Consumer energy efficiency gap and the rebound effect across households income groups

Abstract

The paper sets up a model which reconciles the energy efficiency gap and the decline of the rebound effect with households’ income. It is shown that the two phenomena can be explained in a framework with a utility-maximizing household that enjoys an income-independent endowment of energy services. Energy service endowment is a barrier against the adoption of the most energy-efficient appliances and leads to the so-called energy efficiency gap. Low-income households only use endowments and do not use energy-consuming appliances (cars, wall insulation, etc.). Higr-income households buy an appliance whose energy efficiency depends on the household’s income. Only households with income above a threshold buy the most efficient appliance. For households that replace their appliance with a more efficient one, there will be a rebound effect (the realized energy saving is less than the presumed one). It is shown that the rebound effect is higher at lower income levels because income and substitution effects from a decline in energy service prices are stronger. These stronger effects come from the endowment of energy services. The numerical example shows that the model can reproduce the patterns for the rebound effects of household income groups and their expenditure shares. It is also shown that other causes of the energy efficiency gap, such as credit constraints, do not lead to higher rebound effects at lower income levels.