Living up to expectations:

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1 Lvng up to expectaton: Etmatng dect and ndect ebound effect fo UK houehold Mona Chtn 1 Steve Soell 2 1 Suey Enegy Economc Cente (SEEC), School of Economc, Unvety of Suey, UK 2 Suex Enegy Goup, Scence Polcy Reeach Unt (SPRU), Unvety of Suex, UK Coepondng autho: Steve Soell, Suex Enegy Goup, Scence Polcy Reeach Unt, Unvety of Suex, Bghton, UK Tel. +44 (0) , mal:..oell@uex.ac.uk 1

2 Abtact Th tudy etmate the combned dect and ndect ebound effect fom vaou type of enegy effcency mpovement by UK houehold. In contat to mot tude of th topc, we bae ou etmate on co-pce elatcte and theefoe captue both the ncome and ubttuton effect of enegy effcency mpovement. Ou appoach nvolve etmatng a houehold demand model to obtan pce and expendtue elatcte of dffeent good and evce, utlng a multegonal nput-output model to etmate the GHG emon ntente of thoe good and evce, combnng the two to etmate dect and ndect ebound effect, and decompong thoe effect to eveal the elatve contbuton of dffeent mechanm and commodte. We etmate that the total ebound effect ae 41% fo meaue that mpove the effcency of dometc ga ue, 48% fo electcty ue and 78% fo vehcle fuel ue. The pmay ouce of th ebound nceaed conumpton of the cheape enegy evce (.e. dect ebound) and th pmaly dven by ubttuton effect. Ou eult ugget that the neglect of ubttuton effect may have led po eeach to undeetmate the total ebound effect. Howeve, we povde a numbe of caveat to th concluon, a well a ndcatng pote fo futue eeach. Keywod: Rebound effect; Income and ubttuton effect; lnea almot deal demand ytem 2

3 1 Intoducton Rebound effect a wdely ued tem fo a vaety of economc epone to mpoved enegy effcency. The net eult of thee effect typcally to nceae enegy conumpton and geenhoue ga (GHG) emon elatve to a countefactual baelne n whch thee epone do not occu. To the extent that ebound effect ae neglected n polcy appaal, the enegy and emon aved by uch meaue may be le than antcpated. Stude of ebound effect fo conume typcally focu upon the dect effect that eult fom nceaed conumpton of cheape enegy evce. Fo example, fuel-effcent ca make dvng cheape o people may dve futhe and/o moe often (Small and Van Dende, 2007; Soell, 2007). But a compehenve accountng of the global envonmental mpact of enegy effcency mpovement mut alo take nto account vaou ndect ebound effect. Fo example, any avng on fuel bll may be put towad nceaed conumpton of othe good and evce whoe povon alo nvolve enegy ue and emon at dffeent tage of the global upply chan (Chtn et al., 2013; Duckman et al., 2011). To quantfy ndect ebound effect, t neceay to combne econometc analy of houehold (e)pendng patten wth etmate of the enegy and emon emboded wthn dffeent categoe of good and evce. The latte, n tun can be deved fom envonmentally extended, multegonal nput-output model (Duckman and Jackon, 2009; Tune et al., 2007; Wedmann et al., 2007). Relatvely few tude etmate both dect and ndect ebound effect and mot of thee ely upon expendtue elatcte athe than co-pce elatcte. A a eult, they captue the ncome effect of enegy effcency mpovement but not the ubttuton effect (Chtn et al., 2014). To appecate the dtncton, conde a houehold that ntall nulaton and 3

4 ecove the captal cot ove ten yea though lowe heatng bll. Snce the bll avng exactly offet the captal cot, the nvetment povde no nceae n eal ncome ove th peod - o the ncome effect zeo. Hence, tude that focu olely upon ncome effect would etmate the dect and ndect ebound effect ove that peod to be zeo a well. But nce the unt cot of heatng ha fallen elatve to that of othe good and evce, the houehold lkely to conume moe heatng and fewe good and evce that ae ubttute to heatng. At the ame tme, the houehold may conume moe of othe good and evce that ae complement to heatng. The net eult wll be a hft n conumpton patten and hence a change n the GHG emon aocated wth that conumpton that may offet the ognal emon avng. Hence, t poble that tude that neglect ubttuton wll undeetmate ebound effect. Th tudy theefoe addee the lmtaton of the extng lteatue by: a) etmatng the magntude of both dect and ndect ebound effect followng the adopton of enegy effcency meaue by houehold; b) dentfyng the elatve contbuton of ncome and ubttuton effect to thee eult; and c) dentfyng the elatve contbuton of ndvdual good and evce. Th the ft tudy to etmate thee effect fo UK houehold, a well a the ft to decompoe them to th level of detal. The pape tuctued a follow. Secton 2 ntoduce the elevant concept, hghlght ome methodologcal tade-off and ummae the extng lteatue. Secton 3 outlne the methodology, ncludng the data ouce ued, the economc model adopted and the econometc technque employed. Secton 4 peent the eult, ncludng the etmate of dect and ndect ebound effect and the contbuton of dffeent mechanm and commodte to thoe effect. Secton 5 conclude by dcung the obutne of the eult, the mplcaton and the pote fo futue wok. 4

5 2 Concept and pevou wok 2.1 Dect ebound effect Cot-effectve enegy effcency mpovement educe the effectve pce of enegy evce uch a heatng and lghtng, theeby encouagng nceaed conumpton of thoe evce that offet the ntal enegy and emon avng. The magnal change n the enegy ( q e ) equed to povde a gven quantty of enegy evce ( q ) followng a magnal change n enegy effcency ( q / qe ) may be expeed a: ln qe q, e ln 1 A hown by Soell and Dmtopoulo (2007a), th may be wtten a: q, q, p e Whee q, p the own-pce elatcty of demand fo the enegy evce ( q ) wth epect to the enegy cot of that evce ( p p e / ). The negatve of th elatcty commonly taken a a meaue of the dect ebound effect (R D ) (Soell and Dmtopoulo, 2007a): R D q, p 3 1 q Gven qe q / e q q p, q f ( p ) and p p e /, we have: q e, = 2 qe qe p q 1 pe q q pe q p q O: qe, 1. So: q,, 1 e q p qe p qe qe p q p 5

