Energy Economics 50 (2015) 96–104

Contents lists available at ScienceDirect

Energy Economics

journal homepage: www.elsevier.com/locate/eneco

Measuring energy rebound effect in the Chinese economy: An economic

accounting approach
Boqiang Lin a,b,⁎, Kerui Du c
a
The School of Economics, China Center for Energy Economics Research, Xiamen University, Xiamen, Fujian, 361005, PR China
b
Newhuadu Business School, Minjiang University, Fuzhou, Fujian, 350108, PR China
c
School of Energy Research, B201 College of Economics, Xiamen University, Xiamen 361005, China

a r t i c l e i n f o a b s t r a c t

Article history: Estimating the magnitude of China's economy-wide rebound effect has attracted much attention in recent years.
Received 11 August 2014 Most existing studies measure the rebound effect through the additional energy consumption from technological
Received in revised form 17 April 2015 progress. However, in general technological progress is not equivalent to energy efficiency improvement.
Accepted 22 April 2015
Consequently, their estimation may be misleading. To overcome the limitation, this paper develops an alternative
Available online 4 May 2015
approach for estimating energy rebound effect. Based on the proposed approach, China's economy-wide energy
JEL classification:
rebound effect is revisited. The empirical result shows that during the period 1981–2011 the rebound effects in
Q41 China are between 30% and 40%, with an average value of 34.3%.
Q43 © 2015 Elsevier B.V. All rights reserved.
Q48
Q47
O13
O33

Keywords:
Energy rebound effect
Energy efficiency
Index decomposition analysis
Ridge regression

1. Introduction deterioration (Ang et al., 2010). In practice, the Chinese government

In past decades, China's energy consumption had been rising
dramatically. According to NBSC-a (2012), in 2011 China's energy
consumption reached 3480 million tons of coal equivalent (Mtec)
which increased from 602.75 Mtec in 1980, indicating an annual
growth rate of 5.8%. Moreover, as shown in Fig. 1, the consumption
grew even more dramatically after 2002. At present, China has
been the largest energy consumer as well as the largest emitter of
greenhouse gas (GHS) in the world. It was also projected that
China's energy consumption will grow steadily in the next decade
due to the fact that China is still in the process of industrialization
and urbanization. Consequently, China is facing increasing pressure
on energy security and environmental pollutions.
Energy efficiency has been widely regarded as the most cost-
effective way for dealing with energy challenges and environmental
⁎ Corresponding author at: Newhuadu Business School, Minjiang University, Fuzhou,
Fujian, 350108, PR China. Tel.: t865922186076; fax: t865922186075.
E-mail addresses: bqlin@xmu.edu.cn, bqlin2004@vip.sina.com (B. Lin).
has taken measures to improve energy efficiency for controlling or
slowing down the growth of energy consumption. For instance, in
the “11th Five-Year (2006–2010) Plan” the Chinese government set
a target of reducing its energy intensity by 20% compared to that in
2005 and also initiated detailed policies to realize the target. Howev-
er, taking into account the energy rebound effect, the impact of im-
proving energy efficiency on energy use may be discounted.
Energy rebound effect means that an increase in energy efficiency
may not lead to an expected decrease in energy use owing to the be-
havior change of economic agents (Wang et al., 2012). The idea can
date back to Jeavons (1865). Over the past decades, energy rebound
effect has been a hot topic in energy economics. There is already a
large body of studies in this field. Representative literatures include
Van Es et al. (1998), Schipper and Grubb (2000), Grepperud and
Rasmussen (2004), Barker et al. (2007), Brännlund et al. (2007),
Guerra and Sancho (2010), Wei (2010), Wang et al. (2012), and
Ghosh and Blackhurst (2014). Some excellent reviews can also be
found in the existing literatures, e.g., Greening et al. (2000),
Dimitropoulos (2007), Sorrell and Dimitropoulos (2008), Sorrell
et al. (2009), and Madlener and Alcott (2009).

