Mark Jacobsen, University of California-San Diego

Abstract:
We revisit the direct rebound effect in the case of fuel economy standards, studying a negative component (that is, fewer miles driven when cars are regulated to be more efficient) coming from the feature that vehicles and miles are complements in utility.  The complementarity is in the sense of quality-adjusted trips: when more, or more luxurious, cars are present the value of a marginal mile increases.  Fuel economy regulation tends to reduce luxury and quantity by increasing depreciation, creating a negative effect on household miles that competes with the well-established feature that lower fuel cost encourages driving.  We also allow for the presence of two components — time and miles — in vehicle depreciation.  We show how part of the cost of regulation falls on miles, creating a second negative impact on rebound that is present even when the number of vehicles is held fixed.  A simple quantitative model demonstrates the importance of our results in making policy.  We combine existing estimates of the short-run rebound effect with data on driving patterns in multi-vehicle households.  Under a range of reasonable assumptions the net effect of fuel economy regulation is to reduce miles driven, not increase them as has often been assumed.