Modeling rebound effects and counteracting policies for German industries

Highlights

• Rebound effects in German industry exist and can be countered.

• Policy measures are evaluated using a macroeconometric model.

• Efficiency programs and carbon prices are suited to reduce energy consumption.

• Effects of carbon and energy prices spill over to other (non-industry) sectors.

• Policy design should consider rebound effects and sustainability indicators.

Abstract

Energy efficiency programs for industry are important to reduce energy demand and GHG emissions. Rebound effects reduce intended energy savings. Against this background, various policy measures are modeled and combined for German industry to see how they can counter rebound effects. The efficiency program itself, the reinvestment requirement and carbon prices reduce energy use in industry. Higher carbon prices or energy taxes also reduce energy consumption and emissions in other sectors that are more price sensitive. Reimbursement of carbon pricing revenues via lower electricity prices can incentivize the shift towards electricity, but also towards more energy consumption. A combined set of policy measures for German industry can reduce energy use in industry by 5.2% against a baseline in 2030. The combined policy set will further reduce CO₂ emissions, having only small effects on other sustainability indicators such as GDP and employment. In the future, rebound effects need to be considered in policy design. As the combined set will clearly miss the new national emission target for 2030, additional measures are needed together with a fundamental transformation of the energy system. To reach the targets of the Paris agreement, besides energy efficiency also clean energy supply, sufficiency and behavioral change are necessary.

Introduction

The German government has revised the Climate Change Act in May 2021 to become climate-neutral by 2045 (BMU 2021). It was a direct reaction to a decision of the highest national court, that the government needs to be more ambitious with mitigating climate change (BVG, 2021). Before, the target for climate neutrality was to be reached by 2050. The interim target for 2030 has also been stepped up from −55% to −65% against 1990 levels. This target is ambitious not only compared to the EU target to reach climate neutrality in 2050, but also as national GHG emissions have been 40.8% lower in 2020 compared to 1990, of which about 3 percentage points can be attributed to the COVID-19 crisis (UBA, 2021). This means that the decrease in GHG emissions, which was just about 38% in 30 years, with closures of inefficient and carbon intensive power plants and factories in the course of German reunification in the 1990s having played an important role, will have to be roughly repeated in the next 10 years in order to reach the target. In addition to the national reduction target, binding annual sectoral targets have also been set for the energy sector, industry, transport, buildings and agriculture. If targets are missed, the responsible ministry must decide on additional measures to get back on track. The German government has already adopted an immediate climate action program of about 8 billion Euros for the year 2022 (Bundesregierung, 2021a).

This procedure raises the question of how additional measures can be estimated as accurately as possible in advance in impact assessments. Quite obviously, the German government is not relying solely on a cross-sectoral instrument such as a CO₂ tax or a cap-and-trade system, because then no sectoral targets would be necessary. While economists often emphasize the advantages of a uniform price or quantity instrument (cap), governments do not implement these for various reasons. In the industrial sector, the fear of competitive disadvantages for domestic companies, that could shift their production to less regulated foreign countries, is particularly high. It is often argued that global emissions could even increase because of the relocation, which means that carbon leakage could also be negative from an environmental point of view (Paroussos et al., 2015). The European Union has therefore developed an extensive carbon leakage list of economic sectors that are excluded from the auctioning of emission rights under the EU ETS. In the new package to deliver the green deal, differentiated carbon border adjustment mechanisms are foreseen, to prevent relocation of EU production (EU Commission, 2021). Comparable exemptions exist in Germany for energy taxes and the renewable energy EEG levy. Accordingly, other instruments are used such as support programs to increase energy efficiency. Similar programs are popular in many countries, as an analysis by Safarzadeh et al. (2020) shows. Voluntary agreements, subsidies, favorable loans, and subsidies are often components of these programs.

It is frequently pointed out that rebound effects can occur, resulting in energy savings being lower than expected. This is a well-known phenomenon (Khazzoom, 1980; Khazzoom, 1989; Saunders, 2000; Binswanger, 2001; Sorrell and Dimitropoulos, 2008), that is mainly discussed by energy economists (Holm and Englund, 2009; Chakravarty et al., 2013; Turner, 2013). However, ecological economists also argue that the importance of energy for economic growth is fundamentally underestimated in neoclassical economics and more practical considerations of the rebound effect are needed (Vivanco et al., 2016a; Sonnberger and Gross, 2018; Keen et al., 2019). This leads to the question to which extent relative or absolute decoupling of energy use and economic activity are possible. According to Heun and Brockway (2019) this is a mission impossible, partly due to the rebound effect.