http://dx.doi.org/10.1016/j.eneco.2015.04.014
0140-9883/© 2015 Elsevier B.V. All rights reserved.
 B. Lin, K. Du / Energy Economics 50 (2015) 96–104
Fig. 1. Energy consumption in China, 1980–2011.
Estimating the magnitude of China's economy-wide rebound effect1
has attracted much attention in recent years. There are mainly two
methods used in the existing studies, i.e., the computable general equilib-
rium (CGE) model and the economic accounting approach. For example,
Zha and Zhou (2010) constructed a CGE model and use China's 2002
input–output table to estimate China's energy rebound effect. They
found that a 4% improvement of energy efficiency would generate a 33%
energy rebound. Li and Lu (2011) also used a CGE model to measure
the energy rebound effect in China. But the data they used is China's
2007 input–output table. They found that a 5% increase in energy efficien-
cy would lead to a 178.61% rebound in the long run. The CGE model is a
system modeling method which describes explicitly the response of eco-
nomic agents to energy efficiency change. One distinct merit of the CGE
model is that it has microeconomic foundations so that the mechanisms
of the rebound effect can be explained in depth. However, a series of strict
assumptions are needed for CGE modeling, e.g., utility function, produc-
tion function, and technological change, etc. Saunders (2008) shows
that the choice of function can inadvertently pre-determine results. An-
other shortcoming of CGE models is that simulation analysis based on
the subjective setting of energy efficiency improvement is conducted to
estimated energy rebound effect (Shao et al., 2014). Consequently, the re-
sult may be far away from the actual rebound.
Compared to the CGE model, economic accounting approach is de-
signed to estimate the rebound effect directly. Due to the ease of use,
this approach has widely been employed in recent years. The accounting
framework was first proposed by Zhou and Lin (2007). Their estimation is
built on the logical relationships among technological progress, economic
growth, energy intensity, and energy consumption. Specifically, Zhou and
Lin (2007) based on the change of energy intensity to estimate the effi-
ciency derived savings and used Solow remainder method to measure
the increment of energy consumption due to economic growth which is
derived by technological progress. Taking into account the fact that indus-
trial structure change also contributes to energy intensity change, Wang
and Zhou (2008) proposed an improved model based on the LMDI meth-
od which can exclude the influence of industrial structure change. In view
of the limitations of Solow remainder method, Lin and Liu (2012) pro-
posed using DEA method to estimate the technological change. A recent
study, Shao et al. (2014), further revised Zhou and Lin (2007) model
and provided the theoretical basis for the accounting framework. Addi-
tionally, Shao et al. (2014) used the latent variable approach to estimate
the contribution of technological progress to economic growth which
can overcome the shortcomings of the Solow remainder method and
the DEA method.
1
According to Greening et al. (2000), there are mainly three types of energy rebound
effect, i.e., direct, indirect and economy-wide rebound effect. This paper focuses on
economy-wide energy rebound effect.
97
Thanks to the contribution of pioneer studies, the accounting frame-
work of economy-wide energy rebound effect has been well developed.
However, one particular issue is needed to be noted. In previous studies
technological progress is regarded equivalently to energy efficiency im-
provement. It is true when technological progress is Hicks neutral. But
this is very strict and strong assumption which may be far away from
the reality. Despite energy efficiency gains, capital-saving or labor-
saving technology can also improve the productivity. Therefore, in general
the energy rebound arising from energy efficiency improvement may be
not equal to that derived from technological progress. As a result, the es-
timate of energy rebound effect would be biased.
The purpose of our paper is to further refine the economic accounting
approach and revisit China's economy-wide energy rebound effect. To es-
timate the energy rebound arising from energy efficiency gains consis-
tently, we distinguish energy efficiency improvement from
technological progress through constructing an energy efficiency index.
This strategy enables us to measure the contribution of energy efficiency
improvement to economic growth directly and then calculate the actual
energy rebound effect.
The rest of our paper is organized as follows. In Section 2 we describe
the methodology in detail. Section 3 presents the results and discussion
of our empirical studies. Section 4 concludes the paper.
2. Methodology
2.1. Theoretical background
According to Brookes (1984) and Sorrell et al. (2009), the economy-
wide energy rebound effect can be tracked down as the additional energy
consumption derived by output growth which stems from the energy ef-
ficiency gains. Specifically, energy consumption is induced by the demand
of goods (services). The improved energy efficiency reduces the effective
price of energy service, thereby cutting down the cost of the supply of
goods (services). Furthermore, the decreased cost will bring down the
price of goods (services) which stimulates the demand and then pro-
motes output growth. Consequently, energy consumption is driven to
go up so that the original energy savings are partly offset.
In empirical studies, energy rebound effect at economy-wide level is
often calculated as the ratio of the additional energy consumption from
the growth effect to the original energy savings. See, for example, Zhou
and Lin (2007), Lin and Liu (2012), and Shao et al. (2014). In this paper,
we distinguish the growth effect derived from energy efficiency improve-
ment from that derived from technological progress which is often repre-
sented by total factor productivity. The definition of economy-wide
rebound effect can be formulated as Eq. (1).
AE
RE ¼  100% ð1Þ
OE
where RE denotes the energy rebound effect; AE represents the additional
energy consumption caused by economic growth derived from energy ef-
ficiency improvement; and OE represents the original energy saving. In
this sense, the key to measure energy rebound effect lies in the estimate
of the additional energy consumption and the original energy savings.
The original energy savings directly result from energy efficiency gains2
while the calculation of the additional energy consumption is not very
straightforward. We first need to quantify the impact of output growth
on energy consumption. Then we need to account the contribution of en-
ergy efficiency improvement to output growth so that the additional en-
ergy consumption from energy efficiency gains can be singled out. To
serve our purpose, Index decomposition analysis (IDA) and growth ac-
counting approach are used in this paper. The procedure of our approach
is described detailedly in the following sections.
2
That is to say, an increase in efficiency is equivalent to a decrease in energy
consumption.
98 B. Lin, K. Du / Energy Economics 50 (2015) 96–104

2.2. Accounting the role of output growth and energy efficiency improvement Eq. (4) shows that the change of aggregate energy consumption can
in energy demand be attributed to three components. The first component (D1int|t,τ)
represents the intensity effect which describes the impact from energy
Index decomposition analysis (IDA) is a useful framework for inves- intensity changes of sectors at level 1. The second component (D1str|t,τ)
tigating the mechanisms of energy consumption change and has been is economic structure effect which describes output structure shifts
widely used not only in academic studies but also in national statistical across sectors at level 1. The third component (D0Y|t,τ) is economic
agencies and International organizations (Liu and Ang, 2007). In this growth effect which reflects the impact from output growth on energy
paper, IDA is used to quantify the impact of output growth and the consumption change.
direct effect of energy efficiency improvement on energy consumption. Similarly, energy intensity change in sector j between time periods t
Specifically, we adopt the multilevel–hierarchical (M–H) IDA model and τ can be decomposed as:
which was proposed by Xu and Ang (2014) recently. As pointed in Xu 0  
m j L I 2 S2 ; I 2 S2
!1
and Ang (2014), single-level IDA model may provide results that are I1j;τ X ji;τ ji;τ ji;t ji;t I2ji;τ
somewhat specific due to different choice of sector disaggregation ¼ exp@   ln 2 A
I 1j;t i¼1 L I1j;τ ; I 1j;t I ji;t
level. Moreover, using single-level IDA models at different levels may 0  
2 2 2 2 !1 ð6Þ
cause issues of consistency in result aggregation and interpretation. To X ji;τ S ji;τ ; I ji;t S ji;t
mj L I
S2ji;τ
address these shortcomings, Xu and Ang (2014) proposed two multi-  exp@   ln 2 A
i¼1 L I1j;τ ; I1j;t S ji;t
level decomposition procedures: the multilevel–parallel (M–P) model
and the multilevel–hierarchical (M–H) model.3 Considering that M–H ¼ D2j; int jt;τ  D2j;str jt;τ :
model accommodate data with an asymmetric hierarchy which enables
us make good use of available information, we employ the M–H model Substituting Eq. (6) into D1int|t,τ gives the following equation:
in this paper. 0 0  
m j L I 2 S2 ; I 2 S2
!11
The idea of M–H index decomposition analysis can be depicted in Xn X ji;τ ji;τ ji;t ji;t I2ji;τ
Fig. 2. For simplicity, consider a two-level case where the whole econo- D1int jt;τ ¼ exp@ @   ln 2 AA
j¼1 i¼1 L I 1j;τ ; I1j;t I ji;τ
my can be decomposed into n sectors at level 1 and sector j can be fur- 0 0  
m j L I 2 S2 ; I 2 S2
!11 ð7Þ
ther disaggregated into mj sub-sectors at level 2. For convenience, we X n X ji;τ ji;τ ji;t ji;t S2ji;τ
define the following variables.  exp@ @   ln 2 AA
j¼1 i¼1 L I1j;τ ; I1j;t S ji;τ
E0 Aggregate energy consumption at level 0. ¼ D2int jt;τ  D2str jt;τ :
E1j Energy consumption of sector j at level 1.
E2ji Energy consumption of sub-sector i of sector j at level 2.
Y0 Aggregate output of the economy at level 0. It is easy to generalize the above derivation to a data hierarchy with k
Y1j Output of sector j at level 1. levels of sector disaggregation:
Y2ji Output of sub-sector i of sector j at level 2.

