Identifying the Mechanisms of Rebound Effects from Annual Industrial Energy Efficiency Improvements : A Decomposition Analysis

Rebound effects significantly reduce the effectiveness of energy efficiency in delivering energy use reductions. The understanding of the underlying rebound mechanisms causing this is however scarce. This paper illustrates that industrial energy efficiency improvements in Switzerland lead to rebound effects via both partial equilibrium and general equilibrium channels and that their relative importance depends on the input mix of the sector considered. We find this assessing rebound effects and decomposing them with a recursively dynamic computable general equilibrium model. The decomposition analysis yields three rebound mechanisms: a direct substitution effect, a multiplier effect, and a residual term, the latter of which is further investigated using complementary decomposition techniques. Domestically, partial and general equilibrium channels contribute in almost equal parts to the economy-wide rebound effect of 38% in 2050. For sectoral rebound effects, we find composition and trade effects, which form parts of the residual term, to be the main rebound mechanisms for energy-intensive industries. Conversely, sectors with a high share of value added primarily rebound due to substitution away from capital towards energy. Economic policy instruments could mitigate rebound effects for sectors with strong partial equilibrium rebound mechanisms, while for energy-intensive sectors a more holistic approach needs to be pursued