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.

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  1. Ian says:

    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.

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  2. Venice says:

    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.

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  3. Jake says:

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

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  4. frankenduf says:

    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

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  5. Jeff says:

    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.

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  6. Charles Carreon says:

    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.

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  7. Chris S. says:

    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.

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  8. David Carty says:

    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?

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