The full rebound effect can be distinguished into three different economic reactions to technological changes: • Direct rebound effect: An increase in consumption of a good is caused by the lower cost of use. This is caused by the
substitution effect. • Indirect rebound effect: The lower cost of a service enables increased household consumption of other goods and services. For example, the savings from a more efficient cooling system may be put into another luxury good. This is caused by the
income effect. • Economy wide effect: The fall in service cost reduces the price of other goods, creates new production possibilities and increases economic growth. In the example of improved vehicle fuel efficiency, the direct effect would be the increased fuel use from more driving as driving becomes cheaper. The indirect effect would incorporate the increased consumption of other goods enabled by household cost savings from increased fuel efficiency. Since consumption of other goods increases, the embodied fuel used in the production of those goods would increase as well. Finally, the economy-wide effect would include the long-term effect of the increase in vehicle fuel efficiency on production and consumption possibilities throughout the economy, including any effects on economic growth rates.
Direct and indirect effects For
cost reducing resource efficiency, distinguishing between direct and indirect effects is shown in Figure 1 below. The horizontal axis shows units of consumption of the targets good (which could be for example clothes washing, and measured in terms of kilograms of clean clothes) with consumption of all other goods and services on the vertical axis. An economical technology change that enables each unit of washing to be produced with less electricity results in a reduction of the price per unit of washing. This shifts the household budget line rightwards. The result is a substitution effect because of the decreased relative price, but also an income effect due to the increased real income. The substitution effect increases consumption of washing from Q1 to QS, and the income effect from QS to Q2. The total increase in consumption of washing from Q1 to Q2 and the resulting increase in electricity consumption is the direct effect. The indirect effect comprises the increase in other consumption, from O1 to O2. The scale of each of these effects depends on the elasticity of demand for each of the goods, and the embodied resource or externality associated with each good. Indirect effects are difficult to measure empirically. Some of the direct rebound effect can be attributed to consumers who were previously unable to use a service. However, the rebound effect may be more significant in the context of the undeveloped markets in
developing economies.
Indirect effects from conservation For conservation measures, indirect effects closely approximate the total economy-wide effect. Conservation measures constitute a change in consumption patterns away from particular targeted goods towards other goods. Figure 2 shows that a change in preference of a household results in a new consumption pattern that has less of the target good (QT to QT'), and more of all other goods (QO to QO'). The
resource consumption or externalities embodied in this other consumption is the indirect effect. Although a persuasive view has prevailed that indirect effects with respect to energy and greenhouse emissions should be very small due to energy directly comprising only a small component of household expenditure, this view is gradually being eroded. Many recent studies based on life-cycle analysis show the energy consumed indirectly by households is often higher than consumed directly through electricity, gas, and motor fuel, and is a growing proportion. This is evident in the results of recent studies that indicate indirect effects from household conservation can range from 10% to 200% depending on the scenario, with higher indirect rebounds from diet changes aiming to reduce
food miles.
Economy wide effects Even if the direct and indirect rebound effects add up to less than 100%, technological improvements that increase efficiency may still result in economy-wide effects that results in increased resource use for the economy as a whole. In particular, this would happen if increased resource efficiency enables an expansion of production in the economy, and an increase in the rate of
economic growth. For example, for the case of energy use, more efficient technology is equivalent to a lower price for energy resources. It is well known that changes in energy costs have a large impact on economic growth rates. In the 1970s, sharp increases in petroleum prices led to
stagflation (
recession and
inflation) in the developed countries, whereas in the 1990s lower petroleum prices contributed to higher economic growth. An improvement in energy efficiency has the same effect as lower fuel prices, and leads to faster economic growth. Economists generally believe that especially for the case of energy use, more efficient technologies will lead to increased use, because of this growth effect. To model the scale of this effect, economists use computational general equilibrium (CGE) models. While CGE methodology is by no means perfect, results indicate that economy-wide rebound effects are likely to be very high, with estimates above 100% being rather common.
Income level variation Research has shown that the direct rebound effects for energy services is lower at high income levels, due to less price sensitivity. Studies have found that own-price elasticity of gas consumption by UK households was two times greater for households in the lowest income decile when compared to the highest decile. Studies have also observed higher rebounds in low-income houses for improvements in heating technology. Evaluation methods have also been used to assess the scale of rebound effects from efficient heating installations in lower income homes in the United Kingdom. This research found that direct effects are close to 100% in many cases. High income households in developed countries are likely to set the temperature at the optimum comfort level, regardless of the cost – therefore any cost reduction does not result in increased heating, for it was already optimal. But low-income households are more price sensitive, and have made thermal sacrifices due to the cost of heating. Research articles often examine increasingly convenient and more rapid modes of transportation to determine the rebound effect in energy demand. Because time cost forms a major part of the total cost of commuter transport, rapid modes will reduce real costs, but will also encourage longer commuting distances which will in turn increase energy consumption. While important, it is almost impossible to estimate empirically the scale of such effects due to the subjective nature of the value of time. Time saved can either be used towards additional work or leisure which may have differing degrees of rebound effect. Labor time saved at work due to the increased labour productivity is likely to be spent on further labor time at higher productive rates. For leisure time saving, this may simply encourage people to diversify their leisure interests to fill their generally fixed period of leisure time. ==Additional perspective and recent developments==