Rebound Effects Analysis of Electricity Efficiency Improvements in Iran: A Computable General Equilibrium Approach

Efficiency improvement in electricity uses leads to a decrease in its demand and consequently a decline in the market price of electricity. It is expected that the induced increase in electricity demand due to this price effect offsets part of the primary reduction in consumption, a phenomenon known as "Rebound Effects". Hence, ignorance of these effects in policymaking causes overestimation of the benefits of efficiency improvement policies. This paper aims to determine the parameters that influence the magnitude of the rebound effect theoretically and to evaluate the consequences of exogenous and costless efficiency improvement in electricity use in the context of a computable general equilibrium model. This model is calibrated using Micro Consistent Matrix (MCM) constructed based on 2001 Social Accounting Matrix (SAM) of Iran assuming a small open economy. We found that electricity efficiency improvement will result in rebound effects of 14.2%. This means that 14.2% of the primary decrease in demand is offset by rebound effects. According to our results, there are significant differences between rebound effects across electricity consuming sectors. Oil and Gas sector demonstrates the highest rebound effects. Sensitivity analysis to test the response of rebounds to the specification of elasticity of substitution between electricity and fossil fuels shows that economy-wide rebound effects changes from 11.6% to 14.2% due to changes in elasticity of substitution from 0.1 to 0.9.