6 If the enegy evce a nomal good ( 0) thee wll be a potve dect ebound q, p effect ( R 0 ). Th may be decompoed nto a ubttuton effect and an ncome effect 2 D ung the Slutky equaton: q, p ~ 4 q, p w q, x Whee: w the hae of the enegy evce n total houehold expendtue (x); q, x the expendtue elatcty of the enegy evce; and ~ q, p the compenated own-pce elatcty of demand fo the enegy evce, holdng utlty contant. The ncome ( ubttuton ( R ~ ) component of the dect ebound effect ae then a follow: D Rˆ D ) and ˆ R D w q, x ~ R D q, p R D ~ 6 ~ Rˆ R 7 D D Income and ubttuton effect may ethe offet o enfoce one anothe (Table A.1). If etmate of q, p ae avalable the dect ebound effect can be deved, and f etmate of q,x ae alo avalable t can be decompoed. In contat, f only etmate of q, x 5 ae avalable, then only the ncome effect can be obtaned. Th wll fom a baed etmate of the dect ebound effect nce ubttuton effect wll be ovelooked. 2 The fome the change n conumpton that would eult fom the change n elatve pce f eal ncome wee adjuted to keep utlty contant, whle the latte the change n conumpton that would eult excluvely fom th change n eal ncome. 6

7 2.2 Indect ebound effect Enegy effcency mpovement may alo change the quantty demanded of othe good and evce. Thee nclude both othe enegy evce (e.g. heatng) and othe non-enegy good and evce (e.g. funtue) that embody the enegy and emon equed to manufactue and delve them. Thee change n conumpton patten wll mpact enegy ue and emon at each tage of the elevant upply chan. Fom a global pepectve, thee change may ethe offet o add to the enegy and emon avng fom the enegy effcency mpovement dependng on whethe the quantty demanded of the elevant good o evce ha nceaed o fallen. The ndect ebound effect ( R I ) fom an ndvdual commodty () wll be popotonal to th change n enegy and emon, whch n tun wll depend upon: the enegy o emon ntenty of the commodty elatve to that of the enegy evce; and the elatcty of demand fo that commodty wth epect to the pce of the enegy evce. The latte defned a: ln q q, p 8 ln p Agan, th elatcty can be decompoed: q, p ~ w q, p q, x 9 Whee: w the hae of the enegy evce n total houehold expendtue; q, x the expendtue elatcty of commodty ; and ~ the compenated elatcty of demand fo q, p commodty wth epect to the enegy cot of the enegy evce. The ubttuton effect fo commodty ( ~ ) may offet o enfoce the ncome effect ( w q, x ) fo that q, p commodty (Table A.2). Conumpton of commodte that ae complement (ubttute) to 7

8 the enegy evce wll nceae (educe) followng the enegy effcency mpovement. The mpact of th on emon wll depend upon the emon ntenty of each commodty. If etmate of both and q, x ae avalable the ndect ebound effect fo each q, p commodty can be deved and decompoed ( R I ~ Rˆ R ), but f only etmate of q, x I I ae avalable, only the ncome effect can be obtaned. To etmate the oveall ndect ebound effect we need to um the coepondng change n emon ove all commodte ( R I RI ). 2.3 Etmatng dect and ndect ebound effect To etmate dect and ndect ebound effect we need etmate of the own- and co-pce elatcte fo the elevant enegy evce. Th eque the etmaton of a houehold demand model - namely, a ytem of n equaton epeentng houehold demand fo n commodte a a functon of total expendtue, commodty pce and othe vaable, wth one of thee commodte beng the enegy evce (). A gowng numbe of tude etmate own-pce elatcte fo ndvdual enegy evce ( ), but to ou knowledge no tudy ha etmated co-pce elatcte ( q, p q, p ) owng the dffculte of pecfyng enegy evce a a commodty wthn a houehold demand model (Soell, 2010). Snce enegy evce ae poduced fom a combnaton of enegy commodte (e.g. ga) and duable good (e.g. bole), pecfyng the enegy cot ( 8 p ) and quantty demanded ( q ) nvolve combnng data on enegy commodty puchae wth addtonal data on the ownehp and enegy effcency of the elevant duable (Conad and Schöde, 1991). Snce th data may not be avalable, a mple altenatve to etmate a model fo puchaed commodte () and to mulate enegy effcency mpovement by a

9 educton n the pce of the elevant enegy commodte (e) (Bännlund et al., 2007). So, fo example, moe effcent bole may be mulated by a educton n the unt pce of natual ga (p e ), nce both wll educe the enegy cot of heatng (p ). Elatcte may then be etmated wth epect to enegy commodty pce ( p e ), athe than enegy evce pce ( p ) and ued to etmate both dect and ndect ebound effect. Th appoach mple to mplement but, a dcued below, may potentally lead to baed etmate of ebound effect. It common to fomulate houehold demand model n tem of expendtue ( x ) athe than quantty demanded ( q ) nce expendtue ae eae to meaue. It taghtfowad to convet between the two ung the followng elatonhp: x, p 1q, p ; ~ 1 ~ ; 10 x, p q, p j x, p q, p j ~ ~ x, p q, p 11 j j j ; 12 x, x q, x Houehold demand model can be etmated fom tme ee o pooled co-ectonal data on houehold expendtue and commodty pce. But the numbe of coeffcent to be etmated lmt the degee of feedom, wth the eult that expendtue need to be aggegated nto a lmted numbe of commodty goup. Fo the ame eaon, uch model povde lmted cope fo ncludng covaate and typcally eque etcton to be mpoed upon the paamete value to nceae the degee of feedom. A common tategy to aume epaablty of pefeence between aggegate commodty goup uch a food and tanpot, mplyng that decon on how much to pend on one goup (e.g. tanpot) ae 9

10 epaate fom decon on how to allocate th expendtue between the good and evce wthn that goup (e.g. bu, ca o tan tavel) (Deaton and Muellbaeu, 1980). 3 Th a etctve aumpton, but t can wok eaonably well f the categoe ae well choen. 2.4 Pevou wok Table 3 and 4 clafy the lmted numbe of tude that etmate both dect and ndect ebound effect fo houehold - wth thoe n Table 1 ung expendtue elatcte (ncome effect) and thoe n Table 2 ung co-pce elatcte (ncome and ubttuton effect). Whle mot tude focu upon mpoved enegy effcency n electcty, heatng o ca tavel, othe examne uffcency meaue uch a educng ca tavel o food wate. 4 Dffeent tude etmate ebound effect n enegy, cabon and GHG tem, but no tudy etmate and compae all thee. Th dvety, combned wth the methodologcal lmtaton of each tudy (Soell, 2010) make t dffcult to daw obut concluon.. 3 Weak epaablty mple that the magnal ate of ubttuton between commodte n one goup ndependent of the quantte of othe commodte n othe goup. Th allow the demand fo commodte wthn a goup to be wtten olely a a functon of the expendtue on the goup and the pce of commodte wthn the goup, wth the pce of othe commodte only affectng the goup expendtue and not the allocaton of expendtue wthn the goup. 4 Snce uffcency meaue do not change the effectve pce of the enegy evce, thee ae no aocated ubttuton effect. 10

