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Paper Review: Prices, technology development and the rebound effect (Birol and Keppler, 2001

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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

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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

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relationships with energy intensity and energy efficiency.Explore macro effects on rebound effects of energy efficiency improvements under static and dynamic frameworks 4.Goals Goals of the paper 1.Explore the drivers.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. size and effects of the rebound effects.Explore possible mix of policy options to reduce energy consumption 05/29/11 Center for Energy Policy and Economics 4 . 3.

2005 Intensity & Efficiency not perfectly correlated Source: CPB Netherlands Bureau for Economic Policy Analytics.878 Efficiency_EUK . Energy Intensity Across Sectors and Countries.878 1 Other Unaccounted Factors Consumer preferences Economy structure differences State of technology Geography Climate 5 Data of growth in energy intensity & efficiency of 21 EU countries from 1995 .Definitions An Example: Energy Intensity & Efficiency EUK (1995 – 2005) Intensity_EUK Efficiency_EUK Pearson Correlation Pearson Correlation Intensity_EUK 1 . Empirical Evidence 1980 .2005 05/29/11 Center for Energy Policy and Economics .

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 6 .

relative prices. education base) 05/29/11 Center for Energy Policy and Economics 7 .g.Drivers of energy efficiency improvements § Classical Method: Three Approaches Objective Improve energy efficiency Non-technological drivers Customer preferences. economy structure. relative prices Technological Drivers How to influence adoption of more energy efficient technologies? Target Influence: Three Approaches Existing Technologies New Technologies Combination of Technologies Policy tools targeted at influencing factors (e.

Approach 1: Influence Existing Technologies Assessment Price Approach Control Approach Sufficient level of support infrastructure Sufficient size of resources  Theory on Influencing Factors Relative price of energy to other factors High energy prices: energy saving technologies ↑. share of K and L↓ 05/29/11 Center for Energy Policy and Economics 8 . share of K and L↑ Low energy prices: energy saving technologies ↓.

Approach 1: Influence Existing Technologies Assessment Price Approach Control Approach Sufficient level of support infrastructure Sufficient size of resources Control and constraint mechanism  Theory on Influencing Factors Relative price of energy to other factors High energy prices: energy saving Policy Tools Price-based mechanism K and L↑ technologies ↑. share of K and L↓ 05/29/11 Center for Energy Policy and Economics 9 . share of Low energy prices: energy saving (Taxes. trading schemes) technologies ↓. subsidies.

Approach 1: Influence Existing Technologies Assessment Price Approach Control Approach Sufficient level of support infrastructure Sufficient size of resources Control and constraint mechanism  Theory on Influencing Factors Relative price of energy to other factors High energy prices: energy saving Policy Tools Price-based mechanism K and L↑ technologies ↑. share of K and (+) Benefit in public goods (-) Lower growth (-) Difficult to identify the right tax rate (+) Ecologically efficient (-) Economically inefficient (-) High administrative costs (-) Dependent on regulator foresight (not price signal) TC: 1512.5 TC: 3200 05/29/11 Center for Energy Policy and Economics 10 . share of Low energy prices: energy saving (Taxes. trading schemes) Critique (+) Economically efficient L↓ technologies ↓. subsidies.

ratchet effect Empirical questions (-) Lower growth (-) High administrative costs Other dynamic effects: marketing. trading schemes) Critique (+) Economically efficient L↓ (+) Ecologically efficient technologies ↓. learning (-) Ecologically inefficient (-) Dependent on regulator foresight (-) Difficult to identify the right tax rate (not price signal) TC: 1512.Approach 1: Influence Existing Technologies Assessment Price Approach Control Approach Sufficient level of support Theory on Influencing Factors Relative price of energy to other factors High energy prices: energy saving infrastructure Sufficient size of resources Policy Tools Price-based mechanism K and L↑ Control and constraint mechanism technologies ↑. share of Low energy prices: energy saving (Taxes. proof of EOS.5 TC: 3200 05/29/11 Center for Energy Policy and Economics 11 . subsidies. share of K and (+) Benefit in public goods (-) Economically inefficient Price Effects: reversible vs.

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

Approach 2: Influence New Technologies Assessment Approach Theory on Influencing Factors New technologies increases economy’s production capabilities Policy Tools Determinants of rate of adoption &► Improvements in Public Goods Public resources spend ► R&D turnover  Knowledge & level of skilled labour  Experience with similar / ancillary technologies  Effort from private and government  Appropriate institutional support 05/29/11 Center for Energy Policy and Economics 13 .

Approach 2: Influence New Technologies Assessment Approach Theory on Influencing Factors New technologies increases economy’s production capabilities Policy Tools Critique Determinants of new technologies ► of adoption & turnover Goods Public resources spend ► R&D rate Improvements in Public  Knowledge & level of skilled labour Effectiveness: dependent on supporting structures  Experience with similar / ancillary technologies Rate & turnover: immeasurable  Effort from private and government New technologies: coupled with efforts to increase productivity (no “autonomous  Appropriate institutional support technical progress”) 05/29/11 Center for Energy Policy and Economics 14 .

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

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 Policy Tools Price based mechanism and R&D spend Static Effect Recombination of K & L Price Influence Price of energy ↑ Dynamic Effect Re-direction of R&D towards new technologies 05/29/11 Center for Energy Policy and Economics 16 .

