How to tackle the energy rebound effect

Businesses are being urged not to overestimate the environmental benefits of energy efficiency investments after a major report into the so-called rebound effect revealed money saved as a result of energy savings is often reinvested in energy profligate initiative.

The study from the UK Energy Research Centre (UKERC) analysed a raft of reports on the rebound effect and found that government and business were systematically over-estimating the carbon savings from energy efficiency measures due to a failure to account for how money saved is reinvested.

The report cited the example of drivers investing in a fuel-efficient car who could then take advantage of the cheaper running costs to take more journeys, undermining the expected carbon savings from the original purchases.

Steve Sorrell, chief author of the report and senior fellow at UKERC, said that the problem "applied across the board to all forms of energy efficiency, be it domestic or business". However, he added that the effect was particularly apparent for carbon intensive industries where energy accounts for a large proportion of costs.

"For example, if you look at the steel industry an innovation that delivers energy efficiency will deliver big cost savings, make you more competitive and allow you to grow," he said. "If the innovation becomes standard across the industry it means capacity can grow, which can lead to a lower price and consequently more demand – the net result could be an increase in energy use and carbon emissions."

Sorrell said that this concept, known as the Khazzoom-Brookes postulate, was highly contentious and if it applied at all such "backfire" effects, whereby energy efficiency measures ultimately lead to increased energy use, are extremely rare.

However, he added that the theory highlighted the potential scale of rebound effects and why businesses and legislators should consider them before embarking on energy efficiency investments.

The report warned that the government was in danger of missing its emission reduction targets due to its failure to account for the rebound effect of energy efficiency in both its Energy White Paper and the Treasury's Stern Report.

It advised that government should move to limit the effect by either raising energy prices in line with energy efficiency gains in order to provide a constant incentive for energy saving, or imposing absolute caps on emissions.

Meanwhile, Sorrell insisted that firms should continue to undertake energy efficiency measures as the rebound effect rarely accounted for more than 30 per cent of total energy savings and commonly delivered strong commercial benefits in terms of increased productivity and lower costs.

However, he advised that firms should be aware of the phenomenon when calculating the expected emissions reductions associated with energy saving investments, and also prioritise investments in low carbon technologies that help to decarbonise the energy supply.

"You could try ring fencing [financial savings from energy efficiency to ensure it is not reinvested in energy profligate areas] but the temptation to reinvest elsewhere will be huge," he said. "My advice would be continue investing in energy efficiency measures, but if your priority is minimising CO2 then also focus on saving emissions through low carbon energy."