11 Table 1: Stude etmatng combned dect and ndect ebound effect fo houehold ncome effect only Autho Regon No. of commodty categoe Meaue Aea Metc Enegy/ emon Lenzen and Day Autala 150 Effcency & Food; heatng GHG Dect and (2002) uffcency emboded Alfeddon Sweden 300 Suffcency Food; tavel; utlte CO 2 Dect and (2004) emboded Duckman et al UK 16 Suffcency Tanpot, heatng, GHG Dect and (2011) food emboded Thoma and US 13 Effcency Tanpot, electcty Enegy and Dect and Azevedo CO 2 emboded (2013) Muay Autala 36 Effcency & Tanpot, lghtng GHG Dect and (2013) uffcency emboded Chtn et al UK 16 Effcency Heatng, lghtng GHG Dect and (2013) emboded Chtn et al UK 16 Effcency and Tanpot, heatng, GHG Dect and (2014) uffcency lghtng, food emboded Etmated ebound effect (%) % 7-300% 7-51% 7-25% 4 24% 5 15% 5-106% 11

12 Table 2: Stude etmatng combned dect and ndect ebound effect fo houehold ncome and ubttuton effect Autho Regon No. of commodty categoe Meaue Aea Metc Enegy/ emon Etmated ebound effect (%) Bannlund et al (2007) Sweden 13 Effcency Tanpot; utlte CO 2 Dect and emboded % Mzobuch (2008) Japan 13 Effcency Tanpot; utlte CO 2 Dect and 12-38% emboded Ln et al (2013) Chna 10 Effcency Tanpot; utlte CO 2 Dect and 37% Katena and Wuge (2008) Auta 6 Effcency Tanpot; heatng; electcty emboded Enegy Dect only 37-86% 12

13 Bannlund et al (2007) wa the ft tudy to ue co-pce elatcte to etmate combned dect and ndect ebound effect. Ung uvey data fo Swedh houehold ove the peod , Bannlund et al etmate a houehold demand model 5 fo 13 categoe of nonduable expendtue. Sepaablty aumpton ae ued to: ft, allocate expendtue between duable and non-duable; econd, allocate non-duable expendtue between fou aggegate goup (food, tanpot, dometc enegy and othe); and thd, dtbute the goup expendtue between ndvdual commodte wthn each goup (e.g. dometc enegy ubdvded nto ol, electcty and dtct heatng). Bannlund et al then mulate a 20% enegy effcency mpovement n tanpot and dometc enegy by educng the pce of each commodty n popoton to the etmated contbuton of enegy to total cot, and then ecalculate the model to etmate the mpact on global cabon emon. The eult ugget a ebound effect of 121% fo tanpot effcency mpovement, 175% fo dometc enegy and 140% fo both combned. 6 Bannlund et al do not epaately nvetgate effcency mpovement n electcty and heatng fuel, do not dtnguh between dect and emboded emon and do not calculate the elatve contbuton of ncome and ubttuton effect to the eult - depte etmatng the elevant elatcte. Moe mpotantly, the etmated ebound effect ae emakably lage and ugget that dect ebound effect alone exceed 100%. Th contadct the eult of a gowng body of wok that etmate dect ebound effect fo thee enegy evce n OECD houehold (Soell et al., 2009), togethe wth a lage body of wok that etmate the coepondng enegy pce elatcte (Soell and Dmtopoulo, 2007b). 5 All thee of the tude decbed hee etmate the lnea Lnea Almot Ideal Demand Sytem (LAIDS) ntoduced by Deaton and Muellbaue (1980). 6 The peentaton of eult mleadng. Fo example, tanpot effcency etmated to educe cabon emon by 6.2% n the abence of ebound effect but to nceae cabon emon by 1.3% once ebound effect ae accounted fo. Bannlund et al. epot th a a ebound effect of 7.5%, wheea the coect value 121%. 13

14 Mzobuch (2008) take a mla appoach to Bannlund et al, ung monthly expendtue data fo Japanee houehold ove the peod He alo employ multtage budgetng, but n contat to Bännlund et al, the 13 commodte epeent expendtue on both duable and non-duable (e.g. both ca and oad fuel) and hence cove all houehold emon. Mzobuch mulate multaneou educton n the pce of dometc enegy and oad fuel, but the pecentage mpovement ae dffeent fom thoe n Bannlund et al and vay fom one commodty to anothe. Two cenao ae nvetgated: one whee the effcency mpovement ae cotle, and a econd whee adjutment ae made to eflect the addtonal captal cot of enegy-effcent equpment. 8 Th lead to an etmated ebound effect of 115% n the ft cenao (mla to Bannlund et al) and 27% n the econd. Mzobuch ague that allowng fo captal cot educe the cot avng and hence the etmated ebound effect. But the manne n whch th cenao mplemented alo change the elatve cot avng between electcty, ga, heatng ol and vehcle fuel, leadng to ubttuton between them that modfe the etmated ebound effect. Snce Mzobuch doe not epot the ebound effect fo each ndvdual effcency mpovement, the dve of the eult ae obcued. Ln and Lu (2013) alo follow Bannlund et al appoach, ung annual data fo Chnee uban houehold ove the peod The focu a 30% mpovement n enegy effcency fo tanpot and dometc enegy, but the aumed pce educton n each 7 Methodologcal nnovaton nclude Bayean etmaton method and the ue of an teatve pocedue to etmate ebound effect. 8 Mzobuch aume 20% mpovement n the effcency of electcty and oad fuel ue, 10% n ga ue and 3% n heatng ol ue. Achevng thee aumed to eque a 22% nceae n expendtue on duable fo electcty, 35% fo ga, 12% fo heatng ol and 28% fo vehcle. The fnal pecentage change n the pce of the elevant ubcategoy (e.g. ca tanpot) then depend upon the elatve popoton of duable and nonduable expendtue wthn that categoy. The method of calculatng addtonal captal cot cude and lead, fo example, to the odd eult that fuel-effcent ca ae moe expenve than neffcent ca. Th becaue newe and moe fuel-effcent ca of a patcula model type ae moe expenve than olde and le effcent ca of the ame type. But th neglect the dffeence n cot and fuel effcency between model type n the ame yea and between dffeent ze of vehcle. 14

