The Rebound Effect of Higher M.P.G.

In my last post, I blogged about my (mostly) favorable reaction to California’s program to increase fuel economy. But for the record, I should mention a few petty details — like the fact that these regulations will increase congestion, damage our roads, cut tax revenues, promote (for better or worse) low-density suburban development, and reduce pollution less than advertised.

Oh, and by the way, they will kill people. Other than that, they’re going to be great!

A couple of perceptive commenters (good call, Richard Sprague) identified the reason why all of this will take place. It is known to economists as the “rebound effect,” and it applies to all forms of energy efficiency, not just fuel economy. The theory is pretty simple. A car that gets better mileage needs less gas, needing less gas makes driving cheaper, and when something gets cheaper the demand for it rises. Better fuel economy will cause us to travel more than we otherwise would have, with all the good and bad this implies.

The question, of course, is how big the rebound effect truly is. In 2000, Lorna A. Greening of the International Resources Group, David L. Greene of the Oak Ridge National Laboratory, and Carmen Difiglio of the International Energy Agency reviewed 22 studies on this issue. The research suggested that miles driven would increase by 10 to 30 percent of the percent increase in fuel economy.

A more recent paper by the distinguished urban economist Kenneth A. Small and his co-author Kurt Van Dender (both of the University of California, Irvine) found that the rebound is probably shrinking over time, but that there still is a long-term effect of 10.7 percent (given income levels and fuel prices for the period 1997 to 2001).

A rebound of 11 percent is far from catastrophic in terms of energy savings; should the new regulations come into effect, we will consume a lot less fuel, which means a big net improvement in our welfare and a big net reduction in Mahmoud Ahmadinejad‘s.

But an effect of this magnitude is not trivial either. All else being equal, the new standards will probably increase miles driven by several percent (an approximately 11 percent rebound multiplied by a 40 percent improvement in car and light truck fuel economy implies about 4.4 percent more miles driven in those classes of vehicles).

This may be a good thing; all those new trips will make people happy. But at the same time, some of those trips will be taken on crowded freeways at 5 p.m. in Hummers with worn-out mufflers that are leaking oil and are piloted by drunk drivers who are on their way to pick up a single pack of imported cigarettes.

Travel brings lots of benefits, but if we do think our current level of auto use is excessive, improvements in fuel efficiency make it even more imperative that we control demand through other measures. Sorry if I’m being redundant, but the use of direct forms of pricing like the gas tax, tolling, or a more general mileage tax that combines the two may be necessary to convert the rebound into a slam dunk.


It's not rocket science.

Tax it!

Follow the Norwegians on this one. Third largest exporter of oil yet through taxes they have darn near the most expensive gasoline in the world.

And don't think it doesn't work. Their gasoline consumption is less than 60% of that of Americans.

Bravo Norway!

I am sickened to see gasoline under US$3.00 per gallon.

It doesn't matter if you care about global warming, dependence on the Middle East, congested roads, etc. The simple truth is that oil is finite.


Just increase the gas tax and everything will be fine. We are going to have to adjust the gas tax anyway as more electric and other alternative fuel vehicles take the place of petro fueled vehicles.

We are trying to reduce airborne particulates and our dependence on foreign energy, not reduce the cost of driving petro fueled vehicles. Increasing fuel economy is only half the solution.


Agree with 2 previous posts. Increase the gas tax. It will happen soon. Your gloom and doom predictions won't come true.


hello- where is expanding mass transit?- oh yeah, i forgot- Obama threw it on the trash heap to make room for kickbacks (ahem) tax cuts- i seriously doubt our children will forgive us- we have the opportunity to build mass transit infrastructure and get people back to work- instead the impetus is about smarter cars and fiddling while the economy burns


The most important phrase in your article is this: "all else being equal".

You shouldn't assume that the habits of American drivers alone can effect the price of gas to such a degree as to lower its worldwide cost significantly. Lessening our demand for gas says nothing about drivers in other parts of the world (China, India) where usage will undoubtedly go up over time.

When demand picks up again in our economy (and it surely will) the price of gas will go up, too, no matter how much we conserve here. But if we have more fuel efficient cars here, we won't feel that increase as much as drivers in the developing world.

Charles Carreon

Skip the auto bailout, and send everyone a rebate check to buy a Prius. Let Toyota hire all the workers. Kiss the unions goodbye. Shutter Detroit. Move to the Sun Belt. Free associate.

Chris S.

I applaud an idea that T. Friedman has tried to popularize: using taxes to set a "floor" price for the price of crude oil and gasoline at somewhere in the neighborhhod of $100/bbl and $3/gal respectively. ( I assume that industrial fuel oils would have a similar price structure.)

This would accomplsh the following:
1) With a proce floor for gasoline, consumers would begin to drive less and demand higher fuel efficiency automobiles as they would no longer expect the price "to come back down". Carmakers would respond faster and with a lot less whining than new CAFE standards elicit.
2) With a floor for crude and industrial fuel oil prices, businesses would have a clear incentive to invest in energy efficiency through improved plant design as well as improved technologies.
3) With price floors for energy set and known, businesses and investors in alternative energy would have new stability in their business models which would lead to greatly increased investment in a wide range of energy technologies in early stages of development.


