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"Yet intermediate micro (or even Econ 1000) shows that this is wrong. As the first picture in this post shows, rebound effects make consumers better off, by increasing their 'consumer surplus', the difference between the benefits they get from consuming a good and the price they actually have to pay for it."


Yes, the "rebound effect" makes consumers better off but the adoption of policy the to begin with might not. The gain in energy efficency makes consumers better off only with respect to their consumption of lighting and only if you assume that Y is constant.

If the increase in efficiency of the light bulb came about as a result of large government subsidies or as a result of government fiat, the resources devoted to the development and production of the new light bulbs may have been (and likley would have been) more efficiently used elsewhere. In case where the subsidy or regulation reduces total factor productivity in the economy, real income and consumption (of all goods and services) would be lower and consumers would be worse off.

Hurrah! My favourite result in economics "because the size of the rebound effect is the subject of passionate debate."

Yes, the answer being "it depends!".

For, as above, the answer depends upon the elasticity of demand for lighting. And that depends upon the range in which we're observing it.

Take, for example, water. Elasticity in that first few litres a day is different from that when the plumbing delivers hundreds of gallons a day is different from when the river delivers some hundreds of thousands of gallons through your basement (at which point something or other has turned negative as we quite happily pay people to make it go away again).

So it is with lighting. There is indeed some level of such where the previously observed relationship does not hold: the very existence of sunglasses and window blinds shows that human appetite for light is not unlimited.

Of course, we don't as yet know quite where that level is, only that it exists.

"Recall that Tsao et al assume Cobb-Douglas preferences. They are assuming that consumers devote a constant fraction of their income to lighting (CoL*φ = β*gdp)."

The extent of the rebound will depend on two things. 1. the price elasticity of demand for lighting and 2. rebounds to the rebound. Tsao et al neglect the possibility of inelastic demand. Intermediate micro neglects the repercussions of an infinite regress of rebounds to the rebound...

Oddly enough, as Mike has just tweeted, there's a piece in today's NY Times about the rebound effect that cites Tsao's results: http://www.nytimes.com/2011/03/08/science/08tier.html?_r=4&ref=science. I hadn't seen that when I wrote this.

Gregor - you raise valid points about subsidizing the development of new technologies. And even ignoring R&D etc., there's the fixed costs of producing LED lights, which seriously reduce the potential energy savings. That's the case for carbon taxes.

Yet having said all of that, the point remains: all else being equal, bigger the rebound effect, the greater the gain in consumer surplus from adopting new technology. (look at the first picture, imagine steeper or flatter demand curves, and think about what happens to the size of the shaded trapezoid.)

Frances: Coincidentally, I hadn't seen your post when I tweeted!

Sometimes, I feel that basic micro is really great. This is one of those times.

UK really looks like it has flattened out since about 1970. Nearing satiation?

I'm very surprised at how quickly kerosene rose and fell, having such a short life. Remembering the big kerosene lamps we used to have on the farm, that we brought out to re-use in power cuts during the 1960's.

I put my Christmas lights out on some shrubs where they get covered in snow. I really like the effect as they melt the snow around each bulb - but LEDs would not generate enough heat to do so, so I'll be sticking with fluorescents until they make an LED with a mini-heater attached.


I completely agree. But I made my point because I think some people might draw policy conclusions from your post that are not necessarily correct. If the size of the trapezoid is large, then the technological innovation in question will surely be developed and adopted on its own accord. There’s nothing in your post that makes the case for government action or involvement and therefore nothing that should stir ‘passionate debate’.

Recognizing that the first graph is logarithmic, and seems to flatten out around 1975, I wonder, for the UK if this had anything also to do with the energy shocks of the 1970s, development of North Sea hydrocarbons, increased use of nuclear generation, Thatcher going after the coal miners etc., all effecting the cost of energy/lighting.

"My sense is that some people feel that the existence of rebound effects undermines the case for development and adoption of new, more energy efficient technologies."

