In an all-to-predictable swipe at new fuel economy standards currently being negotiated by the White House and the auto industry, the arch-conservative Heritage Foundation invokes rebound effects as the latest reason to oppose increased auto efficiency:
When it comes to greenhouse gas emissions, The Atlantic's Megan McArdle notes that fuel efficiency standards will reduce carbon dioxide emissions, "but not by as much as advertised, because more fuel efficient cars make driving cheaper, so people will do more of it. This 'rebound' effect robs about 25% of gains, and also means more congestion, and more wear-and-tear on roads." The rebound effect also takes away some of the estimated cost savings and oil reduction.
Let's ignore for a moment the rich irony inherent in the Heritage Foundation expressing any concern about the efficacy of auto efficiency standards in cutting carbon emissions...
Rather, let's focus on the economic implications of rebound effects, which Heritage gets exactly backwards here. If improved vehicle efficiency triggers a rebound in demand for the energy services derived from personal transportation, that rebound represents an unequivocal improvement in economic welfare at the individual level and a sign of improved productivity and growth at the economy-wide level. Last we checked, Heritage was all for economic growth and improved individual welfare.
As we wrote in "Energy Emergence," a comprehensive review of the literature and evidence for rebound effects published by the Breakthrough Institute in February:
Below-cost efficiency improvements [ed. note: such as the fuel economy improvements in question here] may therefore accrue to the economy in any combination of the following three ways: first, as an increase in economic output via the more productive use of energy services (which will in turn drag up demand for energy in the economy as a whole); second, as the productive substitution of energy services in lieu of other inputs (reducing consumption of other inputs to production but increasing energy consumption); and third, as a reduction in energy consumption and expenditures required to produce a given level of energy services. In any case, truly cost-effective energy efficiency measures should be vigorously pursued, as they will lead to an improvement in general 'welfare'...
That's a statement I would expect complete agreement from the Heritage Foundation on: efficient use of our energy resources translates to improved productivity, greater economic growth, and greater individual welfare!
In short, strong rebound effects actually enhance the economic case for improved fuel economy standards and improve the economic cost/benefit equation, rather than erode it as Heritage is trying to imply.
It's only when you are concerned about long-term reductions in total greenhouse gas emissions (as I am) that the environmental downside of rebound effects begin to bite. As we write in "Energy Emergence:"
...from a climate mitigation perspective, we must be keenly aware of the precise, macroeconomic impacts of energy efficiency improvements, since only a reduction in total aggregate energy consumption will directly contribute to emissions reduction objectives. This in turn requires an understanding and analysis of the non-linear combination of impacts on economic activity, demand for energy as a factor of production, and other macroeconomic factors that are together summed up in the term 'rebound effect.'
We appreciate seeing Meagan McArdle, who describes herself as taking global warming "seriously," take the climate implications of rebound effects equally seriously. But it's a joke to imagine Heritage Foundation loosing any sleep over any eroded climate benefits associated with the proposed fuel economy standards...
The truth is that neither Heritage nor efficiency advocates can have it both ways. You can't simultaneously believe that rebound effects undermine or negate emissions reductions and energy savings AND believe that efficiency will reduce economic growth, as Heritage tries to argue. If rebounds are significant, that's a sign that efficiency is actually driving improved economic welfare and growth.
Conversely, you can't simultaneously believe that efficiency improvements will reduce emissions without any rebound in energy demand AND result in economic growth and significant consumer cost savings, as many efficiency avocates argue. If efficiency improvements are resulting in significant consumer savings and economic growth, they are certainly driving significant demand rebounds as well, which undermine some portion of the expected reductions in energy use.
In the end, as our own review of the literature on rebound effects reveals, improving fuel economy standards in developed nations like the United States IS likely to trigger a rebound in energy demand due to lower driving costs, consumer energy savings, and improved economic productivity -- but only a modest rebound.
Direct rebound in demand for gasoline and oil triggered by fuel economy improvements in rich nations may be smaller even than McArdle indicates, on the order of 10-30 percent, according to the range of literature. Meanwhile, total increases in demand for energy of all forms -- as consumers indirectly re-spend savings at the pump and as the economy as a whole reacts to lower gas prices and improved productivity -- may total on the order of 20-40 percent or so.
That implies that the proposed increase in fuel economy standards are likely to present a clear win-win-win: reducing oil use and enhancing energy security (although by less than anticipated if rebounds are ignored); reducing greenhouse gas emissions (although again, less than anticipated if rebounds are ignored); and driving improved individual welfare and savings and greater economic productivity and growth.
Sounds to me like three things America could use a bit more of right about now...
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