An empirical analysis of the welfare implications of the direct rebound effect

Abstract

Improving the energy efficiency of an energy service, such as lighting, cooling, or driving, makes the service cheaper, normally leading consumers to demand more of it. This additional demand is known as the direct rebound effect. Rebound is often perceived negatively because it usually eliminates some of the expected energy savings. To determine if the direct rebound effect is welfare reducing, we undertake a cost-benefit analysis that compares the consumer surplus gained from direct rebound to the associated increase in negative externalities. Focusing on driving, the results reveal that the direct rebound effect is welfare reducing in most cases, as the consumer surplus gains were smaller than the increase in external costs. These external costs include greenhouse gas emissions, air pollution, congestion, and accidents. Finally, we show that overlooking the costs and benefits of the direct rebound effect can lead to a misleading cost-benefit evaluation of energy efficiency, particularly when rebound effects are large.