15 ubcategoy ae not pecfed. They etmate a total ebound effect of 37%, of whch 12.6% dect and 24.4% ndect. 9 But they do not epaately etmate the ebound effect fo tanpot and dometc enegy, and do not pecfy the elatve contbuton of ncome and ubttuton effect to the eult. Fnally, Katena and Wuge (2008) povde only a patal pctue nce they confne attenton to a ubet of commodty goup and neglect emboded emon. They fnd lage ebound effect (37-86%), but th tudy ha not been pee-evewed and ha a numbe of weaknee (Soell, 2010). In um, the extng evdence bae lmted and nadequately explaned. The etmated ebound effect fom both the Bannlund and Mzobuch tude appea lage than thoe n Table 1 and ncontent wth the gowng lteatue on dect ebound effect. Alo, none of the tude n Table 2 clafy the elatve contbuton of ncome and ubttuton effect to the eult, o the elatve contbuton of dect and emboded emon. Ou analy addee thee lmtaton. 3 Methodology Ou appoach nvolve etmatng a houehold demand model to deve pce and expendtue elatcte of dffeent good and evce, utlng a multegonal nput-output model to etmate the GHG emon ntente of thoe good and evce, combnng the two to etmate dect and ndect ebound effect, and decompong thoe effect to eveal the elatve contbuton of dffeent mechanm and commodte. Secton 3.1 develop 9 The numbe n the ummay and abtact of Ln and Lu (2013) ae ncoect, whle thoe n the body of the pape ae coect. 15

16 analytcal expeon fo thee effect, Secton 3.2 decbe the econometc model and Secton 3.3 ummae the data. 3.1 Rebound model Aume a houehold make a cotle nvetment that nceae the enegy effcency ( ) of povdng an enegy evce () by / ( 0), theeby educng the enegy cot ( p ) of that evce by p / p ( 0 ). Let Q epeent the houehold baelne GHG emon (dect plu emboded), H the change n emon that would occu wthout any behavoual epone to the lowe cot enegy evce (the engneeng effect ), G the change n emon that eult fom thoe behavoual epone (the e-pendng effect ), and Q H G the net change n GHG emon. The total ebound effect (R T ) then gven by: R T H Q G 13 H H A dcued above, th comped of dect and ndect effect ( R T R D R ) whch I may each be decompoed nto ncome and ubttuton effect ( R D ~ Rˆ R and D D R I ~ Rˆ R ). I I The baelne GHG emon fo the houehold may be wtten a: x Q xu u x 14 ( ) x 16

17 Whee x the expendtue on commodty (n ), x u the GHG ntenty of that expendtue (n tco 2e / ) and x and x u ae the coepondng value of thee vaable fo the enegy evce. The GHG ntente nclude both dect and emboded emon To etmate the engneeng effect ( H ), we aume the conumpton of all commodte eman unchanged whle the enegy cot of the enegy evce fall. The change n expendtue on the enegy evce a a conequence of the engneeng effect then gven by H x q p. Gven that p p and x H H u x we obtan the followng expeon fo the engneeng effect: H u x x 15 To etmate the e-pendng effect ( G ), we mut allow fo the change n expendtue on each commodty goup ( x ).The change n expendtue on the enegy evce telf a a conequence of the engneeng effect gven by x G p q. 10 Addng n the change of expendtue on othe commodty goup we obtan the followng expeon fo the ependng effect: G u x x G x u ( ) x 16 Aumng magnal change, we can ue elatcte to ubttute fo and x n th G x equaton: 10 Fo the enegy evce telf, the total change n expendtue the um of the engneeng and e-pendng effect: H x x x G 17

18 G u x x ( x, p 1) u ( ) x x x, p 17 Subttutng the expeon fo H (Equaton 15) and G (Equaton 17) nto Equaton 13 and notng that w x / x, we ave at the followng expeon fo the total ebound effect: R T (1 x, p ) ( ) x, p 18 Whee: x u w 19 x u w Fo eae of expoton, we expe elatcte n quantty fom n what follow. Ung Equaton 10 to 12, the total ebound effect can alo be expeed a: R T q, p ( ) q, p 20 The ft tem n Equaton 20 the dect ebound effect (R D ) and the econd the ndect effect (R I ). The ft depend olely upon the own-pce elatcty of enegy evce demand ( q, p ), whle the econd depend upon the elatcty of demand fo commodty wth epect to the enegy evce ( q, p ) and the GHG ntenty and expendtue hae of that commodty elatve to that of the enegy evce ( ). Hence, commodte wth a mall co-pce elatcty may nevethele contbute a lage ndect ebound effect f they ae elatvely GHG ntenve and/o have a lage expendtue hae (and vce vea). Ung the Slutky equaton, we decompoe Equaton 20 a follow: 18

19 R T w ~,, ~ q x w q x 21 q, p q, p ( ) A noted, the challenge of ncopoatng enegy evce wthn a houehold demand model make t dffcult to mplement th appoach dectly. Hence, n what follow we etmate the equed elatcte wth epect to enegy commodte (l) athe than enegy evce (). Table 3 ummae the equed expeon. Table 3 Analytcal expeon fo the component of the ebound effect Dect ebound effect Indect ebound effect fo commodty Income effect ˆ R D we qe, x R I w eq, x ˆ Subttuton effect ~ R D ~ q e, p e ~ R I ~ q, p e 3.2 Econometc model A wth the othe tude n Table 2, we bae ou houehold demand model on the Lnea Appoxmaton to the Almot Ideal Demand Sytem (LAIDS). Th ha become the model of choce n houehold demand analy nce t ha numbe of advantage ove competng appoache (Deaton and Muellbaue, 1980). A a compome between eoluton and degee of feedom, we plt houehold expendtue nto 12 ubcategoe (Table 4) and aume epaablty to gve a two-tage budgetng famewok (Fgue 1). Houehold ae aumed to ft allocate expendtue between fou aggegate goup (), and then dtbute the goup expendtue between ndvdual commodte wthn each goup (). Th famewok allow expendtue on commodte wthn a goup to be pecfed a a functon of 19

20 goup expendtue and the pce of commodte wthn the goup alone. A wth Mzobuch (2008), the commodty categoe nclude both duable and nonduable. Table 4 Categoe of good and evce Aggegate Goup () Categoy () COICOP Decpton Stage 1 Stage 2 categoy 1. Food and beveage 1 1 Food and non-alcoholc beveage 2 2 Alcoholc beveage, tobacco, nacotc 2. Tanpot Vehcle fuel and lubcant 4 Ret of 7 Othe tanpot 3. Enegy Electcty Ga and Othe fuel 4. Othe good and evce 8 9 Receaton & cultue 9 11 Retauant & hotel Educaton 11 8 Communcaton 12 Othe to Clothng and footwea Othe houng Funhng, houehold equpment & houehold mantenance Health Mcellaneou good and evce Note: COICOP - Clafcaton of Indvdual Conumpton Accodng to Pupoe. Othe houng nclude ent, motgage payment, mantenance, epa and wate upply. Othe tanpot nclude publc tanpot, nonfuel expendtue on pvate vehcle and ome avaton although a tavel fo package holday ncluded wthn eceaton and cultue. Othe fuel nclude old and lqud. 20

