Welfare Implications of the Rebound Effect From More Energy-Efficient Passenger Cars

About the Project

KAPSARC’s work on energy demand and efficiency looks at how economic growth, population, energy prices and energy efficiency influence energy demand in different countries, with a focus on Saudi Arabia and the Gulf Cooperation Council. Our objective is to understand and quantify the influence of each of these factors, which also allows us to estimate underlying energy efficiency in different countries. Our work also looks at the welfare implications of policies, from price reform to energy efficiency, and their impact on energy demand.

Key Points

Improving the energy efficiency of passenger cars makes it cheaper to drive, allowing motorists to take to the roads more frequently. This additional driving, which offsets some of the expected energy savings from energy efficiency, is known as the rebound effect and is perceived negatively. This paper undertakes a cost-benefit analysis of the rebound effect following an energy efficiency improvement in passenger cars for 100 countries. We find that:

The rebound effect in passenger cars is welfare reducing in most cases, especially in countries that had some combination of low gasoline prices, high congestion and high accident costs.

Energy efficiency policies may be less likely to deliver net benefits because of welfare reducing rebound. Furthermore, in countries with the most welfare reducing rebound effects, even a free (that is, zero cost) energy efficiency improvement in passenger cars can become welfare reducing. It is therefore important to model rebound, as it can affect decisions to rollout energy efficiency policies

Energy efficiency policies such as fuel economy standards may find greater success when fuel prices are higher, and therefore may be more effective when combined with policies that raise energy prices. Additionally, complementary policies that can mitigate congestion and reduce road accidents will also indirectly improve the net benefits of energy efficiency policies for passenger cars.

There may be a need to change the negative perceptions that the rebound effect holds in energy policy discussions. For energy efficiency improvements in other areas such as building lighting or air conditioning, the rebound effect will probably be welfare enhancing due to the absence of externalities such as congestion and accidents.