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Agenda
Monday: Rebound
Wednesday: Behavioral energy
Friday: Lint to lead review
Next week: Monday: Begin geosciences Friday: Midterm
1
Where are we on energy?• We have gone over energy geology, economics, policy.• This is essentially the same as climate-change
economics• Assume you need some level of energy services, S*,
then you have production function: S* = F(K, E).• Once prices reflect social costs (including Pigovian
taxes), then the equilibrium is efficient (see next slide)• So, which agents can foul things up?
– Governments, firms (markets), consumers
• What are the major problems? Failures of:– Institutions, information, decisions, preferences
• We will take just one issue today. Problem of using regulation rather than prices to reduce energy consumption: … the rebound effect
2
Isoquant
K
S* = F(K, E)
Energy
3
Policies on Oil (Energy) Use
Background– In general, first-best policy for reducing oil (energy) use
is taxes on oil (energy).– However, because of “tax-aversion,” governments often
substitute regulations. – For example, regulations on minimum energy efficiency– A standard question is their efficiency relative to fuel
taxes.
One specific case is: Does the higher efficiency actually increases energy consumption? The Rebound Effect
4
In an efficient energy market
K
S* = F(K, E)
Energy
5Emax
6
Rebound effect
Jevons paradox
“The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.”
“The number of tons of coal used in any branch of industry is the product of the number of separate works, and the average number of tons consumed in each. Now, if the quantity of coal used in a blast-furnace be diminished in comparison with the yield, the profits of the trade will increase, new capital will be attracted, the price of pig-iron will fall, but the demand for it increase; and eventually the greater number of furnaces will more than make up for the diminished consumption of each.”
Jevons, The Coal Question
7
Rebound effects: categories1. Direct rebound effect: Increased fuel efficiency lowers the cost
of consumption, and hence increases the consumption of that good because of the substitution effect.
2. Indirect rebound effect: Through the income effect, decreased cost of the good enables increased household consumption of other goods and services, increasing the consumption of the resource embodied in those goods and services.
3. Economy wide effects: New technology creates new production possibilities in and increases economic growth.
For small industries, #1 will dominate. #2 will almost always be too small to offset small #1.#3 is unclear about the mechanism that the authors are talking
about.
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Direct rebound effect…
9
9
G
Price of vmt
Before mpg improvement
Gasoline consumption
Effect of efficiency improvement
“Rebound effect”
After mpg improvement
… or maybe …
10
10
G
Price of vmt
Before mpg improvement
Gasoline consumption
Effect of efficiency improvement
“Rebound effect”
After mpg improvement
But welfare improvement is unambiguous
(assuming no externalities)
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11
G
Price of vmt
Vmt
Welfare improvement
Economics of direct rebound effectAssume that regulation increases energy efficiency of a capital
good from mpg0 to mpg1 . The question is whether the
lower cost of a vmt (vehicle-mile traveled) would offset the lower cost.
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vmt gasoline
(1) vmt = f (p ,p ), vehicle miles traveled,
(2) cars = f (p ,p ), number vehicles
From this we can get the following:
(3) Gasoline use = G = vmt/ mpg
(4) p = p / mpg
(5) ln / ln
vmtvmt cars
carsvmt cars
d G d mp
gasoline
gasoline
-1 ln / ln ln / ln
But we know from (4) that ln / ln ln / lnp , so
(6) ln / ln -1 ln / ln ln / lnp
which gives us the important result:
(7) ln
vmt vmt
vmt vmt
vmt vmt
g d vmt d p d p d mpg
d p d mpg d p d
d G d mpg d vmt d p d p d
d
gasoline/ ln 1 ln / lnp
So rebound effect is equal to the elasticity of vmt with respect to gasoline prices,
which we have observed in countless studies.
G d mpg d vmt d
Energy goods v. energy services
A key issue in measurement is the difference between energy goods or inputs and energy outputs or services.
E.g., ounce of whale oil v. lumen; gallon of gasoline v. (vmt, comfort, safety, noise, …)
Production function:Energy services = f(capital, labor, fuel, infrastructure,…)
Basic point: There have been vast improvements in energy services per unit of primary energy over time (call it “efficiency”)
13
The price of fuel for lighting
14Roger Fouquet and Peter J.G. Pearson
The long-term price of light
15Roger Fouquet and Peter J.G. Pearson
Example of lighting 1800 - 2000: Did increased efficiency increase lighting
use?
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10.000
1.000
0.100
0.010
0.001500,00050,0005,000500505
Output of lighting
Pri
ce p
er lu
men
-hou
r
Example of lighting
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Dependent Variable: LOG(Output of lighting) Method: Least Squares Included observations: 7 after adjustments
Variable Coefficient Std. Error t-Statistic Prob. C 3.23 1.32 2.437 0.071
LOG(Price of lighting) -0.62 0.35 -1.762 0.152 LOG(GDP) 1.31 0.62 2.111 0.102
R-squared 0.985 Mean dependent var 6.764
Adjusted R-squared 0.978 S.D. dependent var 4.847 S.E. of regression 0.714
Suggests that Jevons effect does not hold. Inelastic demand.
Empirical estimates of rebound effect for autos
Basic results from many demand studies:*
Short-run gasoline price-elasticity on vmt = -0.10 (+0.06)
Long-run gasoline price-elasticity on vmt = -0.29 (+0.29)
Therefore, the rebound would offset 10 to 29 percent of mpg improvement.
This can be applied to other areas as well.
Reference: Phil Goodwin, Joyce Dargay And Mark Hanly, “Elasticities of Road Traffic and Fuel Consumption with Respect to Price and Income: A Review,” Transport Reviews, Vol. 24, No. 3, 275–292, May 2004, available at http://www2.cege.ucl.ac.uk/cts/tsu/papers/transprev243.pdf
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19Source: UK Energy Research Centre, The Rebound Effect
What is the lesson here?1. Most regulations target K rather than E because of tax
aversion.2. Using “second-best” instruments can have paradoxical
effects.3. In extreme case, could actually increase energy use
because of rebound effect.4. Economists conclude that should use first-best instruments
that target the externality rather than an indirect approach.
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