Entergy Mississippi Programs

Fact and Fiction: Efficiency and the Rebound Effect

Fact and Fiction: The Rebound Effect and Efficiency

Gita Subramony for Zondits, June 24, 2014

Environmental regulation and energy policy have been hot topics in recent weeks. The EPA’s new Clean Power Plan, which provides additional rules to limit greenhouse gas (GHG) emissions from coal-fired power plants, has put demand-side management at the forefront of cost-effective strategies for compliance.

Much has been written on energy efficiency programs and their benefits. Studies have quantified how much programs spend per kWh saved. The Lawrence Berkeley National Laboratory (LBNL) recently published a paper on program administrator costs for saved energy. The study shows the US average levelized cost of saved energy (CSE) across multiple sectors is around $0.02 per kWh. Overall, the cost of the efficiency programs is less than building new power plants. Other studies have also indicated the myriad benefits of efficiency: not only is it cheaper than building new power plants, but it also lowers and stabilizes energy rates for consumers, reduces consumers’ spending on energy, creates jobs for program administrators, vendors, and other contractors and consultants, drives innovation for new energy-saving technologies, and also contributes to lessening GHG emissions and pollution. Many states already have programs in place, and bolstering them could result in increased economic activity and cleaner air.

Despite the well-documented benefits of efficiency, some states are putting the brakes on efficiency standards and programs (e.g., Ohio and Indiana). There is a very vocal set of opponents of efficiency that put forth questionable arguments against efficiency and renewable initiatives, standards, and regulations. The “war on coal” rhetoric has definitely increased in light of the EPA’s new rules and has been used as an argument against efficiency. Proponents of the “war on coal” idea argue that regulations and efficiency mandates will kill power plant jobs and increase electricity rates for consumers. Recent studies in Ohio, in fact, showed the opposite – that electricity rates were lowered by 1.4% during the time that the efficiency and renewable standards were in effect and that $2 in savings resulted for every $1 spent on efficiency. Despite these data points, the state passed the renewable and efficiency freeze, and it was signed into law by Ohio governor John Kasich.

Others have used the “rebound effect” to oppose efficiency regulations and programs. This theory argues that efficiency programs might actually result in increased energy usage since the installation of more efficient equipment could result in behavioral changes that actually require greater energy consumption. For example, purchasing a hybrid or electric vehicle might actually result in more driving since the owner will be spending less money on gasoline. Those who advocate for the existence of the rebound effect question why efficiency programs should be funded if they allegedly result in greater energy consumption, which negates the environmental benefits of the programs. However, policy-makers who subscribe to this theory seem to ignore the fact that the rebound effect is likely minimal at worst. Energy policies in California offer evidence that rebound is not liable to decimate the savings incurred by efficiency. California has long been known as a leader in efficiency standards and programs. Data from the California Energy Commission has shown a 15% reduction in energy usage for the state with a 40% reduction compared to other states that do not have such a strong efficiency track record.

Studies undertaken by energy efficiency and economic think tanks show that the rebound effect can be difficult to quantify; however, the phenomenon likely won’t overshadow energy reductions and other economic and environmental benefits that result from efficiency programs and policies. A recent paper authored by Kenneth Gillingham, David Rapson, and Gernot Wagner offers a close examination of the definition of rebound and how it relates to energy policy. The authors note that the concept of rebound in energy efficiency can be expressed in the broadest sense as “a percentage of the forecasted reduction in energy use that is ‘lost’ due to the sum of behavioral or market responses.” They also note that beyond this general definition there are a number of factors that further complicate how evaluators and researchers view rebound: are the efficiency increases for a product isolated from other attributes like cost or are the efficiency increases also viewed in the context of rising product costs and other product changes? In many cases, when a product increases its energy efficiency, costs per unit might increase and availability might decrease, which in turn complicates how rebound is defined and determined. In the paper’s literature review, the authors describe microeconomic and macroeconomic rebound and suggest that at least on a microeconomic level, rebound is not liable to reverse the gains brought on by energy efficiency programs and policies.

Here’s an example: Say you buy a treadmill because you want to become more fit. As a result of using the treadmill, you might consume a few more calories during a typical day, but you will probably not consume that much more that you reverse the health effects of using the treadmill. Overall, you will probably see positive health effects that go beyond slimming down; those could include better sleep habits, less stress, and lower healthcare costs. Similarly, installing and using energy efficiency equipment might slightly alter behavior, but any rebound effects will never exceed the usage of the “business-as-usual” baseline case. In addition, there are clear economic benefits of efficiency (e.g., increased productivity, efficiency sector jobs, etc.).

Perhaps the uncertainty around the rebound effect allows opponents of efficiency to present it as a viable argument. However, as more studies show the cost-effectiveness of efficiency programs as well as their additional benefits, it will be harder and harder for the rebound effect to hold water as an argument against energy efficiency.