Based on the above definitions, we have the following equations: 9

D0tot jt;τ ¼ D1int jt;τ  D1str jt;τ  D0Y jt;τ >
>
=
D1int jt;τ ¼ D2int jt;τ  D2str jt;τ
X
n X
n E1 Y 1 X
n
⋮ > ð8Þ
E0 ¼ E1j ¼
j j
Y0 ¼ I 1j S1j Y 0 ð2Þ >
;
j¼1
1
j¼1 Y j Y 0
j¼1
Dk−1 k k
int jt;τ ¼ Dint jt;τ  Dstr jt;τ
⇒Dtot jt;τ ¼ Dint jt;τ  Dstr jt;τ  Dstr jt;τ  …  Dkstr jt;τ  D0Y jt;τ :
0 k 1 2

E1j X
mj
E2ji Y 2ji X
mj
I1j ¼ ¼ ¼ I2ji S2ji : ð3Þ
Y 1j 2
i¼1 Y ji Y 1j i¼1 Eq. (8) shows that aggregate energy consumption change can be
attributed to energy intensity effect (D kint | t,τ ) at level k, output
Using the multiplicative forms of LMDI, we can decompose the total structure effect at each level (D 1str | t,τ , …, D kstr | t,τ ) and economic
energy consumption change between time periods t and τ as follows: growth effect (D 0Y | t,τ ). Since energy intensity given at a more
  disaggregate level is a better proxy of energy efficiency (Xu and
0 !1
X n L E1 ; E1 I 1j;τ Ang, 2014), D kint| t,τ is preferred to D1int|t,τ for quantifying the direct
Eτ j;τ j;t
D0tot jt;τ ¼ ¼ exp@   ln A effect of energy efficiency on consumption change. Thus, using
Et 0
j¼1 L Eτ ; E t
0 I1j;t Eq. (8) we can account the contributions of energy efficiency
0   !1
Xn L E1 ; E1 S1j;τ change and economic growth to aggregate energy consumption
j;τ j;t
 exp@   ln A change.
0 0
j¼1 L E τ ; Et S1j;t ð4Þ
  In the multiplicative form of decomposition, if the value of any
0 !1
Xn L E1 ; E1 component is greater (less) than 1, then it will increase (reduce) the
@
j;τ j;t Y 0τ A
 exp   ln energy consumption. Thus, Dkint|t,τ b 1 indicates the improvement of
0 0
j¼1 L E τ ; Et Y 0t
energy efficiency while Dkint|t,τ N 1 means that energy efficiency is
¼ D1int jt;τ  D1str jt;τ  D0Y jt;τ decreasing. The meanings of Dkint|t,τ can be interpreted as follows. Take
Dkint|t,τ = 0.8 as an example. It means that without other impacts, energy
where L(⋅,⋅) is a weighting scheme called logarithmic mean weight consumption at time period τ would be 80% of that at time period t,
which is described as follows: suggesting energy efficiency improvement would gain 20% of energy
 savings. As such, the original energy saving (OE, the denumerator of
ðx−yÞ=ð ln x− ln yÞ; x≠y Eq. (1)) can be calculated as (1 − Dint|t − 1,t)Et − 1. In a similar logic,
Lðx; yÞ ¼ : ð5Þ
x; x¼y the increment of energy consumption originated from output growth
as (DY|t − 1,t − 1)Et − 1.
We can also interpret the above case from another angle. When
energy efficiency increases, energy becomes more productive. The
3
See Xu and Ang (2014) for more details. utility of one unit of energy consumption at time period τ is
 B. Lin, K. Du / Energy Economics 50 (2015) 96–104 99

Fig. 2. Hierarchical decomposition structure 10.

Source: Xu and Ang (2014).

equivalent to 1.25 (1/0.8) times of that at time period t. In this symbol “U”) as:
sense, we can construct the energy efficiency index (EEI) as follows.
U t ¼ θt Et ð10Þ
EEI 0 ¼ 1  
ð9Þ where θt denote energy efficiency. Generally speaking, energy effi-
EEIt ¼ EEIt−1  1=Dkint jt−1;t :
ciency is unobserved at the macroeconomic level. Ang et al. (2010)
advocates tracking economy-wide efficiency change through IDA
method. As we discussed in Section 2.2, the EEIt reflects energy effi-
ciency change over time. As a result, it can be approximated to the
2.3. Accounting the contribution of energy efficiency enhancement to
ratio of θt to θ0. In view of this, the EEIt can be a proxy of θt.
economic growth
In general, a three-factor production function can be described as:
Energy has been widely regarded as a fundamental factor of produc-
Y t ¼ f ðK t ; Lt ; U t Þ þ εt ð11Þ
tion as labor and capital. Many studies have investigated the role of en-
ergy in production. For example, Tintner et al. (1977) extended the
where εt is a residual term which denotes the part of output that cannot
CES function to include energy input, and then applied it to
be explained by capital, labor and useful energy service. Taking the de-
Austrian economy for the period 1955–1972. Kümmel et al. (1985)
rivative of both sides of Eq. (11) gives:
proposed another energy dependent production function to fit the
output growth of industries in West Germany and the US. From the
 ∂Y t  ∂Y t ∂Y t ∂Y t  

angle of physics, energy is converted into physical work4 to serve


Yt ¼ Kt þ Lt þ Ut þ εt ð12Þ
∂K t ∂Lt ∂U t ∂εt
the production activity. Thus, the improvement of thermodynamic
efficiency5 would also contribute to output growth. Using energy di-
where Ẋt is the shorthand for dXt/dt. Dividing both sides of Eq. (12) by Yt,
rectly as input of production will neglect the role of thermodynamic
we get the following equation:
efficiency. Therefore, Ayres and Warr (2005) substituted physical
work for “raw” energy as a factor of production. They found that re-    


placing raw energy input by physical work as a factor of production Y t K t ∂Y t K t Lt ∂Y t Lt U t ∂Y t U t ∂Y t εt

