Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect.

We estimate the rebound effect for motor vehicles, by which improved fuel efficiency causes additional travel, using a pooled cross section of US states for 1966-2001. Our model accounts for endogenous changes in fuel efficiency, distinguishes between autocorrelation and lagged effects, includes a

measure of the stringency of fuel-economy standards, and allows the rebound effect to vary with income, urbanization, and the fuel cost of driving. At sample averages of variables, our simultaneous-equations estimates of the short- and long-run rebound effect are 4.5% and 22.2%. But rising real income caused it to diminish substantially over the period, aided by falling fuel prices. With variables at 1997-2001 levels, our estimates are only 2.2% and 10.7%, considerably smaller than values typically assumed for policy analysis. With income and starting fuel efficiency at 1997-2001 levels and fuel prices 58 percent higher, the estimates are still only 3.1% and 15.3%, respectively.

1. INTRODUCTION

It has long been realized that improving energy efficiency releases an economic reaction that partially offsets the original energy saving. As the energy efficiency of some process improves, the process becomes cheaper, thereby providing an incentive to increase its use. Thus total energy consumption changes less than proportionally to changes in physical energy efficiency. This "rebound effect" is typically quantified as the extent of the deviation from proportionality. It has been studied in many contexts, including residential space heating and cooling, appliances, and transportation (Greening, Greene, and Difiglio, 2000).

For motor vehicles, the process under consideration is use of fuel in producing vehicle-miles traveled (VMT). When vehicles are made more fuel-efficient, it costs less to drive a mile, so VMT increases if demand for it is downward-sloping. That in turn causes more fuel to be used than would be the case if VMT were constant; the difference is the rebound effect. Obtaining reliable measures of it is important because it helps determine the effectiveness of measures intended to reduce fuel consumption and because increased driving exacerbates congestion and air pollution. For example, the rebound effect was an issue in the evaluation of recently adopted greenhouse-gas regulations for California (CARB, 2004, Sect. 12.3-12.4). It has played a prominent role in analyses of the Corporate Average Fuel Economy (CAFE) regulations in the US and of proposals to strengthen them.