The macroeconomics of rebound effects

Energy-efficiency improvements are expected to trigger economy-wide rebound effects through a real-income effect on consumption and input substitution in production. We revisit both mech anisms in an analytically tractable Stock-Flow Consistent Input-Output model and derive the economy-wide rebound in closed form as the sum of two forces. A structural effect, equal to minus the inverse of the EROI of the energy system, is non-positive under the Hawkins–Simon condition and strictly negative in circular systems. A final demand effect is positive if energy weighs more in its own price than in that of the consumption good, so that its relative price falls. The economy-wide rebound turns positive only if this relative-price gain, weighted by households’ direct energy purchases relative to the energy used in production, exceeds the share of energy output that the energy system absorbs to produce itself. The analysis shows that the standard real-income effect does not necessarily carry over to the aggregate level. In a monetary economy, nominal incomes and balance sheets adjust to prices, and the real income gained by some sectors is offset by the income lost upstream. Under the structural channel, energy efficiency leads to a negative output effect, lowering investment, GDP and employment, even as consumption per employee rises, and the sign of the intensity rebound is determined by the input–output structure: negative when the economy is capital-embodied-energy intensive, positive otherwise. When the final demand effect dominates, the rebound turns positive, but mainly through a rise in the energy content of GDP rather than through an expansion of economic activity. Finally, our results in dicate that, in circular systems, production-side rebound effects can emerge without substitution effects.