The economy-wide rebound effect and U.S. business cycles: A time-varying exercise

TL;DR

This paper estimates the economy-wide rebound effect in the U.S. using time-varying VAR models, finding it close to 100% with short-lived energy savings, questioning the long-term effectiveness of energy efficiency innovations.

Contribution

It introduces a novel time-varying VAR approach with stochastic volatility to measure the rebound effect across business cycle phases.

Findings

Rebound effect is approximately 100%.

Energy savings last no longer than three years.

Energy efficiency alone is insufficient for long-term energy use reduction.

Abstract

Energy efficiency gains in production and consumption are undisputed economic and environmental goals. However, potential energy savings derived from efficiency innovations may have short-lasting effects due to increased demand for more affordable energy services. Measuring the size of this rebound effect is a critical tool for better assessing the reliability of energy-saving technological change for global warming mitigation. This paper estimates the size of the economy-wide rebound effect using time-varying Vector Autoregressive (VAR) models with stochastic volatility for U.S. business-cycle peak and trough periods. All models estimate a rebound effect close to 100%, with reductions in energy use lasting no longer than three years following energy efficiency innovations. The latter, therefore, are an insufficient tool for effectively changing historical energy use patterns.