21 Fgue 1 Two-tage budgetng model Houehold expendtue Food & beveage Tanpot Enegy Othe good and evce Food & nonalcoholc beveage Vehcle fuel & lubcant Electcty Receaton & cultue Alcoholc beveage & tobacco Othe tanpot Ga Retauant & hotel Othe fuel Educaton Communcaton Othe Let x t epeent the expendtue on aggegate commodty goup n peod t and w t the factonal hae of that goup n total houehold expendtue ( x t ): t x w t 22 x t In the ft tage of the LAIDS model, th pecfed a: w t pt ln( xt / Pt ) 1,..4 1,.. 3 t1 ln w 23 t Whee: and ndex ove the aggegate commodty goup; p t the pce of the aggegate commodty goup n peod t; x t total expendtue pe houehold n that peod; P t the Stone pce ndex fo the aggegate commodte; wt 1 the lagged expendtue hae of commodty goup ;,, tem. The Stone' pce ndex defned a: and ae the unknown paamete and t the eo 21

22 wt 1,..4 ln Pt ln pt 24 Ou model depat fom tandad applcaton of LAIDS by ncludng lagged expendtue hae ( wt 1 ) to captue the neta n pce epone - fo example a a eult of habt fomaton. The ncluon of lag alo educe poblem of eal coelaton (Edgeton, 1997; Klona and Hallam, 2003; Ryan and Ploude, 2009; Shuku, 2002). Snce the lagged expendtue hae um to unty, we only nclude thee n each equaton to avod multcollneaty. 11 We mpoe etcton on the paamete value to enue the eult ae compatble wth conume demand theoy. 12 Specfcally, addng up eque that expendtue on each commodty add up to total expendtue; homogenety eque that quantty demanded eman unchanged f pce and total expendtue change by an equal popoton; and ymmety eque that the Slutky matx ymmetc. Thee etcton ae mplemented a follow: Addng up: 1; 0 ; 0 =1,..4; and 0 =1,..3; Homogenety: 0 =1,..4; Symmety: 11 An altenatve to doppng the lagged budget hae of one commodty would be to mpoe the etcton: Th would not affect the etmated coeffcent. Altenatvely, an unetcted model can be etmated fo both the ft and econd tage and the homogenety and ymmety etcton teted. It common fo thee etcton to be ejected n empcal tude (Keuzenkamp and Baten, 1995). Fo example, the foundatonal LAIDS tudy by Deaton and Muellbaue (1980) ejected thee etcton. The addng up etcton, howeve, alway atfed by doppng one of the equaton. 22

23 The econd tage of the LAIDS model dtbute the goup expendtue ( x t ) between ndvdual commodte wthn each goup. Let x t epeent expendtue on commodty n aggegate goup dung peod t ( ) and w t epeent the factonal hae of that commodty n the expendtue on goup ( x t ): t t x wt 25 x Th pecfed a: w t j pj ln( xt / Pt ) jw jt 1 j 1,.. k j1,..( k 1) ln 26 t Whee: and j ndex ove the commodte wthn aggegate goup (, j ); k the numbe of commodte n aggegate goup ; p t the pce of commodty n aggegate goup n peod t; fo goup ;, j x t expendtue on goup n that peod; and Stone' pce ndex fo goup defned a: j ae the unknown paamete and P t the Stone pce ndex t the eo tem. The t ln P 1,.. k w t ln p t 27 Agan, the addng up, ymmety and homogenety etcton ae mpoed a follow: Addng up: ; ; 0 ; j = 1,..k and j = 1,.(k -1) 1 0 j j 0 23

24 Homogenety: j 0 j = 1,..k Symmety: j j Goddad (1983) deve equaton fo etmatng the hot un expendtue and pce elatcte fo a ngle tage LAIDS model 13, whle Edgeton (1997) deve expeon fo a two-tage model. In the latte, total elatcte ae calculated fom etmate of the between-goup and wthn-goup elatcte. The ntepetaton of thee ummaed n Box 1 and the elevant fomulae ae ummaed n Table 5 (Edgeton, 1997). Both expe the elatcte n tem of quantte athe than expendtue, ung the conveon ndcated n Equaton 10 to 12. Hee, (Konecke delta) equal to unty when = (.e. own-pce elatcty) and zeo othewe. Smlaly, j unty when =j and zeo othewe. 13 Bue (1994) evaluate eveal elatcty expeon fo LAIDS model and fnd thee expeon ae magnally the bet. 24

25 Box 1 Intepetaton of the between-goup, wthn-goup and total elatcte 1. Between-goup expendtue ( q, x ) and pce ( and q, p ~ q, p ) elatcte fo the aggegate commodty goup () epectvely ndcate how the quantty demanded of aggegate goup change followng: a) a change n total expendtue; and b) a change n the pce of aggegate goup holdng total expendtue fxed. 2. Wthn-goup expendtue ( ) and pce ( and q x q,, p j ~ ) elatcte fo each q, p j commodty wthn aggegate goup epectvely ndcate how the quantty demanded of th commodty change followng: a) a change n expendtue on goup ; and b) a change n the pce of commodty j wthn aggegate goup holdng expendtue on goup fxed. Hee, both and j ae wthn the ame aggegate goup. 3. Total expendtue ( ) and pce ( q, x and q, p j ~ q, p ) elatcte fo each commodty j wthn aggegate goup epectvely ndcate how the quantty demanded of th commodty change followng: a) a change n total expendtue; and b) a change n the pce of commodty j holdng total expendtue fxed but allowng expendtue on goup to vay. Hee, and j may be wthn the ame o dffeent aggegate goup. 25

26 Table 5: Analytcal expeon fo the between-goup, wthn-goup and total elatcte wthn a two-tage LAIDS model Elatcty Between-goup Wthn-goup (, j ) Total Expendtue q, x 1 q x 1, q x q, x q, x, w w Uncompenated pce q, p w w q, p j j j w w j q, p q, p q, x ( q, p j j j ) w Compenated pce ~ q p w ~ j, q p w, j j j w w ~ q, p q, p q, x ( q, p j ~ j ~ j ) w Souce: Edgeton (1997); Goddad (1983) 26

27 The fomulae n Table 5 deeve ome explanaton. The fomula fo the total expendtue elatcty fo the th commodty n the th goup (Table 5, lne 2) mply the poduct of the wthn-goup elatcty fo that commodty and the expendtue elatcty of the goup. The fomula fo the total uncompenated pce elatcty (Table 5, lne 3) moe complex. Note ft that when commodte and j ae n dffeent goup, 0 and the expeon educe to: q, p q, j x q, p j w 28 Hee, the ft tem ( q x, ) epeent the change n quantty demanded of commodty followng a change n expendtue on goup ; the econd tem epeent the change n quantty demanded of goup followng a change n the pce of goup ; and the thd tem epeent the hae of commodty j n the expendtue on goup. A hown by Edgeton (1997), the latte equvalent to the change n the pce of goup followng a change n the pce of commodty j ( w j ln p / ln p ). j When and j ae n the ame goup (=), the expeon become: q, p j q, p j q, x ( 1 q, p ) w 29 j Hee, the total co-pce elatcty equal the wthn-goup co-pce elatcty ( ), plu a poduct of thee facto. The ft of thee ( demanded of commodty followng a change n expendtue on goup ; the econd meaue the change n quantty demanded of goup followng a change n the pce of goup ; and the thd epeent the change n the pce of goup followng a change n the 27 q, x q, p j ) meaue the change n quantty