¼ þ þ þ
could explain the historical growth path of the US from 1900 to the Y t Y t ∂K t K t Y t ∂Lt Lt Y t ∂U t U t ∂ε t Y t
  

mid-1970s without introducing the slow residual. In their paper, Kt Lt Ut

¼ ηK ðt Þ þ ηL ðt Þ þ ηU ðt Þ þ ξt ð13Þ
physical work is defined as the product of energy input and thermo- Kt Lt Ut !
   

dynamic efficiency. Kt Lt θt E t
¼ ηK ðt Þ þ ηL ðt Þ þ ηU ðt Þ þ þ ξt
However, in practice not each unit of physical work generated by Kt Lt θt E t
energy is efficiently used for production activity. For instance, a ma-
chine may be turned on without producing anything due to manage- where ηK(t), ηL(t), and ηU(t) represent the output elasticities of capital,
ment inefficiency. As pointed out by Ayres and Warr (2005), labor and useful energy service, respectively. Based on Eq. (13), we
thermodynamic efficiency is not related to economic efficiency. can quantify the contributions of capital, labor, raw energy and energy
Thus, we further generalize their idea to replace physical work by efficiency to economic growth through the following equations.
useful energy service as a factor of production which takes into ac-
count managerial (economic) efficiency as well as physical conver- ηK ðt ÞK t =K t


sion efficiency. We use a broader concept of energy efficiency α K ðt Þ ¼  ð14Þ

Y t =Y t
which indicates the efficiency of energy converted into useful service
for production activity. In this sense, both managerial efficiency and
physical conversion efficiency are considered. This idea helps us to
quantify the impact of energy efficiency enhancement on output 

growth. We formulate the useful energy service (denoted by the ηL ðt ÞLt =Lt
α L ðt Þ ¼  ð15Þ
Y t =Y t


4
Physical work is a concept from thermodynamics and physics. ηU ðt ÞEt =Et
5
Thermodynamic efficiency is a straightforward ratio between output (physical work) α E ðt Þ ¼  ð16Þ
and resource input (Ayres and Warr, 2005). Y t =Y t
100 B. Lin, K. Du / Energy Economics 50 (2015) 96–104

ηU ðt Þθt =θt
α θ ðt Þ ¼  ð17Þ
Y t =Y t
Once the contribution of energy efficiency to economic growth is
identified, we can further calculate the increment of energy con-
sumption from energy efficiency gains (AE, the numerator of
Eq. (1)) as αθ(t)(DY|t,t − 1 − 1)Et − 1. Based on the definition we de-
scribed in Section 2.1, energy rebound effect at economy-wide effect
can be further expressed as:
 
