About a week ago I did a 15 minute benefit-cost analysis of new CAFE rules. Here is a key part of it:
Concerning new fuel economy rules ...:
If the price of a barrel of oil is about $100 "over the program's lifetime" (61% greater than yesterday's price) then the savings in oil expenditures is $180 billion (about 1.3% of annual GDP).
This week the WJS's Numbers Guy looks at the rebound effect and states:
Yikes! However ...
Here is more from the Numbers Guy (with a couple of quick comments):
When President Barack Obama announced tougher fuel-efficiency standards for new cars last week, he emphasized the potential reduction in oil demand. But what if drivers who find that they can go longer on a tank of gas drive more? Would all that additional driving cancel out the environmental benefits the Obama administration is seeking?
Most economists who have studied this so-called rebound effect say the answer is no, though they differ somewhat on how much of the gasoline savings would be burnt up by an increase in driving. The Environmental Protection Agency is predicting a rebound effect of 5%. ...
But some scientists who have studied the issue recently say the EPA's 5% figure is largely consistent with their findings. Kenneth Small, an economist at the University of California, Irvine, and Kurt Van Dender, an economist for the Organization for Economic Co-Operation and Development, examined gasoline prices, fuel efficiency and miles driven, by state, from 1966 to 2001.
Unlike most previous studies, their work didn't assume the rebound effect was constant. And they found it dropped sharply in the last decade, perhaps because rising incomes and increases in traffic reduced drivers' appetite to spend time on the road. ...
It is hard to know just what rebound effect to expect from the new rules. Surveys asking drivers how they have behaved and will behave have produced wide-ranging results, which isn't surprising given the difficulties individuals have recalling and predicting their economic life. And no one has conducted a study tracking individual drivers over many years.
Almost my entire research agenda depends on surveys asking people to predict their economic life!
Also, drivers' reactions to fuel costs include small, short-term effects, such as skipping a road trip because of high gasoline prices, and long-term decisions, such as choosing a job with a longer commute because of greater fuel efficiency. And separating the two effects is difficult.
Dr. Small and Dr. Greene initially assumed that drivers would have the same reaction to cost savings from lower gasoline prices as they do from better fuel economy. But when they put that theory to the test, they found no evidence of a rebound effect tied to fuel-economy gains. That could just mean they need more data. If there really is no rebound effect, however, that would lead to even more oil savings than what the Obama administration is forecasting.
Why might drivers react differently to fuel efficiency than to gas prices? Perhaps because the uncertainty of gasoline prices, and the constant roadside reminders, elicit stronger reactions in drivers than fuel efficiency gained or lost.
This really isn't surprising. Theory says that a dollar is a dollar but people's behavior often suggests otherwise. People really focus on some costs and may almost ignore others.