28 pce of commodty j ( w j ln p / ln p ).The malle each of thee tem ae, the malle j the dffeence between the wthn-goup and total pce elatcty. The fomula fo the total compenated pce elatcty (Table 5, lne 4) follow a mla patten. We etmate thee elatcte ung the expendtue hae fo the lat yea of the tme ee (2013). The total elatcte ae ued fo etmatng ebound effect. 3.3 Data Data fo the pce of dffeent commodty goup and houehold cuent expendtue on thoe goup taken fom Conume Tend, publhed by the UK Offce of Natonal Stattc (ONS). The data ued fo etmaton ae annual tme ee fo Data on total houehold numbe fo elected yea taken fom DGLC (2014), wth data on ntemedate yea etmated by lnea ntepolaton. 14 Fgue 2 ndcate the change n expendtue hae ove th peod both between and wthn-goup. Dung th peod, the hae of food n total expendtue almot halved, the hae of tanpot nceaed by 50% and the hae of enegy fell by 30%. Wthn the enegy goup, ubttuton by ga educed the expendtue hae of othe fuel (coal and ol) fom 42% n 1964 to 6% n Thee vaaton ugget that ou eult may be entve to the expendtue hae aumed - fo example, the mean ove the whole tme peod o thoe applyng to We ue the latte n what follow. 14 Two et of tme ee data fo expendtue and mpled deflato (ued fo pce) ae avalable: a) 1964 to 2010 content wth the UK Natonal Account fo 2010 (ONS, 2010) and b) 1997 to 2013 content wth the Natonal Account fo 2011 (ONS, 2011). To ceate a content tme ee ove the full peod, we take the annual gowth ate of expendtue and deflato dung fom ONS (2010) and ue thee to adjut the 1997 data fom ONS (2011). 28

29 Fgue 2 Tend n UK houehold expendtue hae between 1964 and 2013 Total expendtue 80% 70% 60% 50% 40% 30% 20% 10% 0% Food & beveage Enegy Tanpot Othe good & evce Food and non-alcoholc beveage Enegy 80% 60% 70% 50% 60% 50% 40% 40% 30% 30% 20% 10% 0% Food and non-alcoholc beveagc Tanpot Alcoholc beveagc and tobacco 20% 10% 0% Electcty ga Othe fuel Othe good and evce % 70% 80% 70% 60% 60% 50% 50% 40% 40% 30% 20% 10% 0% Vehcle fuel & lubcant 1997 Othe tanpot % 20% 10% 0% Receaton and cultue Retauant & hotel Educaton Communcaton Othe Ou data ouce fo the GHG emon aocated wth dffeent categoe of good and evce the Suey Envonmental Lfetyle Mappng Famewok (SELMA). Th a 29

30 qua-mult-egonal, envonmentally extended nput-output model that povde etmate of the GHG ntenty of UK houehold expendtue n each categoy (n tco 2 e/ ) fo 2004 (Duckman and Jackon, 2008) Thee fgue nclude both the dect emon fom the conumpton of electcty 17, heatng fuel and vehcle fuel, and the emboded emon fom each tage of the upply chan fo good and evce whch may occu ethe n the UK o oveea. We adjut thee etmate to allow fo the emon aocated wth govenment expendtue of poduct taxaton evenue. 18 Fgue 3 (top) how that expendtue on electcty, ga and othe fuel appoxmately twce a GHG ntenve a expendtue on vehcle fuel and appoxmately fou tme a GHG ntenve a expendtue on othe tanpot whch the next mot GHG ntenve categoy. Oveall, expendtue on enegy commodte appoxmately fve tme a GHG ntenve a the hae-weghted mean. But the hgh GHG ntenty of enegy commodte offet by the mall hae of total expendtue (7% - Fgue 3, mddle), wth the eult that dect enegy conumpton only account fo 27% of an aveage houehold GHG footpnt 15 The GHG ntenty of a categoy etmated fom the GHG emon aocated wth that categoy n 2004 (obtaned fom SELMA) dvded by eal expendtue on that categoy n 2004 (efeence yea 2013). The excepton electcty whee emon ae etmated fom 2013 electcty conumpton (n kwh) multpled by an emon facto fo 2013 (kgco 2 e/kwh). Th adjutment degned to eflect the lage educton n the GHG ntenty of electcty ove th peod. It hould be noted that the GHG ntenty of magnal change n electcty conumpton may dffe fom the aveage GHG ntenty. 16 We do not have GHG ntenty etmate fo eale o late yea. But we obeve that GHG ntente have tended to fall ove tme, whle the popoton of emon fom outde the UK' bode ha tended to nceae. 17 Emon fom electcty conumpton ae commonly labelled a dect, although they occu at the powe taton. 18 Envonmentally-Extended Input-Output (IO) model uch a SELMA only nclude the GHG emon aocated wth each expendtue categoy. But expendtue on dffeent commodte nclude vaou taxe (uch a Value Added Tax - VAT) whch n tun ae ued to fund govenment expendtue. Snce govenment pendng a epaate categoy n the natonal account, the aocated GHG emon ae nomally excluded fom the etmated GHG ntente of houehold expendtue. Excluon of thee emon could ba etmate of ebound effect, n patcula becaue dffeng level of poduct taxaton ae appled to dffeent good and evce. Fo example, n the UK thee 20% VAT on mot good and evce; 5% VAT on electcty, ga and othe fuel; zeo ate VAT on mot food poduct; and aound 65% taxaton on vehcle fuel. To elmnate th potental ba we: ft, etmate the GHG ntenty of UK govenment expendtue n 2004; econd, ue th to etmate the GHG emon aocated wth taxaton n each categoy; and thd, add thee to the emon povded by SELMA fo each expendtue categoy. Th n tun lead to an adjuted GHG ntenty of expendtue fo each categoy whch ued n the calculaton of ebound effect. A the GHG ntenty of govenment expendtue elatvely low, th adjutment doe not gnfcantly change ou eult. 30