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 Policy Tools Price based mechanism and R&D spend 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 Recombination of K & L Price Influence Price of energy ↑ Dynamic Effect Re-direction of R&D towards new technologies 05/29/11 Center for Energy Policy and Economics 17 .

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 18 .

Rebound Effect: Energy & GDP Potential Savings Direct & Indirect Rebound Effects Understanding the Drivers Research Question: Do the technology improvements lead to decrease energy intensity? Check for Rebound Effect Research Question: What happens to share of energy in production if marginal productivity (efficiency) increases? Assess Rebound Effect Research Question: What factors affect the size of rebound effect? What are the dynamics of the Rebound effect? 05/29/11 Center for Energy Policy and Economics 19 .

Understanding Drivers of Rebound Effects 05/29/11 Center for Energy Policy and Economics 20 .

How does Rebound Effect occur? Contributing Factors to Rebound Effects Other Inputs Relative price per unit = PE/PK Relative factor share = E/K I0 Relative factor share I0 – unit isoquant before energy efficiency increase = MPE/MPK Relative price per unit E0 E1 I1 – unit isoquant after energy efficiency increase Energy Rebound Effect I1 E1>E0 I1<I0 05/29/11 Center for Energy Policy and Economics 21 .

Elasticity of substitution 2. * Source: Energy Efficiency and the Rebound Effect: Does Increasing Efficiency Decrease Demand? (Gottro. Dynamics and Effects of Rebound Effects Determining Factors 1.Size.Typical figures* Households [0 – 0.5] Automobiles [0. 2. 2001) 05/29/11 Center for Energy Policy and Economics 22 .Difficult to quantify 3.1 – 0.Elasticity of demand (of the “cheaper” good) Dynamics Higher elasticities ▼ “Easier” to substitute ▼ Higher energy factor share ▼ Higher rebound effect Size of Rebound Effects 1.Intensity decrease less than potential savings 2.3] 1.

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 23 .

technical improvements do not directly translate into a decrease of energy intensity. rational profit-maximising agents §[A2] Absence of structural shifts realistic description . ►Reason:  “self-induced” rebound effect   Assumptions valid for the “basic story”: §[A1] Perfect competition.From the “textbook” economic story… ►Without proper manipulation of the relative price of energy (market-based policy).

rebound step-shaped supply curves. no demand-side feedback.…to the “custom” interpretation (engineer/economist)  Based on what level of substitution is considered possible… magnitude of the rebound effect…  And therefore on the assumed   High: economist long-run ex-ante  Low: engineer short-run ex-post …different modelling approaches:  Top-down: economist  relative prices govern substitution between factors. no substitution. no long-run: rebound flexible production process  Bottom-up: engineer   What defines the  slope of the curve “price vs intensity” for an energy commodity? Hybrid: mixed approach the substitutability of the energy commodity as an input factor short-run: rigid .

[A1] Imperfect markets.  Because of the factors above. industrial sector)  budget theory •residential sector insensitive to “price signals” Principal-agent problem Asymmetries in incentives    a policy instrument. decision-making cost) End-consumer: sub-optimal behaviour   Efficiency gap (“paradox”) between actual and optimal energy •effects of market failure pronounced for residential users (vs. irrational agents  use: Lack of information Inertia (transaction cost. relative price changes are less effective as . →Government intervention required.

[A1] Example: Principal-Agent problem decision-maker bears the cost of the decision .

“oil intensity” reduced. convergences What does the graph not show? § The impact of structural shifts.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. §  aggregate convergence .

price changes might be effective tools to govern intensity.Indicative evidence #2: electricity §  sector electricity price “electricity intensity” cross-sectional data OECD (typical curve) = consumption (kWh) / GDP Important for further policy analysis: Depending on the energy commodity (possibilities of substitution). .

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.g. oil crisis) § Major technological innovations § Major changes in government policy (e. § Market mechanisms do not function in the ordinary way under extra-ordinary conditions.[A2] Structural shocks § Non-continuous changes § External shock (e.g. § 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 § 1/intensity rebound effect (%) = (AB)/(AC) time~efficiency (continuous technical improbable! improvement) .

then: delta_energy intensity ~ delta_technical efficiency example: Leontieff production function (fixed ration of input factors) (exemplifies the transition situation in the short run) .No substitution § § If it is not possible to substitute energy with other factors of production.

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 33 .

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. renewables) Factors for market failure: •Subsidies •High transaction costs •Incentive failures government role . nuclear .g.

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 35 .

Suggested policy mix (to achieve lower absolute energy consumption) Mix of policies [1] market instruments (Δp) condition: competitive markets must be enabled [2] policies to drive innovation price transparency adapt to structural shifts rapid diffusion of technical innovation in areas where private initiative is not enough fact required to manage the complex relationor between… pro duc tivit y fact out put gro wth or sub stit utio End goal •off-set rebound effect •promote technological improvement .

§ Data required to see whether the carbon market has actually driven environmental innovation. § To date method of quantifying magnitude of rebound effect is still debated § § . EU EmissionsTradingSystem) have been enacted to incorporate the carbon price into the electricity price.g. § If yes. policies (e.Conclusion § Since 2000 (paper date). it remains to be seen whether this carbon-driven efficiency improvement has translated into an decrease of energy intensity.

Thank you for your attention Questions? .