Rebounds and Jevons: Nobody Goes There Anymore. It’s Too Crowded.

My last post on David Owen’s piece in the New Yorker and on the Jevons effect stirred up some interesting questions and discussion that I want to follow up on here. My last one purposely avoided some of the more technical parts of the issue to keep it readable and under my word limit. I think I’m about to undo that.

But first we should pay thanks to the great 20th Century philosopher, Yogi Berra, from whom I shamelessly stole the title of this post. Though he discovered it nearly 100 years after Stanley Jevons, I believe his exploration of the Jevons effect is more complete and accurate than Jevons’ own, as well as being vastly shorter. The notion that we could get so efficient at using energy that we’d end up using more is about as valid as the idea that a restaurant could get so crowded that it was empty.

Dictating Terms

Though I hate having arguments about how we should argue, there are a few things we need to get straight:

First, as originally observed and defined by Jevons, the Jevons effect is a decidedly micro issue. He observed that increased energy efficiency in coal fired steam engines resulted in increased use of coal to fire steam engines as they were used in more applications and more intensively in existing ones.

Further, the central point of Jevons’ theory was that advances in energy efficiency forced increases in energy consumption. Not merely that consumption increased despite efficiency, but that efficiency caused the increase.

So, if you believe that energy consumption would have been higher without advances in energy efficiency then, by definition, you do not also believe in the Jevons effect.

Much of the debate around this, including the comments to my last post, seem to center around a weaker form of the Jevons effect, i.e. that energy efficiency can’t keep up with demand growth. This is a very different argument than the strict form of the Jevons effect.

The distinction is important, because more than once I have found myself arguing that the Jevons effect doesn’t widely exist, and demonstrating that with examples, only to have people say that Jevons doesn’t mean we shouldn’t invest in efficiency and that I’m missing the macro question, neither of which are consistent with the definition of the Jevons effect, at least in the strict form.

I believe it is this second argument, over the weaker form of Jevons that most people are really arguing about, which is really about the size of the rebound effect.

With this in mind, let’s take a look at the different potential sources of rebound.

Home Economics 101

Looking first at household energy use (which is very different from using energy as a factor of production), I believe there is very little evidence for any Jevons effect.

Increased energy efficiency can often be treated as a decrease in energy prices, which can be broken down into two separate effects. The substitution effect and the income effect. When the price of any good falls, it frees up some amount of money we would have spent on it, essentially increasing disposable income (thus the name “income effect”). If consumption patterns don’t change, we would expect people to buy more of everything more or less proportionately.

Of course, falling energy prices do impact peoples’ consumption patterns. When energy prices fall, we tend to buy more of it because it is more affordable. This is the substitution effect. Because energy has become cheaper relative to other goods, we buy more energy and less of some other things, substituting one for the other.

For households, both these effects tend to be small. The substitution effect is small because energy is already so cheap that it tends not to influence our decisions to watch TV, use our computers, or put lights on. Most people have no idea how much it costs to run a TV (about 5 cents an hour), so owning a more energy efficient TV will have little impact on how much TV they watch.

The income effect also tends to be fairly small because (as you can see in this nifty graphic) the average household spends less than 12% of its income on gasoline and utilities (which here includes water, garbage etc as well as electricity). For the average household, if everything suddenly became 10% more efficient, energy would fall to 10.8% of their income, and their disposable income would go up by 1.2%. Energy consumption would rebound to about 10.93% (10.8% x 101.2%), producing an 11% rebound, far below the 100% needed for Jevons.

The places where you should expect the combined substitution and income effects to be large are where energy consumption is more of a luxury than a necessity. Using an air conditioner or heating our homes above a certain minimum level are good examples because when energy is expensive or the budget is tight, this is where people will economize. But, as I showed about air conditioning in my previous post, and Matt Kahn showed about driving in his, even for non-necessities, the Jevons effect is hard to find.

And admit it, while high gasoline prices might make you cancel the family road trip to the Grand Canyon this summer, nothing, not even free gasoline, could make you do it twice.

