Technological progress is one of the means of reducing energy usage and carbon dioxide (CO2) emissions. However, this reduction, in turn, leads to a reduction in the real cost of energy services per unit, which results in an increase in the demand for energy services. Therefore, a reduction in the anticipated CO2 emissions caused by a technological improvement might be partially offset in response to the cost reduction. Previous studies have referred to this effect as the “rebound effect.” A large amount of empirical evidence on the rebound effect exists; however, most of these studies assume an exogenous improvement in energy efficiency, and thus, capital costs that may decrease the magnitude of the rebound effect are not taken into account expressly. This paper extends the scope of the research conducted by Brannlund et al. [Brannlund, R., Ghalwash, T., Nordstrom, J., 2007. Increased energy efficiency and the rebound effect: effects on consumption and emissions. Energy Economics 29, 1–17] in terms of two aspects: (i) considering capital costs explicitly as additional capital costs and (ii) adapting an iterating procedure, and estimating the rebound effect, using Japanese household data. As a result of our empirical analysis, we conclude that the rebound is approximately 27%. However, we also find that ignoring additional capital costs leads to an increase in the rebound effect. In the case of Japanese households, the magnitude of the rebound effect increases to approximately 115%. Moreover, our simulation study shows that only a one-time iteration of Brannlund et al. [Brannlund, R., Ghalwash, T., Nordstrom, J., 2007. Increased energy efficiency and the rebound effect: effects on consumption and emissions. Energy Economics 29, 1–17] may lead to a biased result.
