Improving the efficiency with which we use energy is often said to be the most cost-effective way to reduce energy use and greenhouse gas emissions. Yet, such improvements usually 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. Disagreements about the magnitude of energy efficiency rebound are immense and play a central role in debates over the role energy efficiency can play in combating climate change. But these differing views seem to stem as much from the lack of a common framework for the analysis as from different estimates of key parameters. I present a theoretical framework that parses rebound into economic income and substitution effects. The framework helps shed new light on how rebound is affected by the pricing of energy, as well as by the degree to which consumers optimize their consumption. I then explore the implications of this framework for measurement of rebound, examining rebound from improved auto fuel economy and lighting efficiency. The illustrative calculations I carry out suggest that rebound is unlikely to that more than offset the savings from energy efficiency investments (known as “backfire”), but rebound is likely to reduce the net savings by roughly 10% to 40% from these energy efficiency improvements.
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