Presentation Empirical Methods Final

Paper Review:
Prices, technology development and the

rebound effect (Birol and Keppler, 2001)
Empirical Methods for Energy Economics
Group 5: Maria Kaninia and Ratri Sryantoro
Agenda
§ Introduction: goals and definitions

§ Classical Approach
§ Drivers of efficiency improvements
§ Rebound Effect: energy efficiency and GDP
§ Modified Approach
§ Structural shifts and imperfect markets
§ Markets and governments
§ Final Remarks

05/29/11 Departement/Institut/Gruppe 2
Agenda

§ Final Remarks

Goals
Goals of the paper
1.Compare two existing options to influence energy efficiency improvement:
A price-based mechanism to raise energy prices
A command and control regulation to induce innovation in energy and
productivity
2.Explore the drivers, size and effects of the rebound effects, relationships with energy
intensity and energy efficiency.
3.Explore macro effects on rebound effects of energy efficiency improvements under
static and dynamic frameworks
4.Explore possible mix of policy options to reduce energy consumption
05/29/11 Center for Energy Policy and Economics 4

Definitions
An Example: Energy Intensity & Efficiency EUK (1995 – 2005) Other Unaccounted Factors
Intensity_EUK Efficiency_EUK Consumer preferences

Intensity_EUK Pearson Correlation 1 .878
Efficiency_EUK Pearson Correlation .878 1 Economy structure
differences
Data of growth in energy intensity & efficiency of 21 EU countries
from 1995 - 2005 State of technology
Intensity & Efficiency not perfectly correlated Geography

Source: CPB Netherlands Bureau for Economic Policy Analytics, Energy Intensity Across
Sectors and Countries, Empirical Evidence 1980 - 2005 Climate

Agenda

§ Final Remarks

Drivers of energy efficiency improvements
§ Classical Method: Three Approaches

Objective
Improve energy efficiency
Non-technological drivers Technological Drivers
Customer preferences, economy How to influence adoption of more

structure, relative prices energy efficient technologies?
Target Influence: Three Approaches
Existing Technologies New Technologies Combination of Technologies
Policy tools targeted at influencing factors (e.g. relative prices, education base)

Approach 1: Influence Existing Technologies
Assessment Price Approach Control Approach
Theory on Influencing Factors Relative price of energy to other factors Sufficient level of support
High energy prices: energy saving infrastructure
technologies ↑, share of K and L↑ Sufficient size of resources
Low energy prices: energy saving
technologies ↓, share of K and L↓

Policy Tools Price-based
technologiesmechanism
↑, share of K and L↑ Control andsize
Sufficient constraint mechanism
of resources
(Taxes, subsidies,
Low energy prices:trading
energyschemes)
saving
technologies ↓, share of K and L↓

Policy Tools Price-based
technologiesmechanism
↑, share of K and L↑ Control andsize
Sufficient constraint mechanism
of resources
energyschemes)
saving
Critique (+) Economically efficient
technologies ↓, share of K and L↓ (+) Ecologically efficient
(+) Benefit in public goods (-) Economically inefficient
(-) Lower growth (-) High administrative costs
(-) Difficult to identify the right tax rate (-) Dependent on regulator foresight
(not price signal)
TC: 1512.5 TC: 3200


Policy Tools Price-based mechanism
technologies ↑, share of K and L↑ Control andsize
Sufficient constraint mechanism
of resources
energyschemes)
saving
Critique (+) Economically efficient
technologies ↓, share of K and L↓ (+) Ecologically efficient
(+) Benefit in public goods (-) Economically inefficient
Empirical questions Price
(-)
 Effects:
Lower reversible vs. ratchet effect
growth (-) High administrative costs
Other dynamic effects: marketing, proof of EOS, learning
(-) Ecologically inefficient (-) Dependent on regulator foresight
(-) Difficult to identify the right tax rate (not price signal)
TC: 1512.5 TC: 3200

Approach 2: Influence New Technologies
Assessment Approach
Theory on Influencing Factors New technologies increases economy’s production capabilities
Determinants of rate of adoption & turnover

 Knowledge & level of skilled labour
 Experience with similar / ancillary technologies
 Effort from private and government
 Appropriate institutional support

Assessment Approach
Policy Tools Determinants of rate

Public resources spend ► R&D&►
of adoption turnover
Improvements in Public Goods

Assessment Approach
Policy Tools Determinants of new

Public resources spend ► R&D ►
technologies rate of adoption & turnover
Improvements in Public Goods
Critique Effectiveness: dependent on supporting structures
Rate & turnover: immeasurable
New technologies: coupled with efforts to increase productivity (no “autonomous
technical progress”)

Approach 3: Influence through Both Technologies
Assessment Approach
Theory on Influencing Factors “Induced technological change”

