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Unraveling the interplay of substitution elasticities and the green energy rebound effect

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  • Acurio Vásconez, Verónica
  • Pereira Henriques, Mónica

Abstract

This paper examines how technological progress in either green or fossil energy affects the consumption of both energy types within a neoclassical growth model that explicitly separates energy inputs—unlike the original Saunders (1992) framework. By incorporating substitution elasticities between production factors, we investigate whether improvements in one sector genuinely displace fossil fuels or instead generate structural rebound effects that increase total energy use. Using alternative functional forms—Cobb–Douglas and nested CES—we show that when the elasticity of substitution exceeds one, technological progress in either green or fossil energy can amplify the use of one or even both energy types, potentially triggering backfire effects, whereas low substitution elasticities moderate this impact. These findings highlight that the environmental effectiveness of technological change depends critically on production structures and substitution possibilities, offering policy-relevant insights for managing systemic rebound mechanisms.

Suggested Citation

  • Acurio Vásconez, Verónica & Pereira Henriques, Mónica, 2025. "Unraveling the interplay of substitution elasticities and the green energy rebound effect," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 717-725.
    • Handle: RePEc:eee:streco:v:75:y:2025:i:c:p:717-725
    DOI: 10.1016/j.strueco.2025.10.007
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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