Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect

Small, Kenneth A.; Van Dender, Kurt · 2007 · OpenAlex-citations

DOI: 10.5547/issn0195-6574-ej-vol28-no1-2

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Summary

This paper estimates the "rebound effect" for motor vehicles, defined as the increase in vehicle-miles traveled (VMT) resulting from improved fuel efficiency, which partially offsets intended energy savings. The authors address limitations in prior literature, such as the failure to account for the endogeneity of fuel efficiency and the confounding of dynamic effects with regulatory impacts. Specifically, they aim to determine how the rebound effect varies with income, urbanization, and fuel costs, and to distinguish between short- and long-run effects using a robust econometric framework. The study utilizes a pooled cross-sectional time-series dataset of U.S. states from 1966 to 2001. The authors employ a simultaneous-equations model that jointly determines VMT, vehicle stock, and fuel efficiency. This approach accounts for the fact that fuel efficiency is endogenous, responding to fuel prices and regulations. The model includes lagged dependent variables to capture behavioral inertia and autoregressive errors to handle serial correlation. A key innovation is the construction of a theoretically motivated variable measuring the stringency of Corporate Average Fuel Economy (CAFE) regulations, defined as the gap between mandated efficiency and the efficiency drivers would have chosen absent regulation. The system is estimated using two- and three-stage least squares (2SLS and 3SLS) with fixed effects to control for unobserved state-specific factors. The results indicate that at sample averages, the short-run rebound effect is 4.5% and the long-run effect is 22.2%. However, the magnitude of the rebound effect is not constant; it declines significantly with rising real income and, to a lesser extent, with lower fuel prices. When evaluated at the levels of income and fuel prices observed in the most recent period of the data (1997–2001), the estimated rebound effects drop substantially to 2.2% in the short run and 10.7% in the long run. These recent estimates are roughly half the average values over the full 1966–2001 period and are considerably smaller than values typically assumed in policy analyses. The study also finds that the long-run price elasticity of fuel demand declined in magnitude in recent years, driven largely by income growth and lower real fuel prices. The significance of these findings lies in their implication for energy and environmental policy. The authors conclude that the rebound effect has diminished over time due to socioeconomic changes, meaning that improvements in fuel efficiency are likely to yield greater net energy savings and reductions in carbon dioxide emissions than previously estimated. This challenges standard assumptions used in evaluating regulations like CAFE and greenhouse gas standards, suggesting that policy analyses relying on constant, higher rebound effect estimates may overstate the additional travel induced by efficiency gains.

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