The impact of increased efficiency in the industrial use of energy: A computable general equilibrium analysis for the United Kingdom

The conventional wisdom is that improving energy efficiency will lower energy use. However, there is an extensive debate in the energy economics/policy literature concerning “rebound” effects. These occur because an improvement in energy efficiency produces a fall in the effective price of energy services. The response of the economic system to this price fall at least partially offsets the expected beneficial impact of the energy efficiency gain. In this paper we use an economy-energy-environment computable general equilibrium (CGE) model for the UK to measure the impact of a 5% across the board improvement in the efficiency of energy use in all production sectors. We identify rebound effects of the order of 30-50%, but no backfire (no increase in energy use). However, these results are sensitive to the assumed structure of the labour market, key production elasticities, the time period under consideration and the mechanism through which increased government revenues are recycled back to the economy.