As explained in previous posts, energy efficiency policies are not as effective as expected in reducing energy consumption. The reason is that engineering calculations do not take into account secondary effects coming from agents’ behavior. This is known as the rebound effect.
Although most of the efforts have been placed in providing empirical evidence and improving theoretical background and methods, some few studies suggest that energy pricing (taxation, cap-and-trade systems) could be a potential solution to offset the rebound. One problem is, however, that the magnitude of rebound is still under discussion, so how do we tax energy in an effective way that deals with rebound? And what about other economic impacts of such a tax?
I have conducted an empirical assessment (the first one, as far as I know) on potential energy taxation to counteract the economy-wide rebound effect. Using an adapted version of the dynamic energy-economic CGE model developed for the Metres project, I have tested the effects of an energy productivity improvement on energy consumption, finding an economy-wide rebound effect of 82.82%. This means that only 17.18% of expected energy savings become effective. Then I have tested different forms of energy taxation and found that a marginal tax rate lower than the increase of productivity would totally counteract the rebound effect and there would still be a global economic improvement from the energy productivity increase, in relation to the base case. Specifically, for a global energy productivity improvement of 5%, we would need an ad valorem tax rate of 3.76% to the production of all energy industries to totally offset the rebound effect.
Energy efficiency must be stimulated, but additional measures should be planned if we want to reduce energy consumption. This research suggests energy taxation would be a good candidate.
An article with these and other interesting results from the analysis, as well as more details, has been sent to a scientific Journal.