α θ ðt Þ D0Y jt−1;t −1
REt ¼    100%: ð18Þ
1−Dkint jt−1;t
It is very intuitive that the numerator of Eq. (18) denotes the indirect
effect of energy efficiency improvement, i.e., the increment of energy
consumption induced by output growth which is derived by energy ef-
ficiency improvement while the denumerator is the original energy sav-
ings, i.e., the decrease of energy consumption induced by energy
efficiency improvement given other conditions unchanged.
3. Empirical studies
3.1. Data
We collected original data from China Energy Statistical Yearbook
(CESY), China Statistical Yearbook (CSY) and China Premium Database.6
The sample period ranges from 1980 to 2011. For M–H index decompo-
sition analysis, the whole economy is first decomposed into three major
industries, namely the primary, secondary and tertiary industries. The
secondary industry comprises two subsectors: “Industry (S1)” and
“construction (S2)”. The “Industry” sector is further decomposed into
“Mining (S11)”, “Manufacturing (S12)”, and “Electric Power, Gas and
Water (13)”.7 The tertiary industry is also composed of three subsec-
tors: “Transport, Storage and Post (T1)”, “Wholesale, Retail, Hotels and
Catering Services (T2)”, and “Financial Intermediation, Real Estate and
other Tertiary Industries (T3)”. The structure of sector decomposition
is shown in Fig. 3. Following Ma and Stern's (2008) suggestion, energy
intensity is measured by energy consumption per unit of value-added
in order to make aggregation consistent. Data on capital stock of China
from 1980 to 2006 is obtained from Shan (2008). We extend the series
to 2011 using the PIM method described in Shan (2008). Data on value-
added and capital stock are converted into constant prices in 1990.
3.2. Results and discussion
The detailed results of decomposing China's energy consumption
change using M–H index composition analysis are presented in
Table 1. We can observe that the average growth rate of China's energy
consumption during 1980–2011 reached 5.8%, increasing its consump-
tion by 5.7 times compared to that in 1980. As shown in Table 1, eco-
nomic growth was the major driving force to China's increasing
energy consumption. Without changes in other factors, economy
growth would have increased China's energy consumption by 20
times from 1980 to 2011, which indicates an average growth rate of
10.2%. By contract, in most of years energy efficiency improvement con-
tributed negatively to China's rapid consumption growth. On average,
the improvement of energy efficiency reduces China's energy consump-
tion by 4.6%. The cumulative effect of energy efficiency enhancement on
energy consumption can be calculated as −77.2%. Compared to the ef-
fects of economic growth and energy efficiency enhancement, we find
that impacts from output structure change were trivial. In past years,
6
Available at: http://www.ceicdata.com.
7
“Manufacturing” is composed of 38 finer subsectors. However due to data limitation,
the finer decomposition is not conducted in this paper.
the Chinese government had taken varied measures to optimize its eco-
nomic structure for slowing down energy consumption growth. How-
ever, our results reveal that the effect of such measures had not been
significantly effective.
Based on the results of Table 1, we construct the energy efficiency
index as we described in Section 2.2. The result is presented in Fig. 4.
It can be observed that energy efficiency index had been increasing
steadily in the 1980s. Since then, the increasing trend sped up until
2002. During 2003–2005, the energy efficiency was declining which is
in accordance with the finding of Ma and Stern (2008). After 2005, en-
ergy efficiency started increasing again.
For quantifying the contribution of energy efficiency enhancement to
economic growth, we have to assume an explicit form of production
function. In this paper, we choose the translog form function which can
be regarded as a second order approximation to the unknown production
function so that we can reduce the risk of model misspecification. The
econometric equation is presented in Eq. (19).
lnY t ¼ α 0 þ α K ln K t þ α L ln Lt þ α L lnU t þ α KL ½ ln K t  lnLt 
2
þ α KU ½ lnK t  ln U t  þ α LU ½ lnLt  ln U t  þ α KK ½ ln K t  ð19Þ
2 2
þ α LL ½ lnLt  þ α UU ½ ln U t  þ εt :
Since cross and square terms of input variables are included in the
translog function, regressors in Eq. (19) may be significantly correlated.
Consequently, ordinary estimation of Eq. (19) would suffer the problem
of multi-collinearity. A simple method for detecting multi-collinearity is
to calculate the correlation coefficients between any two of the regres-
sors. If these coefficients are greater than 0.8, then it is an indication of
multi-collinearity. The Pearson's correlation coefficients of the regres-
sors in Eq. (19) is calculated and reported in Table A1. It is seen that
most of coefficients are greater than 0.9 which provides evidence of
strong multi-collinearity among the regressors. Furthermore, Farrar–
Glauber statistics is used for the formal test. The value of Chi-square sta-
tistics is calculated as 2430.57, significant at 1% level. The result indi-
cates that significant multi-collinearity does exist among our variables.
To deal with the multi-collinearity data, we adopt ridge regression
proposed by Hoerl and Kennard (1970a,b). The essential idea of ridge
regression is to trade a small amount of bias in the coefficient estimates
for a substantial reduction in coefficient sampling variance. The ridge
 −1 0
estimator is formulated as β ^ ðkÞ ¼ X 0 X þ kI X Y where I is an identity
^ ð0Þ is the OLS estimator). It
matrix and k ≥ 0 is called ridge constant (β
can be proved that the larger ridge constant is the larger is the bias of
^ ðkÞ, but the smaller the variance (Judge et al., 1985). To select the op-
β
timal k, we adopt ridge trace plot which is the most popular diagnostic
tool and widely used in empirical studies (e.g., Lin and Wesseh, 2013;
Smyth et al., 2011). The ridge trace plot for our data is presented in
Fig. 5. It is seen that the estimated coefficients become quite steadily
when the ridge constant arrives at 0.3. Therefore, we take k = 0.3 for
the ridge regression. The estimated results are reported in Table A2.
Based on the results of ridge regression, we can calculate the output
elasticities of input factors. The computing results are presented in
Table A3. All of the output elasticities are positive which is consistent
with production theory. They are found to be relatively stable over the
sample period. Moreover, the summation of output elasticities are
above 1.3, significantly greater than unit which indicates the increasing
returns to scale in China's economy. Based on Table A3, we further cal-
culate the contributions of capital, labor, energy and energy efficiency
to economic growth using Eqs. (14)–(17). Table 2 presents the comput-
ing results. It can be observed that capital is the dominant contributor of
China's output growth with an average contribution of 39.7%. The result
is consistent with the fact that China's economic growth is investment-
driven. After the international financial crisis in 2007, the Chinese
government issued a four trillion economic stimulus which significantly
increased the contribution of capital to economic growth. On the
contrary, with the deceleration of employment growth, the contribution
 B. Lin, K. Du / Energy Economics 50 (2015) 96–104 101

Fig. 3. The structure of sector decomposition.

of labor was gradually declining. The growth of useful energy service is arising from energy efficiency policies 2000–2010 and find a total re-
the second driving force to China's economic expansion. On average, it bound effect of around 26%. Van Es et al. (1998) applied a CGE model
contributed 34.1% of China's economic growth. As shown in Eq. (13), to examine the impact of energy efficiency improvement in Holland
the contribution of useful energy service can be attributed to physical and find a rebound effect of 15%. Small and Van Dender (2007) found
energy growth and energy efficiency enhancement. The last column of that the energy rebound effect in the US Department of Transportation
Table 2 shows that energy efficiency improvement also played an im- was 22.2%.
portant role in China's economic growth. The annual average contribu- The rebound effect in China showed a growing tendency during the
tion is calculated as 15.3%. “Sixth Five-Year” (1981–1985) and became slight fluctuation around
Based on the previous results, we can further calculate China's ener- 33% during the “Seventh Five-Year” (1986–1990). During the period
gy rebound effect using Eq. (18). The computing results are reported in of 1991–2000, the rebound effect first climbed to the peak (40.7%)
Table 3. Our results show that energy rebound effect in China is between and then returned to a stable level around 35%. After that the rebound
30% and 40% during the sample period. The average value of energy re- effect began to decrease during the “Tenth Five-Year” (2001–2005).
bound effect is calculated as 34.3% which means that 34.3% of energy This phenomenon may arise from the deterioration of energy efficiency,
savings originated from efficiency improvement are offset by the incre- which weakened the rebound effect. It is interesting to find that the en-
ment of energy demand induced by economic growth. The result in this ergy rebound effect stayed around 35% steadily during the “Eleventh
paper is higher than those of most studies on developed countries. For Five-Year” (2006–2010). It means that the great impetus for energy sav-
example, Barker et al. (2007) use the macroeconomic model, MDM-E3 ing through promoting energy efficiency in “Eleventh Five-Year Plan”
to examine the macroeconomic rebound effect for the UK economy had been discounted because of the existence of energy rebound effect.
It implies that stimulating improvement in energy efficiency alone can-
Table 1 not address the dilemma between maintaining economic growth and
Results of decomposition of energy consumption change in China. accomplishing energy conservation and emission reduction targets.
Compared to the previous studies on China's country-wide energy
Dtot DY D1str D2str D3str D3int
rebound effect, our estimated results are more reasonable. It can be
1980–1981 0.9863 1.0472 0.9864 0.9893 0.9999 0.9652
seen in Fig. 6 that the estimated results of other studies not only dramat-
1981–1982 1.0441 1.0856 0.9837 1.0112 0.9999 0.967
1982–1983 1.064 1.1069 1.004 0.9942 0.9999 0.9631
ically fluctuate over years but also reveal some abnormal cases. For in-
1983–1984 1.0737 1.1499 1.0022 0.9995 1.0003 0.9319 stance, in Zhou and Lin (2007) and Wang and Zhou (2008), the
1984–1985 1.0815 1.1389 1.0394 0.9891 0.9991 0.9245 rebound effect for 2002 was estimated to be less than −300%. In Shao
1985–1986 1.0544 1.0891 1.0141 0.9996 0.9993 0.9558 et al. (2014), the value for 1989 was calculated as 717.58%. It is very dif-
1986–1987 1.0715 1.1174 1.0175 0.9989 0.9994 0.9439
ficult to interpret such results. One possible reason for the abnormal re-
1987–1988 1.0735 1.116 1.0231 1.0047 0.9995 0.9363
1988–1989 1.0423 1.0399 1 1.0196 1.0018 0.9814 sults is that additional energy consumption arising from technological
1989–1990 1.0183 1.0381 0.9931 1.0049 1.001 0.982
1990–1991 1.0514 1.0899 1.024 1.0048 0.9974 0.9401
1991–1992 1.0519 1.2378 1.053 1.0050 1.0023 0.8012
5

