Residential energy efficiency policies: Costs, emissions and rebound effects

Ambitious energy efficiency goals constitute an important part of the EU's road to a low-carbon society. While the introduction and restructuring of climate policy instruments is taking place rapidly, knowledge of how the instruments interact is lagging behind. This analysis looks at the 2030 policy goals for residential energy efficiency and how they interact with targets for restricting CO2 emissions. The case studied is Norway, which has committed to new climate policy targets for 2030 in line with the EU. A multi-sector computable general equilibrium model of the Norwegian economy is used to explore the cost, emission and energy rebound effects of alternative interpretations of the policy underlying the proposed 2030 energy efficiency goal. The model incorporates bottom-up information on energy efficiency investments and takes account of both energy and process emissions. The economic costs of the energy efficiency policies are found to be high: equivalent to a welfare loss of 1%. The costs rise when energy efficiency policies interact with carbon pricing. Economy-wide rebound amounts to nearly 40%, mainly because energy-intensive, trade-exposed industries expand. As emissions from these industries stem from both combustion and industrial processes, total CO2 emissions increase by 2.4%.