A recent overview about rebound effects is provided by Brockway et al. (2021), who conclude that economy-wide rebound effects are often underestimated in large-scale energy and climate models. This is confirmed by another review of Stern (2020). While model-based ex-ante studies report rebound effects in the order of 50% (Colmenares et al., 2020), 70% to 90% in a global study according to Wei and Liu (2017), econometric estimation methods even come to the conclusion that the rebound effects could be around 100% (Bruns et al., 2021). This means that after some years the effects of increases in energy efficiency fizzle out completely. There is also some evidence, that rebound magnitudes increase in general with the degree of aggregation (Birol and Keppler, 2000). There are, however, other factors as the magnitude of (price) elasticities that influence rebound effects. Simple explanatory attempts should therefore be regarded with caution in view of the different quantitative results and the various methods used to quantify rebound effects (Stern, 2020; Colmenares et al., 2020; Santarius, 2016). Saunders, 2013a, Saunders, 2013b presents a detailed econometric analysis of historical energy efficiency rebound magnitudes in the US economy by sector and in aggregate. The results strongly suggest that energy consumption forecasts that ignore rebound effects will systematically and significantly underestimate energy consumption. Skelton et al. (2020) show that downstream efficiency improvements will induce higher rebound effects. They model material and product-service efficiency rebounds for the first time. Using the example of the steam engine, Jevons (1865) even assumed that backfire could occur in the long term. However, da Rocha and de Almeida (2021) show that depending on the model assumptions, a wide range of effects of increases in energy efficiency can be achieved, from backfire (rebound effect >1) to superconservation (rebound effect <0).

The discussion of rebound effects focuses on the magnitude of the effects. How policymakers should deal with this and how rebounds could be reduced or avoided through appropriate measures has hardly been discussed so far (Freire-González and Puig-Ventosa, 2015). For example, Jarke-Neuert and Perino (2020) show that in the case of an emissions trading system, promoting the efficiency of electrical appliances is counterproductive and can even lead to backfire. Dahlqvist et al. (2021) look at energy-intensive industries in Sweden. They recommend combining voluntary energy efficiency programs with energy taxes if the aim is to reduce overall energy use. Xu et al. (2021) examine the metallurgical industry in China. They also conclude that additional policy measures are needed in conjunction with energy efficiency improvement policies. Vivanco et al. (2016b) discuss the possibilities of limiting rebounds through policy measures. According to their analysis an appropriate policy design and a policy mix are necessary. Economy-wide caps as well as energy and CO₂ taxes are therefore particularly suitable. However, acceptance of price increases among the population is limited, as shown, for example, by the yellow vest protests in France. At this point it becomes clear that the debate between science and policy is partly going in circles. Science often proposes single optimal instruments as carbon taxes and cap and trade systems what policy does not want to implement due to fear of carbon leakage or other reasons for exemptions or specific support listed above, . Or policy mix proposals remain quite vague, and science has so far only been concerned with or been able to assess to a limited extent the instruments used by policymakers.

This is where our contribution comes in. Using the rebound typology of Lange et al. (2021), rebound effects of energy efficiency improvements in German industry until 2030 at the meso and macro level are the starting point of the analysis. Lutz et al., 2021a, Lutz et al., 2021b show that increases in energy efficiency in German industry, that are induced by energy efficiency programs are reduced by the rebound effect: At the macroeconomic level the rebound effect from an efficiency increase that requires investment, i.e. the relative difference between targeted and actual decrease in energy consumption, lies between 13% in 2021 and 19% in 2030. At industry level, the spread is between almost zero and more than 20%. One reason for the quite low magnitude of rebounds in international comparison could be the policies such as voluntary agreements already in place (BMWi 2012). But additional counteracting policies are needed. In a model analysis with the national economy-energy-environment model PANTA RHEI, different policies and policy mixes are analyzed together with the original rebound effects. Policies are assessed regarding socio-economic impacts and carbon emissions. The results support the understanding and acceptance of policy options. The paper is therefore structured as follows. Next, in Section 2, the modeling of rebound effects and the different policy measures are presented in the PANTA RHEI model. Section 3 discusses the results of the individual policy measures and a combined set of these measures. The paper finishes with a discussion of the results in Section 4 and general conclusions in Section 5.