1992–1993 1.0625 1.1354 1.025 1.0025 0.9855 0.924

1993–1994 1.0582 1.127 1.022 1.0041 0.9952 0.9193
1994–1995 1.0688 1.107 1.0129 1.0014 1.014 0.9387
1995–1996 1.0306 1.0983 1.0093 1.0026 0.9913 0.9354
4
Energy efficiency index

1996–1997 1.0053 1.0908 1.0065 1.0052 0.9963 0.9143

1997–1998 1.002 1.0768 1.0052 1.0006 1.0044 0.921
1998–1999 1.0322 1.0745 1.0036 1.0027 0.9974 0.9572
1999–2000 1.0353 1.0823 1.0052 1.0016 0.9894 0.9602
3

2000–2001 1.0335 1.0826 1.0028 1.0012 0.9951 0.9556

2001–2002 1.06 1.0893 1.004 1.0003 0.993 0.9757
2002–2003 1.1528 1.0952 1.0082 0.9995 0.9867 1.0587
2003–2004 1.1614 1.0988 1.0036 1.0038 1.001 1.0482
2

2004–2005 1.1056 1.1115 1.0039 0.9969 0.9953 0.9986

2005–2006 1.0961 1.1248 1.0041 0.9952 0.9956 0.9796
2006–2007 1.0844 1.1391 1.0049 0.9972 1.0008 0.9492
2007–2008 1.039 1.0956 1.0017 0.9982 0.9971 0.9513
1

2008–2009 1.0522 1.0904 1.0029 0.9907 1.0034 0.9679 1980 1985 1990 1995 2000 2005 2010
2009–2010 1.0596 1.1005 1.0053 0.9979 0.9991 0.9606 Year
2010–2011 1.071 1.0901 1.0031 0.9999 1 0.9796
1980–2011 5.7735 20.0608 1.3108 1.0217 0.9416 0.2282
Geometric mean 1.0582 1.1016 1.0088 1.0007 0.9981 0.9535
Fig. 4. Energy efficiency index in China, 1980–2011.
102 B. Lin, K. Du / Energy Economics 50 (2015) 96–104

0.16

0.14
lnK
0.12 lnL
lnU
0.1 lnK*lnL
lnK*lnU
lnU*lnL
0.08
(lnK)2
0.06 (lnL)2
(lnU)2
0.04

0.02
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Ridge constant k

Fig. 5. Ridge trace plot of the coefficient estimates in translog production function.

