Vehicle Use and Fuel Economy: How Big is the “Rebound” Effect? *

Abstract

By reducing the fuel costs of travel, motor vehicle efficiency improvements tend to increase the demand for travel, thereby offsetting some of the energy-saving benefit of the efficiency improvement and creating a “rebound” effect. The key factor is the elasticity of vehicle travel with respect to fuel cost per mile. Past studies offer a wide range of estimates depending on model formulation and time period, with more recent analyses indicating that travel is insensitive to fuel costs and efficiency. This paper analyzes U.S. light-duty vehicle miles travelled from 1966-89, examining a variety of statistical issues that bear on the size of the “rebound” effect, including error structure, functional form, and possible lagged effects. The results consistently confirm that the “rebound” effect has been quite small, about 5-15%, or less; and that short-run (one year) adjustments accounted for essentially all of the change in travel due to fuel price and fuel economy changes. The findings imply that the energy savings of technical fuel economy improvements to cars and light trucks will be only slightly reduced by increased vehicle travel. They also imply that gasoline taxes would need to be very large in order to stimulate significant reductions in travel.