Unintended Green Incentives

by Elaine Schwartz    •    Dec 19, 2010

True or False? When we become more energy efficient, we use up fewer resources.

This New Yorker Magazine article says maybe. Citing the “rebound effect,” the article briefly takes us back to Williams Jevons, England, and 1865. In a book called The Coal Question, Jevons explains that the energy efficiency created by the steam engine encouraged more energy use rather than less. Jevons said, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.”

Also though, the article takes us to a somewhat different conclusion. As explained in a Congressional Research Service (CRS) report, the “rebound effect” is most evident in a developing economy. Why? Slack demand can lead to considerable increase in energy use. In a mature market, the “rebound effect” is less pronounced.

The “rebound effect” reminds me of the Peltzman Effect. As Peltzman describes it, when regulation changes incentives, people’s response can offset the intent of the regulation. For example, because seat belts protect us, we might drive more dangerously. Because Lipitor controls cholesterol, we might eat more fatty meats.

The Economic Lesson

As economists, we can say it is all about opportunity cost. As the opportunity cost of using a commodity decreases, we tend to use more of it. Diminished opportunity cost is one reason that demand slopes downward. The lower the price, the more we want because we sacrifice less to get it.

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