progress is mistaken as the rebound from energy efficiency gains. Ener- 4. Conclusion
gy efficiency is just one component of technological progress. In the real
world, many factors (e.g., climate change, institutional change and war) Economy-wide energy rebound effect means that part of the energy
would influence technological progress. As a result, it is generally driven conservation due to energy efficiency improvement vanishes because of
to be fluctuating. Moreover, some special events would cause the ex- the growth effect. Improving energy efficiency has been regarded as a
treme change of technology which may lead to the abnormal results critical policy approach for saving energy (Shao et al., 2014). It is of
in the studies we mentioned above. As shown in Fig. 4 the energy effi- great interest and very important to estimate how much of initial ener-
ciency change is estimated to be quite steadily. As such, dramatical gy savings are lost through energy rebound effect. Many researchers
change of energy rebound effect might not be reasonable. It seems have devoted to estimating the magnitude of economy-wide energy re-
that our approach can rule out the abnormal value of energy rebound ef- bound effect in China. However, there is still empirical controversy over
fect because of the distinguishment of energy efficiency improvement this issue. The magnitude of China's energy rebound effect varies greatly
from technological progress. with different studies. More importantly, previous studies mistake the
additional energy use derived from technological progress as the energy
rebound which is not consistent with the definition of the rebound ef-
fect, thereby generally giving rise to biased estimated results. Our
paper contributes to the existing literature on estimating economy-
Table 2
wide energy rebound effect through revising the economic accounting
Contributions of production factors to output growth (%). approach.
Based on the improved approach, this study re-estimates China's
Year Capital Labor Useful energy service
economy-wide energy rebound effect from 1981 to 2011. Our results re-
Total Physical energy Energy efficiency veal that during the sample period energy rebound effect in China is be-
1981 43.9789 54.0198 14.2721 −8.7925 23.0646 tween 30% and 40%, with an average value of 34.3%. It means that on
1982 25.9935 33.3138 27.7108 15.6208 12.0900 average 34.3% of initial energy savings in China are offset by energy re-
1983 23.1114 18.7791 29.1817 18.2641 10.9177
bound effect. This figure is much less than the estimates of Zhou and Lin
1984 20.7304 20.2349 30.0514 15.0799 14.9715
1985 25.0312 20.1054 36.3009 18.1321 18.1688
(2007), Wang and Zhou (2008), and Lin and Liu (2012), and slightly less
1986 38.5950 25.5406 35.0779 18.9466 16.1313 than the finding of Shao et al. (2014). From the perspective of interna-
1987 31.4935 20.1436 34.8189 19.0233 15.7956 tional comparison, China's energy rebound effect is higher than devel-
1988 30.4718 20.5378 38.3270 19.8989 18.4280 oped countries such as US, UK, and Holland.
1989 50.0872 37.3166 48.4550 33.4659 14.9891
1990 49.0527 36.5834 30.4281 15.1921 15.2360
1991 26.4613 10.4483 40.7831 18.2082 22.5749
1992 13.9034 3.4925 40.5122 7.0133 33.4989
1993 31.2731 6.0430 34.5046 14.8983 19.6063 Table 3
1994 36.1070 6.3089 37.3252 14.8793 22.4459 Estimation results of China's energy rebound effect: 1981–2011.
1995 42.8835 7.0157 40.9346 20.9940 19.9407
Year Rebound effect (%) Year Rebound effect (%)
1996 44.5257 11.0087 33.2539 10.2060 23.0479
1997 42.8865 11.5982 35.9708 1.9341 34.0367 1981 31.316 1997 36.049
1998 49.3062 12.7374 37.7887 0.8559 36.9328 1982 31.387 1998 35.928
1999 47.3501 12.0572 34.2984 14.3762 19.9222 1983 31.659 1999 34.690
2000 42.2904 9.8709 31.0470 14.2860 16.7610 1984 32.930 2000 34.707
2001 42.8547 10.0615 32.3961 13.5822 18.8140 1985 33.418 2001 34.992
2002 43.2899 6.2643 31.9058 22.5525 9.3533 1986 32.486 2002 34.409
2003 46.8116 5.5214 34.4733 54.1003 −19.6270 1987 33.087 2003 31.841
2004 46.3757 6.1354 39.5602 55.3116 −15.7514 1988 33.558 2004 32.303
2005 43.5510 3.9262 32.6374 32.2140 0.4233 1989 32.112 2005 34.061
2006 39.4731 3.0232 32.0253 26.3173 5.7080 1990 32.270 2006 34.890
2007 31.0515 2.8045 34.0543 20.8328 13.2215 1991 33.858 2007 36.189
2008 49.8801 2.8847 32.5526 14.0687 18.4840 1992 40.078 2008 36.254
2009 62.7779 3.3114 32.6933 19.9800 12.7133 1993 34.952 2009 35.781
2010 54.4089 3.1214 34.8334 20.6423 14.1910 1994 35.335 2010 36.212
2011 56.2073 3.9560 35.5854 27.5243 8.0611 1995 34.795 2011 35.653
Average 39.7489 13.8118 34.3148 19.0196 15.2952 1996 35.081 Average 34.267
 B. Lin, K. Du / Energy Economics 50 (2015) 96–104
Fig. 6. Comparing our results with other studies. Note: the right figure is just the left one whose vertical ordinate is restricted to between −150 and 150.
Our empirical results also provide important policy implications for
China's energy conservation effort. In the past 20 years, the Chinese gov-
ernment has tried very hard to promote energy conservation and emis-
sion reduction. Our results indicated that the energy-saving effect of
efficiency gains in China was discounted considerably due to the re-
bound effect. For the purpose of supporting economic growth and social
stability, the Chinese government has been administratively maintain-
ing energy price at a low level, and has created price distortions that
led to the rebound effect, as economic agents would be motivated to
use more energy when energy efficiency increases. The existence of
the energy rebound effect highlights the importance of energy pricing
reforms to energy conservation and emission reduction. Therefore, to
accomplish energy conservation and emission reduction targets, mea-
sures to promote energy efficiency should include energy pricing re-
forms. The recent slowdown in energy demand and lower energy
prices (particularly coal prices), have provided a good opportunity for
China's energy pricing reforms. The Chinese government should use
the opportunity to speed up the energy pricing reforms. If energy subsi-
dies are unavoidable, better energy subsidy designs should be provided
to avoid price distortions.
Finally, there are some limitations in this paper which should be
duly noted. First, the (M–H) IDA is applied to account the impacts of en-
ergy efficiency improvement and output growth on energy consump-
tion change. As pointed out by Ma (2014), the IDA model is a
descriptive approach so that the interactions between energy efficiency
improvement and output growth cannot be disentangled. The general-
ized Divisia decomposition method proposed by Vaninsky (2014) might
be a solution. For this method, some explicit conditions are needed to be
incorporated in the decomposition process. Once these conditions are
