Estimating the Rebound Effect of Increasing Energy Efficiency Associated with Household Consumption and CO2 Emission in Iran

Increasing energy efficiency is considered as one of the major instruments for reducing energy use and carbon dioxide emissions. Increasing energy efficiency reduces the cost of energy, and energy services, thus increasing the real income of consumers. The demand of energy and energy services will increase as their prices decrease, hence increasing energy usage. Moreover, increase of real incomes will increase the consumption of other goods. This in turn will further increase energy use. In short, the reduction in the prices of energy and energy services and the increase of real income will lead to lower actual energy saving than the expected energy saving. This phenomenon is known as the “rebound effect” in economic literature. The main purpose of this paper is to estimate the “rebound effect” when assessing impact of increasing energy efficiency on Iranian household consumption and CO_2 emission. We assume technological progress to be an exogenous factor. Simulating increased energy efficiency under three different scenarios, we investigate the effect of increasing energy efficiency on household consumption and CO_2 emission. In all scenarios, increased energy efficiency causes an increase in the consumption of some goods and a reduction in consumption of other goods. The estimated rebound effect is about 98 percent and this suggests that increasing energy efficiency only reduces energy use and CO_2 emission slightly. The results also indicate that the greater the increase in energy efficiency the lower is the rebound effect. It is thus clear that if we are to achieve a noticeable reduction in energy use and CO_2 emission, energy efficiency has to be increased in a marked manner.