Stochastic relationship between technology and resources for research
“Benefit maximization”: most beneficial resource allocation
Static Effect
Recombination of K & L
Price Influence
Price of energy ↑ Dynamic Effect
Re-direction of R&D
towards new technologies

Assessment Approach

Policy Tools Price based

“Benefit mechanism and
maximization”: R&D
most spend resource allocation
beneficial
Static Effect
Price Influence
Re-direction of R&D

Assessment Approach

Policy Tools Price based

“Benefit mechanism and
maximization”: R&D
most spend resource allocation
beneficial
Critique Immeasurability: which of the two approaches is more successful?
R&D spend not directly related to energy Static Effect
Government Spending related to price of energy
Price Influence
Re-direction of R&D

Agenda

§ Final Remarks

Rebound Effect: Energy & GDP
Potential
Savings
Direct & Indirect
Rebound Effects
Understanding the Drivers Check for Rebound Effect Assess Rebound Effect
Research Question: Research Question: Research Question:

Do the technology What happens to share of What factors affect the size
improvements lead to energy in production if of rebound effect?
decrease energy intensity? marginal productivity What are the dynamics of the
(efficiency) increases? Rebound effect?

Understanding Drivers of Rebound Effects

How does Rebound Effect occur?
Relative price per unit = PE/PK
Other
Contributing Factors to Inputs Relative factor share = E/K
Rebound Effects
I0
Relative factor share
I0 – unit isoquant
Rebound before energy
I1 efficiency increase
Effect = MPE/MPK
I1 – unit isoquant
Relative price after energy
per unit efficiency increase
E0 E1 Energy
E1>E0
I1<I0

Size, Dynamics and Effects of Rebound Effects
Determining Factors Dynamics Size of Rebound Effects
Higher elasticities 1.Intensity decrease less
1.Elasticity of substitution ▼ than potential savings
2.Elasticity of demand (of “Easier” to substitute 2.Difficult to quantify
the “cheaper” good) ▼
Higher energy factor share 3.Typical figures*
▼ Households [0 – 0.5]
Higher rebound effect
Automobiles [0.1 – 0.3]
1.
2.
* Source: Energy Efficiency and the Rebound Effect: Does Increasing Efficiency Decrease Demand? (Gottro, 2001)

Agenda

§ Final Remarks

From the “textbook” economic story…
 ►Without proper manipulation of the relative price of energy (market-based
policy), technical improvements do not directly translate into a decrease of energy
intensity.
►Reason:
 “self-induced” rebound effect


Assumptions valid for the “basic

story”:
realistic
§[A1] Perfect competition, rational description
profit-maximising agents
§[A2] Absence of structural shifts
…to the “custom” interpretation (engineer/economist)
Based on what

level of substitution is considered possible…
And therefore on the assumed

magnitude of the rebound effect…
High: economist long-run ex-ante


Low: engineer short-run ex-post
…different modelling approaches:

 Top-down: economist
 relative prices govern substitution between factors, rebound

 Bottom-up: engineer
 step-shaped supply curves, no substitution, no demand-side feedback, no
rebound long-run:
 Hybrid: mixed approach flexible production
process
What defines the
the substitutability
slope of the curve short-run:
of the energy
“price vs intensity”
commodity as an rigid
for an energy
input factor
commodity?
[A1] Imperfect markets, irrational agents
 Efficiency gap (“paradox”) between actual and optimal energy

use: •effects of market

Lack of information failure pronounced for
Inertia (transaction cost, decision-making cost) residential users (vs.

End-consumer: sub-optimal behaviour industrial sector)
 budget theory •residential sector

Principal-agent problem insensitive to “price
signals”
Asymmetries in incentives
Because of the factors above, relative


price changes are less effective as
a policy instrument.
→Government intervention required.

[A1] Example: Principal-Agent problem
bears the cost of the

decision-maker
decision
Relative prices: dominant role for energy intensity
Indicative evidence #1: oil
§ Oil crisis of 1973: caused abrupt change
in relative prices
§ Short term: disruption
§ Long term: shock absorbed, “oil aggregate
intensity” reduced, convergences
What does the graph not show?
§ The impact of structural shifts.

