Energy intensity: the roles of rebound, capital stocks, and trade

According to conventional wisdom, improving energy efficiency is an easy way to mitigate climate change and improve energy security, though the reduction in energy intensity in developed economies is largely due to offshoring energy-intensive production to developing countries. This chapter presents a contrarian view. Theory, historical evidence, and time series analysis suggest that the economy-wide rebound effect is large. Energy efficiency improvements may actually result in no net energy savings, an outcome known as backfire or Jevons’ paradox. Despite this, energy intensity declined over the last two centuries in the US and some other developed economies. So, there is an open question of what has driven this decline in energy intensity. As it is machines, appliances, and structures that actually use energy, the relationship between capital and energy is crucial to understanding how energy intensity evolves. Strong inertia permeates energy systems that have well-established infrastructures on both the supply and demand sides, making it difficult to change course. This inertia seems to be proportional to the scale of the energy system undergoing transition. Future research should investigate how capital stocks affect the pace of change. International trade is another factor affecting energy intensity. When technology differences are accounted for, offshoring of energy use through trade specialization is not as important as commonly believed, and cannot explain much of the decline in energy intensity in developed economies. Recently, however, the export portfolios of some developed countries, with a strong historical record of energy intensive exports, have become less energy intensive, while their imports have become more so. This trend towards outsourcing also calls for more research.