I've always heard this argument in the context of discussions about the environment and conservation (i.e., using energy efficient light bulbs won't reduce energy consumption, because we'll just use more energy or that more energy efficient engines won't reduce gas consumption because we'll just buy bigger, more powerful, cars) and in that context, the existence of rebound effects might be welfare decreasing, if the price of energy (be it electricity or gas) doesn't internalize the social cost using/producing it (so that the already socially inefficient level of consumption becomes more socially inefficient as it becomes less expensive to engage in activities that consume energy).

Mind you, to believe that, you have to accept that the rebound effect is so large as to overwealm the efficiency gains in determining total consumption. Still, given the proliferation of LCD/LED lighting in every possible electrical appliance known to man and beast (why does the bottom of the water tank for my coffee machine need a bright blue light? Ok, it looks cool.), maybe that's not so hard to accept.

Bob, your argument suggests that the first-best solution is to tax carbon, thereby internalizing the externality. I agree.

Once we're agreed on that point, however, there is no further reason to worry about rebound effects - if people decide to spend their money on cool-looking lights rather than other cool-looking stuff, why worry?

Increasing your light use by ten with a rise in efficiency of 100 still leaves you with a saving of one order a magnitude ( plus an LED is cheaper to manufacture)
The neighbors have discovered the real fun in LED that building managers already know: the huge savings in maintenance staff cost.

The paper actually does present a formal model of a Cobb-Douglas aggregate economy. There is some acknowledgement of the structure that that form imposes, although aggregation issues are ignored and the econometric work is extremely weak.

That said, it is good to see physicists actually drawing on the economics literature instead of contemptuously dismissing it out of hand.

I wonder about the impact of increasing house size on this. More rooms, more lights. And more gadgets with their blinking lights.

Also wonder if, as we (maybe) start to see a move to smaller, denser housing, whether that would have a significant-enough impact on "light demand".

Frances: "Bob, your argument suggests that the first-best solution is to tax carbon, thereby internalizing the externality. I agree"

No argument there. But, of course, in the real world, where the first-best solution is politically difficult (if not nigh on impossible), I suppose it's still a concern (Not one that keeps me up at night, mind you. Unlike the damned LED lights!).

Hi everybody I want to say one ... I really like the effect as they melt the snow around each bulb but LED's would not generate enough heat to do so, so I'll be sticking with fluorescent until they make an LED with a tankless heater attached.

People think that making airplanes more efficient will reduce the amount of CO2 they belch out. "Look how environmentally conscious we are by buying efficient planes!"

No so fast. Making airplanes more efficient reduces the cost of fuel per plane, reducing the cost of airline tickets, so that that more people fly. Which means there are more planes in the air.

Thus making airplanes more efficient might INCREASE the amount of CO2 produced.

Chris - this is what Tsao et al say in their paper with respect to their choice of Cobb-Douglas specification:

Third, it predicts a relatively large rebound effect in consumption of light and energy, and it is partly our purpose to show that, even if such a large rebound occurs, there would be significant benefits to SSL when the inter-relationships between consumption of light, gross domestic product and energy consumption are taken into account. Nevertheless, the Cobb–Douglas production function is not, as discussed by Saunders (Saunders 2008), ‘rebound- flexible’, and thus cannot represent the full range of possible rebound effects.

Fair enough.

But is your average person going to read this article? No. They're going to read the NY Times version, which makes it sound as if Tsao et al *discover* lighting expenditures are a constant % of GDP rather than *assuming* lighting expenditures are a constant % of GDP. This is taken from today's NY Times:

Yet people have found so many new places to light that today we spend the same proportion of our income on light as our much poorer ancestors did in 1700, according to an analysis published last year in The Journal of Physics by researchers led by Jeff Tsao of Sandia National Laboratories.

“The implications of this research are important for those who care about global warming,” said Harry Saunders, a co-author of the article. “Many have come to believe that new, highly-efficient solid-state lighting — generally LED technology, like that used on the displays of stereo consoles, microwaves and digital clocks — will result in reduced energy consumption. We find the opposite is true.”