Industrious Efficiency

For industry, the income effect is the fact that with the price of energy (more appropriately “energy services”) falling, they become more profitable on a per unit basis. This increase in profitability should lead to an increase in production levels, though how large is hard to know. If we make the conservatively high assumption that businesses plow all of the increased profits back into making product, we can do the same type of calculation as we did for households. In 2006 (the most recent data available), energy consumption made up just over 3% of total input costs in the manufacturing sector (labor was about 21%). So, by the same calculation as above, the income effect would create a very small rebound effect: a 10% increase in operating efficiency in the manufacturing sector would result in a 9.7% reduction in energy use, a 3% rebound.

The substitution effect is even smaller in industry. Though we can often think of increases in efficiency as reductions in energy prices, that’s really just a form of intellectual shorthand. Increases in industrial end-use efficiency typically result from things like investments in more efficient equipment or higher expenditures on labor for operations and maintenance. These represent substitutions of physical capital and labor for energy in the industry’s production process. Because increasing expenditures on labor and machinery are what cause the cost savings in energy, firms can’t take advantage of this efficiency by shifting expenses back to energy. That would undo the savings they created in the first place.

And all of this is supported, if not proved, by actual data. Again, I can’t let Owen (remeber him? He started all this) off the hook for laziness. All of this is easily accessible from the DOE’s Manufacturing Energy Consumption Survey and BEA’s Input Output tables. I took a look at some of the heavier and more intensive industries, ones that would be most sensitive to energy prices and most likely to show large rebounds or even a Jevons effect. Between 1998 and 2006 (the periodicity of some of the data is a little odd), here is what I found:

This shouldn’t be surprising to anyone: Energy efficiency leads to reduced energy use, with some rebound. The pattern is consistent across the manufacturing sector. Despite a 26% increase in GDP and a 7% increase in manufacturing output over that time period, both energy intensity and energy use fell for the sector as a whole and for almost all of the sub-sectors that I looked at. Try it for yourself.

So you’ll have to pardon my incredulity when I hear people like Owen claim that Jevons effects are everywhere, because everywhere I look, I can’t find them.

Some of the Whole and All of Its Parts

A final word about the macro question. There is nothing particularly magical about the macroeconomy, it is merely the sum of all the micro parts. If we can’t find a Jevons effect in all the individual places we look, it will continue to be absent if we sum them all up.

The one exception to this is the question of productivity. If energy efficiency increases overall productivity (it does), which in turn accelerates economic growth (it should), then there is a third source of rebound effect that won’t show up in the income or substitution effects I describe. A self-fulfilling income effect, perhaps.

This is tough to address in a few words (or even in many), because it links back to very technical questions of multifactor productivity and the like. But looking at past increases in gasoline prices, history shows that for every 1% increase in gasoline prices, GDP tends to decline about 0.05%, so that a doubling of gas prices might knock a half a point off of GDP. If we’re willing to assume that this is at least the right neighborhood for all energy types and that the response to a reduction in prices would be about as large as it is for an increase in prices (and there are good reasons to doubt this), then this productivity effect would still be pretty small. A 1% across the board increase in energy efficiency might produce an increase in GDP of 0.2% (not insignificant given historic annual growth rates in the 3% neighborhood). This, in turn, would lead to an increase in energy consumption of slightly less than the same relative magnitude, a rebound effect of less than 20%.

Putting all of these things together, the most you can reasonably expect is a total rebound effect of 30% under some pretty generous assumptions. Combine this with income growth caused by other things, population growth, and other factors, and the gains from efficiency can get buried in the weeds. All that’s really clear is that for significant periods, energy efficiency has not increased fast enough to cause energy use to go down.

But, and this is the key point, this is not the same as saying, and it does nothing to justify saying that efficiency can’t grow fast enough to reduce overall energy use. That is exactly as valid as saying that nuclear power can never reduce our use of fossil fuels, because even when we made large investments in nukes, fossil use still increased. I’ll have plenty more to say about nukes later, but nuclear advocates would rightly respond that this is proof only of the fact that our investments in nuclear were not large enough to offset increases in electricity demand. The same is true for efficiency. If efficiency investments have never forced energy use to decline, that’s proof only that we, as a nation, have never really given it a try.

So while there may be many good reasons to go to a crowded restaurant, being alone isn’t one of them.