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

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.