Though perhaps I'm just enjoying the opportunity to contemptuously dismiss physics research out of hand too much.... ;-)

Further to rabbit's point: Trying to think through the macro implications ... wouldn't the net effect depend on what people decide to do with the money they aren't spending on lighting (or plane tickets, or gas or whatever)? In aggregate, the economy might end-up consuming more energy, it may not. If most people decide that their best option is to buy gasoline and go for a drive with their extra money, then we're no further ahead. Of the cuff I'd say it's likely we'd end-up using more energy since most things we want to do take energy, so freeing-up energy (and thus money) in one part of the economy probably leads to more energy consumption in another part of the economy ... but that's just a guess. It might not. I don't know.

That lumen consumption chart reminds me of the "hockey stick": you have to ignore the last 30 years to make it work.

On "people feel that the existence of rebound effects undermines the case for ... energy efficient technologies. Yet intermediate micro shows that ... rebound effects make consumers better off, by increasing their 'consumer surplus'":

I think you are ignoring the environmental externality that motivates the discussion of rebound effects in the first place. If the externality is not corrected through say a Pigouvian tax, then a change in the cost of the polluting good creates offsetting effects; the rebound effect on the externality could outweigh the direct effect on consumer welfare.

Suppose that each unit of per capita electricity consumption creates an externality costing the average consumer k units of the numeraire. Suppose that the tax rate on electricity is t as a percentage of the consumer price, and that the (absolute value) demand elasticity is e. Then a decrease in pre-tax price of electricity decreases consumer welfare (i.e. the rebound effect dominates) if

t < k - 1/e

So if you think that preferences are Cobb-Douglas (e=1) and we have no corrective tax (t=0), then electricity cost reductions are bad for consumers if and only if the external cost is more than 100% of the private benefit of electricity consumption. Hmm, doesn't sound too likely.

(You can tell I liked your post, by the way!)

Michael, thanks for the kind words on the post. Yes, that last paragraph on consumer surplus could have been better, and I should have stated clearly the need for internalizing the externality through carbon taxes. Thanks for adding this clarification.

1. Buy incandescent lights
2. Toronto Hydro says "you're using too much - buy LEDs!"
3. Buy LEDs
4. Toronto Hydro says "you're not using enough - we're raising the per kWh rate!"

5.  You use *even* less.

Mission accomplished.

tomslee - "I really like the effect as they melt the snow around each bulb - but LEDs would not generate enough heat to do so.."
Are you sure? Remember some of the light will be captured by the snow and converted to heat. In Canada, you may be right, here in Europe, I'm pretty sure you are wrong. (At least if you are patient, you are wrong).

"Recall that Tsao et al assume Cobb-Douglas preferences. They are assuming that consumers devote a constant fraction of their income to lighting (CoL*φ = β*gdp). So it's hardly surprising that they predict a 90% decrease in the cost of lighting will increase the quantity demanded ten-fold. Given their assumptions, they could not possibly have obtained any other result."

I really like this. It happens all the time, people specify model, run it and then say "we conclude as a result of this model that..." - where the conclusion is in assumptions. It happens really often (like economists who count only allocative efficiency and then whoopee discover that the free market is most efficient).

reason: thanks for your kind words. It's frustrating to see this paper presented as being such an authoritative study - reporters talk about 'three centuries of data from six continents' when, let's face it, the authors have about 20 data points (look at the diagram and count 'em).

The rebound effect has a context. Ignoring the context sort of makes the whole debate beside the point. What Jevons wrote:



In this context, can minimization of the energy efficiency rebound effect be separated from minimization of the employment rebound effect? Can Jevons's assertion about the "greater force and distinctiveness" of the energy efficiency rebound be supported or disclaimed? This is all part of what I term "the Luddite Question" at http://ecologicalheadstand.blogspot.com/2011/03/luddite-question-rhythm-rebounds-and.html

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