§
convergence
Indicative evidence #2: electricity

sector
§ electricity price
“electricity
intensity”
cross-sectional
= consumption
data OECD
(kWh) / GDP
(typical curve)
Important for further policy analysis: Depending on the energy commodity (possibilities of
substitution), price changes might be effective tools to govern intensity.
[A2] Structural shocks
§ Non-continuous changes
§ External shock (e.g. oil crisis)
§ Major technological innovations
§ Major changes in government policy (e.g. performance standards in the
transport sector)
§
§ “Normal” adjustment procedure of adapting to improved
efficiency inhibited
§ No factor substitution possible in the short-term in production processes.
§ Market mechanisms do not function in the ordinary way under extra-ordinary
conditions.
§ Catch-up phase required

Reversibility = assumption in the “textbook” static framework
§ Real world: “ratchet effect” for efficiency improvement
§ in addition to:
§ constant incremental improvement over time
§ learning effect
§ “locked” achieved improvement because of adjustment costs
§
rebound
1/intensity
effect (%) =
(AB)/(AC)
time~efficiency
(continuous technical
improbable! improvement)
No substitution
§ If it is not possible to substitute energy with other factors of production, then:
§ delta_energy intensity ~ delta_technical efficiency
example:
Leontieff production function (fixed ration of

input factors)
(exemplifies the transition situation in the

short run)
Agenda

§ Final Remarks

Government objective (political): lower absolute consumption
of energy
§ Technological efficiency improvements not enough
§ Critical tool: manipulation of relative prices
exception
primary energy with no
negative side-effects (e.g.
nuclear , renewables)
Factors for market failure:
•Subsidies
government role
•High transaction costs
•Incentive failures
Agenda

§ Final Remarks

Suggested policy mix (to achieve lower absolute energy consumption)
Mix of policies
[1] market instruments (Δp) price transparency
condition: competitive markets adapt to structural shifts
must be enabled
rapid diffusion of technical
innovation
[2] policies to drive innovation in areas where private initiative is
not enough
fact the complex

required to manage
relationor
between… End goal
pro
duc •off-set rebound effect
tivit •promote technological
y improvement
fact
out or
put sub
gro stit
wth utio
Conclusion
§ Since 2000 (paper date), policies (e.g. EU

EmissionsTradingSystem) have been enacted to incorporate the
carbon price into the electricity price.
§ Data required to see whether the carbon market has
actually driven environmental innovation.
§ If yes, it remains to be seen whether this carbon-driven
efficiency improvement has translated into an decrease of
energy intensity.
§ To date method of quantifying magnitude of rebound effect
is still debated
§
§
Thank you for your attention
Questions?

Presentation Empirical Methods Final

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Paper Review:

Prices, technology development and the

§ Introduction: goals and definitions

§ Introduction: goals and definitions

05/29/11 Center for Energy Policy and Economics 4

Intensity_EUK Efficiency_EUK Consumer preferences

Intensity & Efficiency not perfectly correlated Geography

05/29/11 Center for Energy Policy and Economics 5

§ Introduction: goals and definitions

§ Classical Method: Three Approaches

Improve energy efficiency

Non-technological drivers Technological Drivers

Customer preferences, economy How to influence adoption of more

Target Influence: Three Approaches

Existing Technologies New Technologies Combination of Technologies

05/29/11 Center for Energy Policy and Economics 7

Low energy prices: energy saving

technologies ↓, share of K and L↓

05/29/11 Center for Energy Policy and Economics 8

05/29/11 Center for Energy Policy and Economics 9

TC: 1512.5 TC: 3200

05/29/11 Center for Energy Policy and Economics 10

High energy prices: energy saving infrastructure

TC: 1512.5 TC: 3200

05/29/11 Center for Energy Policy and Economics 11

Theory on Influencing Factors New technologies increases economy’s production capabilities

Determinants of rate of adoption & turnover

05/29/11 Center for Energy Policy and Economics 12

Theory on Influencing Factors New technologies increases economy’s production capabilities

Policy Tools Determinants of rate

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Theory on Influencing Factors New technologies increases economy’s production capabilities

Policy Tools Determinants of new

05/29/11 Center for Energy Policy and Economics 14

Theory on Influencing Factors “Induced technological change”

“Benefit maximization”: most beneficial resource allocation

05/29/11 Center for Energy Policy and Economics 15

Theory on Influencing Factors “Induced technological change”

Policy Tools Price based

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Theory on Influencing Factors “Induced technological change”

Policy Tools Price based

05/29/11 Center for Energy Policy and Economics 17

§ Introduction: goals and definitions

Research Question: Research Question: Research Question:

05/29/11 Center for Energy Policy and Economics 19

05/29/11 Center for Energy Policy and Economics 20

05/29/11 Center for Energy Policy and Economics 21

05/29/11 Center for Energy Policy and Economics 22

§ Introduction: goals and definitions

 “self-induced” rebound effect

Assumptions valid for the “basic

 relative prices govern substitution between factors, rebound

 Efficiency gap (“paradox”) between actual and optimal energy

 budget theory •residential sector

Because of the factors above, relative

bears the cost of the

§ The impact of structural shifts.

Leontieff production function (fixed ration of

(exemplifies the transition situation in the

§ Introduction: goals and definitions

primary energy with no

negative side-effects (e.g.