31 (Fgue 3, bottom), plt between 19% dometc enegy (.e. electcty, ga and othe fuel) and 8% vehcle fuel. The categoy povdng the laget ngle contbuton (25%) to total emon othe good and evce whch nclude expendtue on clothng, houng mantenance, wate and funhng and account fo 45% of expendtue. The next hghet othe tanpot (12%) whch nclude non-fuel cot fo pvate ca, publc tanpot and ome a tavel. Snce thee categoe have both a elatvely hgh expendtue hae and a elatvely hgh GHG ntenty they povde a gnfcant contbuton to total emon (42%). Ou etmate of GHG ntente allow fo the vaaton of poduct taxaton between categoe: namely VAT exempton fo food and non-alcoholc beveage, lowe ate VAT fo dometc enegy and hgh taxaton of vehcle fuel (~60% of etal pce). The latte contbute to the compaatvely low GHG ntenty of vehcle fuel compaed to dometc enegy. 31

32 Shae of expendtue tco2e/ Fgue 3 GHG ntenty of expendtue (2004), hae of total expendtue (2013) and hae of total GHG emon (2013) by categoy fo an aveage houehold % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 32

33 Shae of GHG emon 30% 25% 20% 15% 10% 5% 0% 4 Reult 4.1 Econometc eult The two-tage budgetng aumpton model n Fgue 1 lead to a total of 16 equaton n fve goup. The equaton n each goup ae etmated a a ytem ung the Iteatve Seemngly Unelated Regeon (ISUR) method whch utable fo mpong coequaton etcton and coect the etmate fo any coelaton of the eo tem between equaton. The equaton n each goup ae etmated wth homogenety and ymmety etcton mpoed. 19 The addng up etcton mpoed by doppng one of the equaton n each goup. 19 We alo etmated the equaton n each goup wthout mpong homogenety and ymmety etcton, and ued a Wald tet to tet fo thee etcton both ndvdually and n combnaton. Both the homogenety and ymmety wee ejected fo the enegy goup and ymmety wa ejected fo all goup. Howeve, t common fo thee etcton to be ejected n demand model. A Edgeton (1997) note: " th hould not be taken a an ndcaton of a falue of the law of demand, nce the Slutky condton ae deved at the mco level and only nvaant to aggegaton unde vey pecal aumpton. The elatcte calculated fom the model theefoe mut be ntepeted a aggegate elatcte and not mco elatcte 33

34 Annex 2 ummae the paamete etmate fo each goup of equaton and the eult of the etcton. Annex 3 ummae the between-goup elatcty etmate, and Annex 4 ummae the wthn-goup etmate. The mot elevant eult ae the total elatcty etmate fo the enegy and tanpot goup whch ae ummaed n Table 8 to 10. Fo eae of ntepetaton, all elatcte ae expeed fo quantte (q) athe than expendtue hae (w). Lookng ft at Annex 2 (Table A.3 to A.7), we ee that the oveall ft of the equaton good, wth moe than two thd of the paamete etmate beng tattcally gnfcant at the 5% level and wth mot of the equaton havng an adjuted R 2 exceedng 90%. We alo apply the Potmanteau eal coelaton tet fo each goup and fnd no evdence of eal coelaton. Lookng at the total elatcty etmate (Table 6-8), we make eveal obevaton. Ft, the total expendtue elatcte (Table 6) fo dometc enegy ae elatvely low 0.07 fo electcty and 0.09 fo ga. Thee value ae boadly compaable wth thoe etmated fom co-ectonal data n ou pevou wok (Chtn et al., 2014) whee we howed that hghncome goup have vey low expendtue elatcte fo thee commodte whch n tun ha a gnfcant nfluence on the oveall mean. In contat, the etmated expendtue elatcte fo othe tanpot and the ub-categoe of othe good and evce exceed unty, ndcatng that they ae luxuy good. comng fom a epeentatve conume. To enue compatblty wth conume demand theoy, we chooe to mpoe the etcton. 34

35 Second, the total uncompenated own-pce elatcte (Table 8) fo enegy commodte have the expected gn wth value of fo electcty, fo ga and fo vehcle fuel. Fo compaon, a evew of tude by Epey and Epey (2004) found a mean hotun elatcty of (medan -0.28) fo electcty; a tudy by Ache et al. (2008) found hot un elatcte of houehold natual ga demand to be o le; and a evew of tude by Goodwn et al. (2004) found a mean hot-un elatcty fo vehcle fuel of Hence, ou etmate appea to be at the hgh end of the ange found n the lteatue - epecally fo ga and vehcle fuel. Thee hgh own-pce elatcte wll n tun tanlate nto hgh etmate of the dect ebound effect. Snce the expendtue elatcte fo enegy commodte ae elatvely mall, the own-pce epone pmaly dven by ubttuton effect a ndcated by the nea equvalence of the compenated and uncompenated elatcte fo thee commodte (Table 7 and 8). Thd (Table 8), electcty and ga ae found to be ubttute, and both of thee ae etmated to be complement fo vehcle fuel. In addton, both othe tanpot and all ubcategoe wthn othe good and evce ae etmated to be complement to enegy commodte and wll theefoe contbute a negatve ndect ebound effect. Food and dnk poduct ae etmated to be ubttute to electcty and ga and wll contbute a (mall) potve ndect ebound effect. Howeve, food and dnk ae complement to vehcle fuel. Oveall, the eult ugget that the ubttuton effect fo enegy commodte outwegh the ncome effect, and change n the pce of one o moe enegy commodte wll have the laget mpact on the quantty of enegy commodte demanded both n tem of the ownpce epone and the co-pce epone between enegy commodte. Impact on the quantty demanded of othe commodte ae much malle. Snce enegy commodte ae 35

36 alo GHG ntenve, they ae lkely to domnate the total ebound effect. Th demontated below, whee we epot the ebound eult. 36

37 Table 6 Total expendtue elatcte ( ) x q Expendtue elatcty Table 7 Total compenated co-pce elatcte- enegy goup ( ~ ) q p j Enegy Tanpot Food and beveage Othe good and evce Electcty Ga Othe fuel Vehcle fuel Othe tanpot Food and Enegy Tanpot Food and beveage Othe good and evce Electcty Ga Othe fuel Vehcle fuel Othe tanpot Food & nonalcoholc beveage Alcoholc beveage & tobacco Receaton and cultue Retauant and hotel Educaton Communcaton Othe nonalcoholc beveage Alcoholc beveage & tobacco Receaton and cultue Retauant and hotel Educaton Communcaton Othe Electcty Ga Othe fuel Vehcle fuel

38 Table 8 Total uncompenated co-pce elatcte-enegy goup ( ) q p j Enegy Tanpot Food and beveage Othe good and evce Electcty Ga Othe Vehcle Othe Food and Alcoholc Receaton Retauant Educaton Communcaton Othe fuel fuel tanpot nonalcoholc beveage beveage & tobacco and cultue and hotel Electcty Ga Othe fuel Vehcle fuel

