Environmental rebounds/backfires: Macroeconomic implications for the promotion of environmentally-friendly products

This paper develops a dynamic two-good (clean and dirty goods), two-sector model to explore the implications of the macroeconomic environmental rebound/backfire effect for environmentally-friendly product promotions on not only the demand side (a subsidy on the clean-good consumption), but also the supply side (a technology promotion in the clean-good production). The macroeconomic environmental rebound/backfire is decomposed into three effects – the substitution, wealth, and sectoral reallocation effects. We show that the steady-state pollution stock exhibits a U-shaped relationship with either demand-side or supply-side green promotions. Our calibrated result indicates that in terms of pollution, the macroeconomic rebound effectfor the economy as a whole appears to be substantial. More pronounced rebound effects are present when the elasticity of substitution between the clean- and dirty-good consumption is lower, the labor supply is more elastic, the environmental efficiency of clean goods is lower, and the technology level in the clean-good production is higher. We also show that a pollution rebound can result in a social welfare improvement, implying that the rebound effect somewhat improves economic efficiency, and so policies aimed at mitigating the rebound effect may be counterproductive from a welfare perspective.