Green Energy, Efficiency and Climate Change: An Economic Perspective - Green Energy and Efficiency: An Economic Perspective - page 6

2.2 The Rebound Effect

Energy ef ciency is often said to be the cost-effective way of reducing GHG

emissions to combat climate change. However, the impact of energy ef ciency on

total energy use is controversial as long as an energy ef ciency improvement can

lead to greater use of the energy ef cient device and increased spending on other

goods that were previously not affordable. These behavioral or systemic responses
to the introduction of new technologies that increase energy efciency are known as
the rebound effect (or take-back effect). A brief history of the rebound effect
analysis can be found in Borenstein [ 5 ] where the author contributes to the mi-
croeconomic literature on the rebound effect and quanti es the rebound effect by

decomposing it into substitution and income effects. He concludes that the rebound
effect is substantial for the vehicle fuel economy and lighting and if ignored, it
would lead to substantial overstatement of energy savings. He also states that as
long as the rebound effect re

ects the creation of economic value, because con-
sumers are able to re-optimize, given the change in relative prices, it should be
celebrated and not regretted. On the other hand, Gillingham et al. [ 9 ] point out that
the rebound effect is real and it makes energy ef

ciency policy less effective, but
they also say that the rebound effect is usually very small and it should not be used
to derail energy-ef ciency policies.

2.3 The Energy Ef ciency Gap

The energy ef ciency paradox measures the extent to which

end users underinvest in privately optimal energy ef

ciency gap or energy ef

ciency improvement. There-
fore, it has to do with the difference between the optimal and the actual levels of
energy consumption. It has attracted wide attention among energy policy analysts, as
society has forgone the apparent cost-effective investment in energy efciency even
though improvements in ef

ciency signi cantly reduce energy consumption at low

costs.
Gillingham and Palmer [ 11 ] offer a thorough review of the most recent literature
relevant to the energy ef ciency gap, including the latest insights from behavioral

economics. They conclude that engineering studies may overestimate the size of
the gap because they fail to account for all costs and neglect particular types of
economic behavior. Furthermore, some market failures, which we explain below,
such as asymmetric information or agency problems, contribute to the gap.
Moreover, they nd that the relative contribution of the different factors to the gap

depends on the energy user and on the energy use. Therefore, they conclude that
this should be taken into account by policymakers when designing cost-effective
energy ef

ciency policies.
In this sense, Allcott and Greenstone [ 2 ] argue that policy intervention to reduce
the energy ef ciency gap should address directly the market failure that causes the