Estimating the rebound effect of technological improvement in Iran’s industry sector

Rebound effect refers to the phenomenon that energy savings from improvement in energy efficiency are lower than expected due to unintended second-order effects. The main reason of improving energy efficiency is Technological improvement. According to Khazzoom formula, the rebound effect of improving technology is equal to price elasticity of demand so in this research natural gas demand function is estimated. In addition to the economic drivers (natural gas price, price of substituted energy factors, industry value added), there are number of exogenous factors that drive energy demand. This research therefore uses Structural Time Series Model to estimate natural gas demand in Iran`s industry sector during 1988 to 2009 and then Khazzoom rebound effect is calculated. Estimated short run and long run rebound effect in Iran`s industry sector are 63 percent and 133 percent respectively, with a generally increasing UEDT in a decreasing rate. UEDT has upward sloping but level of UEDT is fixed during the period of research so the model is “smooth trend model”. Relating to the research findings improving technology in Iran`s industry sector reduces Natural gas consumption up to 37 percent in short run. But in long time period increases Natural gas consumption up to 133 percent. So in short run technological improvement can reduce consumption approximately but in long run price policy reform should be used simultaneously.