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A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications

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  • Severin Borenstein

Abstract

Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a “rebound†effect. I present a theoretical framework that parses rebound into economic income and substitution effects. The framework leads to new insights about the magnitude of rebound when goods are not priced at marginal cost and when consumers are imperfect optimizers, as well as the role of technological progress in rebound. I then explore the implications of this framework with illustrative calculations for improved auto fuel economy and lighting efficiency. These suggest that rebound is unlikely to more than offset the savings from energy efficiency investments (known as “backfire†), but rebound likely reduces the net savings by roughly 10% to 40% from these energy efficiency improvements.

Suggested Citation

  • Severin Borenstein, 2015. "A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications," The Energy Journal, , vol. 36(1), pages 1-22, January.
    • Handle: RePEc:sae:enejou:v:36:y:2015:i:1:p:1-22
    DOI: 10.5547/01956574.36.1.1
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    References listed on IDEAS

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    1. Roger Fouquet & Peter J.G Pearson, 2011. "The Long Run Demand for Lighting: Elasticities and Rebound Effects in Different Phases of Economic Development," Working Papers 2011-06, BC3.
    2. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
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    7. Tan, Yong & Walheer, Barnabé, 2025. "On decomposing the energy rebound effect," Energy Economics, Elsevier, vol. 149(C).

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