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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.