39 4.2 Etmate of ebound effect The etmated ebound effect ae peented n fou way to llutate both the magntude and the undelyng dve. Specfcally, we ndcate the elatve contbuton of: a) ncome and ubttuton effect; b) dect and ndect ebound effect; c) dect and emboded emon; and d) ndvdual commodte. Ou etmate of the total ebound effect ae 41% fo ga, 48% fo electcty and 78% fo vehcle fuel and 55% fo all thee n combnaton (Fgue 4). Thee etmate ae lage than many n the lteatue, although malle than thoe by Bannlund et al (2007) and Mzobuch (2008). Net ubttuton aco all commodte account fo 60-70% of the total ebound fo ga and electcty epectvely and ~90% fo vehcle fuel. In othe wod, ubttuton effect domnate. Th demontate the mpotance of captung ubttuton effect and ugget that tude that only etmate ncome effect (.e. ely olely upon expendtue elatcte) could gnfcantly undeetmate the total ebound - patculaly fo vehcle fuel. Ou etmate of dect ebound effect ae 59% fo ga, 41% fo electcty and 56% fo vehcle fuel (Fgue 5) - ndcatng that they account fo the majoty of the total ebound. Fo ga, the dect ebound effect exceed the total ebound effect, nce the ndect ebound effect negatve. Thee etmate ae at the hgh end of the ange n the lteatue, patculaly fo vehcle fuel whee mot (pmaly US) tude etmate dect ebound effect of 20% o le (Soell and Dmtopoulo, 2007b). Fgue 6 demontate that the ncome effect motly deve fom othe commodte (ndect ebound) whle the ubttuton effect motly deve fom the enegy evce telf (dect ebound). Agan, tude that only etmate ncome effect could eoneouly conclude that the ndect ebound 39

40 effect account fo the majoty of the total ebound - wheea thee eult how the oppote. Dect emon fom enegy commodte account fo between 70 and 80% of the total ebound (Fgue 7). Th follow dectly fom the above, nce t the dect ebound effect that domnate the oveall ebound effect and th wholly dect emon. Income effect ae domnated by emboded emon (.e. non-enegy commodte) whle ubttuton effect ae domnated by dect emon (.e. enegy commodte) (Fgue 8). Snce the ubttuton effect lage than the ncome effect, ubttuton both wthn and between enegy commodte have the domnant nfluence on the oveall eult. Agan, tude that neglect ubttuton effect could eoneouly conclude that the total ebound effect cont pmaly of emboded emon - wheea thee eult how the oppote. Fnally, 40

41 Fgue 9 llutate the elatve contbuton of dffeent commodte to the total ebound (nomaled to 100%). Th agan how the domnance of own-pce effect (dect ebound). Subttuton between electcty and ga dampen the ebound effect fo thee two commodte, a doe ubttuton away fom food and beveage and othe good and evce. In contat, the complementay elatonhp between enegy commodte and both othe tanpot and vehcle fuel contbute a potve ebound effect. Fo vehcle fuel, the complementay elatonhp wth electcty, ga and (patculaly) othe tanpot nceae the total ebound. Snce othe tanpot nclude non-fuel cot fo vehcle, a complementay elatonhp wth vehcle fuel to be expected. Fgue 4 Etmated ebound effect plt by net ncome and ubttuton effect 80% 70% 60% 50% 40% 30% 20% 10% 0% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Subttuton effect Income effect 41

42 Fgue 5 Etmated ebound effect - plt by dect and ndect ebound effect 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Dect ebound Indect ebound 42

43 Fgue 6 Net ncome and ubttuton effect - plt by dect and ndect ebound Income effect Subttuton effect 80% 70% 60% 20% 50% 40% 15% 30% 20% 10% 10% 0% -10% -20% 5% -30% -40% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) 0% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Dect ebound Indect ebound Dect ebound Indect ebound Fgue 7 Etmated ebound effect - plt by dect and emboded emon 80% 70% 60% 50% 40% 30% 20% 10% 0% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Dect emon (electcty, ga, othe fuel and vehcle fuel) Emboded emon 43

44 Fgue 8 Net ncome and ubttuton ebound effect - plt by dect and emboded emon Income effect Subttuton effect 20% 15% 80% 70% 60% 50% 10% 40% 30% 5% 20% 10% 0% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Dect emon (electcty, ga, othe fuel and vehcle fuel) Emboded emon 0% -10% Ga Electcty Vehcle fuel 1, 2 and 3 n combnaton (equal %) Dect emon (electcty, ga, othe fuel and vehcle fuel) Emboded emon 44

45 Fgue 9 Contbuton of dffeent commodty goup to the total ebound effect Ga Electcty 150% 100% 50% 0% -50% -100% 100% 80% 60% 40% 20% 0% -20% -40% Subttuton effect Income effect Subttuton effect Income effect Vehcle fuel Combned 100% 80% 60% 40% 20% 0% -20% -40% 100% 80% 60% 40% 20% 0% -20% Subttuton effect Income effect Subttuton effect Income effect 5 Summay and dcuon In ou pevou tudy of combned dect and ndect ebound effect fo UK houehold (Chtn et al., 2014) we concluded that the total ebound effect wa modet (0-32%) fo meaue affectng dometc enegy ue and lage (25-65%) fo meaue affectng vehcle fuel, and that t pmaly deved fom nceaed conumpton of non-enegy good and 45

46 evce. We futhe uggeted we may have undeetmated the total ebound nce we dd not model ubttuton effect. The peent tudy how that th uggeton wa coect. By ung pce athe than expendtue elatcte, we now etmate gnfcantly lage ebound effect, namely 41% fo dometc ga ue, 48% fo electcty and 78% fo vehcle fuel. The pmay ouce of th ebound nceaed conumpton of cheape enegy evce (.e. dect ebound), and th pmaly dven by ubttuton effect. A clea mplcaton of th fndng that tude that gnoe ubttuton effect (e.g. thoe n Table 1) wll undeetmate the total ebound. Snce all ebound contbute to GHG emon, an undeetmate of ebound effect may lead to an oveetmate of the mpact of clmate polce on global emon. Polcymake ae pmaly concened wth natonal GHG emon and dect ebound, o tend to neglect emboded emon and ndect ebound. But n th patcula cae, t dect ebound that domnate. In pactce, many tude focu olely upon dect ebound effect and etmate thee fom tme-ee data on ndvdual enegy evce (e.g. tanpot, heatng). Snce, by defnton, thee neglect ndect ebound effect, the eult may alo undeetmate the total ebound (unle, that, the ndect ebound effect negatve). Howeve, ou eult ugget that uch tude may povde a bette appoxmaton to the total ebound effect than do tude that etmate the latte ung only expendtue elatcte. Snce the dect ebound effect appea lage than the ndect ebound effect, eo n etmatng the fome wll matte moe than eo n etmatng the latte. We upect, howeve, that the peent tudy (along wth othe n Table 2) may oveetmate the total ebound effect. The pmay eaon fo th that we aume the own-pce 46