General Equilibrium Rebound from Energy Efficiency Policies ∗

I study the general equilibrium implications of large-scale policies to improve energy efficiency, which are being implemented around the world to mitigate climate change. Energy efficiency policies “rebound” when economic responses undercut their direct energy savings. I develop an analytic general equilibrium framework that allows improvements in energy efficiency to affect output prices and factor prices. I show that general equilibrium channels typically amplify rebound and make it more likely that improvements in efficiency end up increasing total energy use. General equilibrium channels are likely to be especially problematic when sectors targeted for efficiency improvements have a large value share of energy. In these cases, ignoring general equilibrium channels can severely bias benefit-cost analyses in favor of energy efficiency policies.