See Inside August 2007

On the Rebound

Discouraging people from using more energy just because it costs less

Economics 101 states that if prices decline, consumption will increase. Now economists are applying this law of demand to policies intended to improve energy efficiency and reduce greenhouse gas emissions linked to global warming. The result is called the rebound effect, and it takes place when higher consumption undercuts the energy savings produced by a given technology.

For example, a household that saves energy and money by installing better insulation may then decide it can afford to raise the thermostat during the winter. “If you invoke a program or policy that lowers the cost, people do more of that thing,” remarks Richard Newell, an energy and environmental economist at Duke University.

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