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International Handbook on the Economics of Energy

Edited by Joanne Evans and Lester C. Hunt

As an essential component for economic growth, energy has a significant impact on the global economy. The need to meet growing energy demand has prompted cutting-edge innovation in clean technology in an attempt to realise environmental and cost objectives, whilst ensuring the security of energy supply. This Handbook offers a comprehensive review of the economics of energy, including contributions from a distinguished array of international specialists. It provides a thorough discussion of the major research issues in this topical field of economics.
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Chapter 8: Theoretical Foundations of the Rebound Effect

Harry Saunders


Harry Saunders 1 Introduction The relationship between energy efficiency and energy consumption is a surprisingly subtle one. In this chapter, we present a highly simplified but nonetheless rigorous picture of a standard theoretical economic framework for understanding this relationship. The intent is to give the reader a solid foundation for informed analysis of policy issues related to energy efficiency. To keep things concrete, along the way we connect the discussion to the question of demand-side global warming remedies, which, as one might expect, depend heavily on the link between energy efficiency and energy consumption. 2 Energy–Economy Interactions – the Basics We begin with the simplest possible way to look at energy efficiency in an economy. Suppose we have an economy that produces a certain amount of GDP with a certain amount of energy. We can characterize this economy by the following equation: Y 5 f (R, E) . In this equation, Y represents ‘real output’, which you can think of as being GDP although strictly speaking there is a slight difference if you are an economist.1 E represents the amount of energy used in producing this real output and R represents the quantity of other inputs used (capital, labor, materials and so on). Were we looking only at an instant in time, we would not even need this equation to understand the relationship between energy and output – energy’s efficiency in being able to produce output would be adequately characterized by the E/Y ratio. But in general we will want to know...

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