Investment, Technological Progress and Energy Efficiency

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 those changes operate through the choice of energy efficiency, which is embodied in new vintages of capital that differ due to Investment Specific Technological Change. 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. This may not be the case with rising energy prices. Thus, 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 evaluate the aggregate effect of any policy aiming to reduce energy use