satisfied, we can directly quantify energy rebound effect in a single de-
composition model.8 It would be a perfect framework. However, we
have not found any feasible condition to isolate the interaction of energy
efficiency improvement and output growth. Second, this paper just
focus on accounting China's economy-wide energy rebound effect. The
potential determinants of energy rebound effect have not been investi-
gated. Further studies should be carried out to examine this issue, which
can yield more interesting insights for policy makers.
Acknowledgments
The paper is supported by Newhuadu Business School Research
Fund, the China Sustainable Energy Program (G-1311-19436, and G-
8
Our proposed approach actually contains two stages. The first stage applies an IDA
method. The second stage is economic growth accounting.
103
1404-20905), and Ministry of Education (Grant No. 10JBG013). We
thank two anonymous reviewers for their helpful comments and sug-
gestions which led to an improved version of this paper. We are also
grateful to Presley K. Wesseh, Jr. for helping to improve the language
of this paper.
Appendix A. Supplementary data
Supplementary data to this article can be found online at http://dx.
doi.org/10.1016/j.eneco.2015.04.014.
References
Ang, B.W., Mu, A.R., Zhou, P., 2010. Accounting frameworks for tracking energy efficiency
trends. Energy Econ. 32, 1209–1219.
Ayres, R.U., Warr, B., 2005. Accounting for growth: the role of physical work. Struct.
Chang. Econ. Dyn. 16, 181–209.
Barker, T., Ekins, P., Foxon, T., 2007. The macro-economic rebound effect and the UK econ-
omy. Energy Policy 35, 4935–4946.
Brännlund, R., Ghalwash, T., Nordström, J., 2007. Increased energy efficiency and the re-
bound effect: effects on consumption and emissions. Energy Econ. 29, 1–17.
Brookes, L., 1984. Long-term equilibrium effects of constraints in energy supply. The
Economics of Nuclear Energy. Springer, pp. 381–402.
Dimitropoulos, J., 2007. Energy productivity improvements and the rebound effect: an
overview of the state of knowledge. Energy Policy 35, 6354–6363.
Ghosh, N.K., Blackhurst, M.F., 2014. Energy savings and the rebound effect with multiple
energy services and efficiency correlation. Ecol. Econ. 105, 55–66.
Greening, L., Greene, D.L., Difiglio, C., 2000. Energy efficiency and consumption—the re-
bound effect—a survey. Energy Policy 28, 389–401.
Grepperud, S., Rasmussen, I., 2004. A general equilibrium assessment of rebound effects.
Energy Econ. 26, 261–282.
Guerra, A.-I., Sancho, F., 2010. Rethinking economy-wide rebound measures: an unbiased
proposal. Energy Policy 38, 6684–6694.
Hoerl, A.E., Kennard, R.W., 1970a. Ridge regression: applications to nonorthogonal
problems. Technometrics 12, 69–82.
Hoerl, A.E., Kennard, R.W., 1970b. Ridge regression: biased estimation for nonorthogonal
problems. Technometrics 12, 55–67.
Jeavons, W.S., 1865. The coal question: can Britain survive? In: Fluxed, A.W., Kelley,
Augustus, M. (Eds.), The Coal Question: An inquiry Concerning the Progress of the
Nation, and the Probable Exhaustion of Our coal-mines. Macmillan & Co., London.
Kümmel, R., Strassl, W., Gossner, A., Eichhorn, W., 1985. Technical progress and energy
dependent production functions. J. Econ. 45, 285–311.
Li, Y.L., Lu, W.C., 2011. The economy-wide rebound effects of energy efficiency increase in
production. China Popul. Resour. Environ. 42–49.
Lin, B., Liu, X., 2012. Dilemma between economic development and energy conservation:
energy rebound effect in China. Energy 45, 867–873.
Lin, B., Wesseh, P.K., 2013. Estimates of inter-fuel substitution possibilities in Chinese
chemical industry. Energy Econ. 40, 560–568.
Liu, N., Ang, B., 2007. Factors shaping aggregate energy intensity trend for industry: ener-
gy intensity versus product mix. Energy Econ. 29, 609–635.
Judge, G.G., Griffiths, W.E., Hill, R.C., Lütkepohl, H., Lee, T.C., 1985. The Theory and Practice
of Econometrics. (2nd ed.), John Wiley & Sons, New York.
Ma, C., 2014. A multi-fuel, multi-sector and multi-region approach to index decomposi-
tion: an application to China's energy consumption 1995–2010. Energy Econ. 42,
9–16.
104 B. Lin, K. Du / Energy Economics 50 (2015) 96–104
Ma, C., Stern, D.I., 2008. China's changing energy intensity trend: a decomposition analy-
sis. Energy Econ. 30, 1037–1053.
Madlener, R., Alcott, B., 2009. Energy rebound and economic growth: a review of the main
issues and research needs. Energy 34, 370–376.
NBSC-a, 2012. National Bureau of Statistic of China (NBSC). China Statistical Yearbook.
Saunders, H.D., 2008. Fuel conserving (and using) production functions. Energy Econ. 30,
2184–2235.
Schipper, L., Grubb, M., 2000. On the rebound? Feedback between energy intensities and
energy uses in IEA countries. Energy Policy 28, 367–388.
Shan, H., 2008. Reestimating the capital stock of China: 1952–2006. J. Quant. Tech. Econ.
17–31.
Shao, S., Huang, T., Yang, L., 2014. Using latent variable approach to estimate China's
economy-wide energy rebound effect over 1954–2010. Energy Policy 72, 235–248.
Small, K.A., Van Dender, K., 2007. Fuel efficiency and motor vehicle travel: the declining
rebound effect. Energy J. 25–51.
Smyth, R., Narayan, P.K., Shi, H., 2011. Substitution between energy and classical factor in-
puts in the Chinese steel sector. Appl. Energy 88, 361–367.
Sorrell, S., Dimitropoulos, J., 2008. The rebound effect: microeconomic definitions, limita-
tions and extensions. Ecol. Econ. 65, 636–649.
Sorrell, S., Dimitropoulos, J., Sommerville, M., 2009. Empirical estimates of the direct re-
bound effect: a review. Energy Policy 37, 1356–1371.
Tintner, G., Deutsch, E., Rieder, R., Rosner, P., 1977. A production function for Austria em-
phasizing energy. De Economist 125, 75–94.
Van Es, G., De Groot, A., Velthuisen, J., van Leeuwen, M., 1998. A description of the SEO
computable general equilibrium model. SEO Report no. 477. Foundation for Economic
Research, Amsterdam.
Vaninsky, A., 2014. Factorial decomposition of CO2 emissions: a generalized Divisia index
approach. Energy Econ. 45, 389–400.
Wang, Q.W., Zhou, D.Q., 2008. Improved model for evaluating rebound effect of energy re-
source and its empirical research. Chin. J. Manage 688–691.
Wang, H., Zhou, P., Zhou, D.Q., 2012. An empirical study of direct rebound effect for pas-
senger transport in urban China. Energy Econ. 34, 452–460.
Wei, T., 2010. A general equilibrium view of global rebound effects. Energy Econ. 32,
661–672.
Xu, X.Y., Ang, B.W., 2014. Multilevel index decomposition analysis: approaches and appli-
cation. Energy Econ. 44, 375–382.
Zha, D., Zhou, D.Q., 2010. The research on China's energy efficiency rebound effect based
on CGE model. J. Quant. Tech. Econ 39–53.
Zhou, Y., Lin, Y.Y., 2007. The estimation of technological progress on the energy consump-
tion returns effects. Economist 45–52.