Unraveling the interplay of substitution elasticities and the green energy rebound effect

This paper examines how technological progress in either green or fossil energy affects the consumption of both energy types within a neoclassical growth model that explicitly separates energy inputs—unlike the original Saunders (1992) framework. By incorporating substitution elasticities between production factors, we investigate whether improvements in one sector genuinely displace fossil fuels or instead generate structural rebound effects that increase total energy use. Using alternative functional forms—Cobb–Douglas and nested CES—we show that when the elasticity of substitution exceeds one, technological progress in either green or fossil energy can amplify the use of one or even both energy types, potentially triggering backfire effects, whereas low substitution elasticities moderate this impact. These findings highlight that the environmental effectiveness of technological change depends critically on production structures and substitution possibilities, offering policy-relevant insights for managing systemic rebound mechanisms.