Investment, Technological Progress and Energy Efficiency

• BSE Working Paper: 110382 | September 16
• Keywords: Rebound effect , Energy efficiency , Vintage capital , Investment Specific Technical Change
• JEL codes: E22, E23, Q43
• Rebound effect
• Energy efficiency
• Vintage capital
• Investment Specific Technical Change

In this paper we propose a macroeconomic model where energy intensity at the macro level responds to changes in energy prices and technological innovations. In our theory this response depends on the interaction between the energy efficiency built in capital goods and the growth rate of Investment Specific Technological Change. ISTC reduces the cost to produce investment goods (extensive margin) and renders them more productive (intensive margin). Higher ISTC acts as an energy saving device. If energy prices stay constant, a permanent increase in the growth rate of ISTC may rise energy intensity in the long run, producing a rebound effect. This is so because the combination of higher ISTC growth rate and constant energy prices makes agents to choose less energy efficient capital goods. Our theory can be used to test when and how we should see a rebound effect in energy use at the aggregate level and can be used to test the aggregate effect of any policy aiming to reduce energy use.