Increased energy efficiency in Scottish households: trading-off economic benefits and energy rebound effects?

Energy rebound effect from increased energy efficiency has been generally considered as an undesired consequence of increasing energy efficiency policies that needs to be accounted when assessing the ability of such policies to decrease the demand for energy. However, recent studies have associated the energy rebound effect to a wider range of economic benefits coming from the higher energy efficiency. In computable general equilibrium (CGE) setting Lecca et al. 2014 show that a more efficient use of energy could lead to a reallocation of household’s expenditure towards non-energy sectors, which could stimulate the economy through a shift in the aggregate demand. However this would crowd out export due to an increased pressure on domestic consumption price. Here we use a regional (CGE) model for the Scottish economy to analyse the economic response of household - and of the wider economy - to an increase in household energy efficiency. We follow the approach of Lecca et al. 2014 but we focus on the regional case of Scotland. This allows us to understand some of the implications of moving from a national to a regional CGE modelling framework in the analysis of the impacts household energy efficiency improvements in the whole economy. The macroeconomic impacts of improving household energy efficiency are analysed using a CGE model for Scotland called AMOS-ENVI. This is a dynamic CGE model with forward-looking investment and consumption decisions, designed to analyse environmental and energy disturbances in a regional setting. The model accounts for 20 different productive sectors, including 4 supply chain energy industries, and includes information about fScottish households, the Scottish Government and imports and exports to the rest of the UK (RUK) and to the rest of the World (ROW). Wages are determined within the region in an imperfectly competition setting, using a wage curve where the real wage is negatively related to unemployment rate. The labour force is initially assumed fixed. We than release this assumption to allow for free workers interregional migration across UK, occurring in response to the difference between national and regional real wage and unemployment rates. We consider an energy efficiency improvement as being any technological change which allows households to consume the same bundle goods as before but using less physical energy in doing this. The rebound effect is measured as being the ratio between potential energy savings (PES) and actual energy savings (AES). The PES correspond to the pure engineering effect, for example improving efficiency by 10% and saving 10% of energy. The AES are calculated as the proportionate change in a specific energy use, for which efficiency has improved, as the result of the full general equilibrium adjustments. Results from simulations show that increasing household energy efficiency stimulates the Scottish economy through an increase and change in patterns in the domestic aggregate demand. In the long-run central case scenario the regional GDP increases by 0.11%, unemployment rate drops by 0.45% and households consumption increases by 0.4%. The consumption of energy decreases both in household and in production, although the calculated general equilibrium rebound effect is 50%, so that only 50% of the potential energy savings are achieved. By introducing free migrations of workers, we find that in an open region characterised by an integrated labour market, interregional migration of workers may give additional momentum to the economic expansion from the increased household energy efficiency. In fact the net in-migration relieves pressure on the real wage and the cpi, which return to their baseline values in the long-run restoring the lost competitiveness observed in the national case (Lecca et al., 2014). By considering different simulation scenarios we show that there is a friction between the economic expansion from increased household energy efficiency and the rebound effects. Moreover, we show that the economic stimulus from increased energy efficiency in household would be different depending on the precise specification of the impact itself.