels increase those savings by 19%; however, they reduce the savings from improving the efficiency of the energy supply sector by 65%.