Improving efficiency is a core measure to reduce energy demand and associated emissions, yet actual performance invariably lags expectations. This is widely understood to occur due to the rebound effect, where the cost savings from improving efficiency are spent on other energy and emissions-generating activities. Notwithstanding the environmental negative of rebound, its associated potential welfare benefit is less understood, thus complicating the analysis of sustainable development outcomes. To develop a deeper understanding of rebound and associated welfare effects, this study innovates by considering both in a unified framework using a hybrid methodology and Taylor expansion. The consumer welfare effect is specified in dual form to the rebound effect, and a classification of four consumer types is obtained accordingly. The methodology is applied to China’s urban households from 1995 to 2018. The rebound effects for carbon dioxide, sulfur dioxide, nitrogen oxides, and particulates emissions, are found to be in the range of 77–80 %. The welfare effect, a potentially desirable outcome, is estimated to be 4 %. The results demonstrate that rebound has drained most of the expected environmental improvement, while simultaneously generating a substantial consumer welfare benefit associated with energy consumption. It is concluded that the average urban resident in China can be appropriately characterised as ‘insufficient in demand’, implying a challenge to short-run transition. The conceptual and analytical novelty of the study can support the proposal of innovative policy recommendations, through re-aligned energy efficiency policies, that can minimise rebound, while improving welfare in parallel.