30 Rebound Effect
First, note that when an energy service becomes more efficient, it also becomes less expensive. Say I trade in my old car in for a Prius, which is 20 percent more fuel efficient. Among other things, that means I spend (roughly) 80 percent what I used to spend to drive how much I used to drive.
That’s money in my pocket I didn’t have before. What do I do with it?
One thing I might do with it is buy more gas, i.e., drive more. In other words, I might respond to the lower cost of an energy service by increasing my demand for the service. The amount of primary energy I use for driving, which fell when I bought my Prius, would rebound back upward. That is the direct rebound effect.
Or, I might use the extra money to, say, buy an iPad. Thing is, manufacturing and operating an iPad requires energy. So even if the energy I devote to driving drops, my total energy use could rebound back upward. That is the indirect rebound effect.
(The same basic story applies to businesses. If their energy costs go down through energy efficiency, they invest some of the savings in more production, thus bumping their energy use back up.)
Stepping back, there’s the question of economy-wide rebound effects. If we drive energy efficiency across the entire economy, then we lower what’s called the energy intensity of the economy, that is, how much primary energy it takes to get a unit of GDP. When the economy as a whole is more energy efficient, it takes less energy to create wealth.
What is the macroeconomic effect of a drop in energy costs? The same effect we’d expect from a drop in labor costs or capital costs: faster growth. And insofar as stimulating growth means increasing energy use, that will wipe out some of the energy-saving gains of the efficiency.