Squaring the energy efficiency circle: evaluating industry energy efficiency policy in a hybrid model setting

Improving energy efficiency within the industry will play a central role in mitigating greenhouse gas emissions by reducing the use of fossil fuels. Nevertheless, the ex-ante evaluation of energy-efficiency policies largely remains an unresolved challenge. Understood within a theoretical economic framework, the root of the challenge is the simultaneity and interaction between three primary effects: an activity, a price, and a technical effect. This paper demonstrates how the IntERACT model, a Danish hybrid model, captures each effect and their interactions endogenously. The paper finds that a specific energy efficiency policy leads to an additional reduction in industrial energy use of around 5% in the year 2030, of which a policy-induced reduction in the energy efficiency gap accounts for half. The results reflect a total rebound effect of 12.5% and an implied elasticity of energy service demand of 16 around 15% across industrial sectors.