David Carty

This Freakonomics entry seems to totally discount comfort. How will the expected total miles increase of driving a high-mileage car versus a luxury SUV be affected by how comfortable the driver is?

martin dijkema

The answer is to split the USA into separate countries. The Northeast, together with the Left coast can unite with Canada, and the rest of the country can secede.

Let's be honest with each other. We do not want to live together. We want a free market economy and the rest of you in the NE and the Left coast want a socialist state. The comments here that you actually want to be taxed higher proves the point clearly.

We had the Boston Tea Party to get away from George III taxes but now we are dealing with an out of control big government mania in the form of Obama, Pelosi and Reed and the rest of you cult followers.

Let us go our separate ways amicably, before we start to pick up our weapons.


We don't import from Iran. In fact some of the gasoline they import is probably ours.

The only thing that needs serious controls and restraints is government.

There would be no housing bubble or credit meltdown if government had kept liberal politics out of the regulatory market. Government is also why mass transit is the colassal failure that it is.


Advocates for increasing tax seem to have little compassion for poorer citizens, especially in rural areas, who can not buy new cars and have to drive long distances for work, shopping, health care, etc.

Please do not tell them to move (to the more expensive areas which they can not afford and where they do not have a family/social network) or to use public transportation, which does not exist.


YES!! I agree with the suggestions to increase our TAXES on gas & oil. This would assist in bringing our economy back to stable ground and make the private & public sectors place their focus where it belongs - GREEN TECHNOLOGIES. Welcome to the 21st C, the sooner we change the better for mankind!!! I have written to my senators and congressmen recommending these tax increases and I am just getting by. Everyone needs to support this increase - so that we have a future!

mike b

It is true that the tighter standards may increase driving, but the subprime mess will reduce driving simultaneously. The logic is that housing demand in the exurbs has dropped precipitously. These are the new developments built in the far off suburbs where pricing has collapsed. Housing demand in inner suburbs and in cities has fallen less dramtically since there is was less of an increase in square footage during the real estate boom in these areas.
Plus the resulting unemployment from the credit crisis will reduce driving.
Because of this built in reduction in demand, it is the perfect time to force higher standards since the reduction in miles driven have already led to drastically lower oil prices.
Our failing economy is proving to be our best foreign policy in years.


"some of those trips will be taken on crowded freeways at 5 p.m. in Hummers with worn-out mufflers that are leaking oil and are piloted by drunk drivers who are on their way to pick up a single pack of imported cigarettes."?

Isn't the rebound effect specific to the people actually receiving better gas mileage? So won't the extra trips be driven by careful, considerate treehuggers in efficient vehicles on their way to commune with nature or visit the ashram to achieve inner peace? ;-)

marcus medler

All this analysis may be true and price does kind of effect behavior but if you think Americans are rational with their spending, you are not looking at lottery ticket sales, gambling and latte purchases.

Charlie S

Although i applaud the effort to focus attention on the rebound effect--nothing ever works as well as we think it will or saves as much money as we expect--the findings of the studies cited do not justify the tenor of this column, which seems to imply that energy efficiency will make things worse on net. Please take the extra step of monetizing the savings (in terms of energy consumed, pollution generated, etc.) and the costs (in terms of the other effects) and provide a net figure. When doing so, figure that lower tax payments (because of fewer gallons bought) are not losses but transfers (from states to drivers), and treat other items appropriately.

Deserves Fudge

Fuel-efficient new cars are expensive. They will be purchased by people who can afford them. It seems unlikely that affluent people are currently limiting their mileage because of high fuel costs. It follows that they are unlikely to increase their mileage when their vehicles' fuel efficiency increases. Less affluent people probably do limit their driving in response to high fuel costs and low vehicle efficiency, but those folks generally don't buy new cars. Granted, improved fleet standards will eventually push efficient cars into the hands of the poor, but only after 5 or 10 years. Intuitively, it seems that this delay would largely eliminate the rebound effect that the author describes.

Daniel W.

I feel we may be ignoring the most valuable resource consumed with travel... time. Does the fact that the gas will cost the same mean people will be willing to live 40% further from their frequent destinations (work, school, etc)?


Yes, raise the price of gas through taxation. Dedicate the taxes collected to non-auto related transportation. But, the real devil is development. So long as we enable suburbs and exurbs to be built in the manner they are today, we will never get the vehicle miles driven monkey off our back. It is not economic to build light rail lines to serve low-density development. The author is correct that the law of unexpected consequences, or perhaps predictable consequences, will come into play here.

Thomas G.

Even the more moderate "rebound effect" was calculated using "income levels and fuel prices for the period 1997 to 2001." A lot has changed since then, including a widespread and sustained decline in vehicle miles traveled. In every region of the country, every month, for over a year it has declined (check it out: Gas prices and the economic collapse may explain this on their own, but I wonder if a backlash against low-density development, and long commutes, might have something to do with it as well. That would help to explain the mess in the housing market.