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https://www.overleaf.com/project/5c76f90439a149176b503b75 When Does Eco-Efficiency Rebound or Backfire? An Analytical Model R´ egis Chenavaz Kedge Business School, Aix-Marseille School of Economics Stanko Dimitrov University of Waterloo Frank Figge Kedge Business School, Macquarie University 11th Workshop on Dynamic Games in Management Science Montr´ eal, Canada

Introduction Model Motivation Argument Literature Results Take Away Motivation Different firms worry about environmental issues Huppes (2005), Picazo-Tadeo (2012), Sheffi (2018) Coca-Cola, Nestl´ e, and AB InBev (beer) focus on water use Siemens makes efforts on the use of energy Apple, Tesco (retailing) and Chiquita (bananas) examine their carbon footprint R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 2 / 26

Introduction Model Motivation Argument Literature Results Take Away Motivation Eco-efficiency is doing business using natural resources more efficiently World Business Council for Sustainable Development (2002) Eco-efficiency offers profitable opportunities Sheffi (2018) Diminish the environmental burden Lower (variable) cost Please the consumer More sales Mitigate the risk of eco-litigation Less NGO complaint and consumer boycott R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 3 / 26

Motivation Eco-efficiency appears financially wise... Bank (2002), Wall Street Journal (2016) ... but, is it always environmentally wise?

Introduction Model Motivation Argument Literature Results Take Away Literature There is a rebound effect when eco-efficiency does not reduce the resource use as expected Khazzoom (1980), Wirl (1996), Sorrel et al. (2008, 2009), Jacobs and Subramanian (2012), Agrawal and Bellos (2017), Benjaafar et al. (2018)... Increased automobile fuel efficiency leads to more driven miles, and more net fossil consumption than expected Jenkins Jr. (2018) In the US, the rebound effect cancels out 10% of CO 2 savings from greater car efficiency Van Benthem and Reynaert (2015) Rebound effect with eco-efficient appliances such as LED lights Mc Ginty (2014), Zink and Geyer (2016) R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 5 / 26

Introduction Model Motivation Argument Literature Results Take Away Literature Extreme cases of rebound There is a backfire effect (over rebound) when eco-efficiency even increases the total resource use Also known as Jevons paradox (1866) There is a reverse rebound (super conservation) when eco-efficiency makes more environmental savings than expected Surveys of Greening et al. (2000) and Saunders (2008) R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 6 / 26

Introduction Model Motivation Argument Literature Results Take Away Literature Example: an increase of eco-efficiency of 10% leads for the total resource use (=ressource use per unit*demand) to an increase = ⇒ backfire effect demand must increase “strongly” with eco-efficiency no change = ⇒ total rebound a decrease of less than 10% = ⇒ partial rebound a decrease of 10% = ⇒ zero rebound a decrease of more than 10 % = ⇒ reverse rebound demand must decrease with eco-efficiency R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 7 / 26

Introduction Model Motivation Argument Literature Results Take Away Literature Survey of Saunders (p. 2203, 2008) Super-conservation (reverse rebound) is a highly counter-intuitive phenomenon . How can, say, a 1% increase in fuel efficiency result in a 2% decline in fuel use? The answer lies in the fact that profit maximization in response to a change in τ invokes a host of complex interactions : cross-substitutions among factors, changes in their marginal productivities (and therefore prices ), changes in the way prices affect the cost function, and changes in the cost function itself. In their impact on rebound some of these will be negative, some positive. R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 8 / 26

Introduction Model Motivation Argument Literature Results Take Away Literature Rebound effect: the cost effect explanation Surveys of Greening et al. (2000), Sorrell and Dimintropoulos (2008), Saunders (2008) Improved eco-efficiency for a product decreases the cost and thus the price of that product, which increases the demand Greater demand offsets the reduction in resource use Reverse rebound: no explanation Survey of Saunders (2008) What, but not why Parametric functions for demand and cost Yield strong but specific results Cancel out some of the effects at play R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 9 / 26

Introduction Model Motivation Argument Literature Results Take Away Approach and Contribution Dynamic pricing and eco-efficiency investment policies of a firm within an optimal control framework Joint consideration of supply- and demand-sides in the firm’s dynamic behavior with general (opposing parametric) demand and cost functions We measure the known cost effect on the supply-side and the intermediary role of price We find two new effects on the demand-side, which influence the rebound What and why of the reverse rebound R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 10 / 26

Introduction Model Argument General Formulation Results Take Away General Formulation: Main Variables Dynamic behavior of a firm in a monopoly situation t ∈ [0 , T ] continuous time p t price - decision (control) variable u t investment in eco-efficiency - decision (control) variable e t eco-efficiency level - state variable � � � ∂ x y � � η x / y = � = elasticity of x with respect to y ∂ y x R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 11 / 26

Introduction Model Argument General Formulation Results Take Away General Formulation: Eco-Efficiency Dynamics de t dt = E ( u t , e t ) Investment increases eco-efficiency with diminishing returns Eco-efficiency decays autonomously over time ∂ u > 0 , ∂ 2 E ∂ E ∂ u 2 < 0 , ∂ E ∂ e < 0 Parametric example: de t dt = √ u t − δ e t Similar to Saha et al. (2017) and Zhang et al. (2017) R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 12 / 26

Introduction Model Argument General Formulation Results Take Away General Formulation: Demand Consumer are sensitive to price and to eco-efficiency (greenness) Eurobarometer (2013), Laroche et al. (2001), Nielsen (2014) D = D ( p t , e t ) Demand decreases with the price and increases with eco-efficiency Consumers are marginally less price sensitive for greener products ∂ e � 0 , ∂ 2 D ∂ D ∂ p < 0 , ∂ D ∂ p ∂ e � 0 Parametric example: D = a 0 − a 1 p t + a 2 e t Dai and Zhang (2017), Saha et al. (2017), Zhang et al. (2017) R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 13 / 26

Introduction Model Argument General Formulation Results Take Away General Formulation: Resource and Cost Resource is an environmental input that disappears in the production process, like raw material, water, or energy Sheffi (2018) The resource use per unit produced decreases with eco-efficiency dR R = R ( e t ) , de � 0 The unit production cost increases with the resource use dC C = C ( R ) , dR � 0 Consequently, the unit cost decreases with eco-efficiency dC de = dC dR C = C ( R ( e t )) , de � 0 dR R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 14 / 26

Introduction Model Argument General Formulation Results Take Away Objective of the Firm π = π ( p t , u t , e t ) profit π = [ p t − C ( R ( e t ))] D ( p t , e t ) − u t Intertemporal profit maximization � T e − rt π dt max p � 0 , u � 0 0 subject to de t dt = E ( u t , e t ) R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 15 / 26

Introduction Model Profit Maximization Argument Impact of Eco-Efficiency on Price Results Effects at Play Take Away Profit Maximization p , C p ∗ ✻ Markup Profit D ( p , e ) ❄ ✻ Cost ❄ C ( R ( e )) ✛ ✲ D D ∗ Sales There is an optimal relationship between price and investment ...and thus between price and eco-efficiency: p = p ( e ) The profit-maximizing price trades-off Markup p − C ( R ( e )) Sales D R´ egis Chenavaz When Does Eco-Efficiency Rebound or Backfire? GERAD 2019 16 / 26