An Examination of the Rebound Effect of CAFE StandardsEPA Grant Number: F6C10781
Title: An Examination of the Rebound Effect of CAFE Standards
Investigators: Gillingham, Kenneth
Institution: Stanford University
EPA Project Officer: Lee, Sonja
Project Period: September 1, 2006 through September 1, 2009
Project Amount: $111,344
RFA: STAR Graduate Fellowships (2006) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences , Academic Fellowships , Fellowship - Economics
The purpose of this research is to examine Corporate Average Fuel Economy (CAFE) standards, one of the most important environmental policy instruments for addressing the issue of greenhouse gas emissions from the transportation sector. While directly reducing the fuel use per mile driven, CAFE standards also have behavioral consequences: increases in driving and delayed retirement of the vehicle stock as the cost per mile driven declines and the price of new vehicles increases. The increase in vehicle-miles-traveled due to CAFE standards is often called the rebound effect and it often turns out to be a critical parameter in cost-benefit analyses of increases in standards.
However, recent evidence suggests that as consumers become wealthier (or spend more time in traffic), the time cost of travel becomes relatively more important than the fuel cost of travel, so consumers become less sensitive to changes in the fuel cost of travel, implying a lower rebound effect. The theory behind this important result remains largely unexplored, warranting further empirical work to more deeply understand the behavioral effects of CAFE standards.
This research will begin with the development of a theoretical model of the decision-making process of drivers that incorporates salient features such as income and congestion. The theoretical model will allow for the examination of a set of inter-related issues regarding vehicle choice, VMT, and policy instruments to reduce greenhouse gases in the transportation sector. This model will then be econometrically estimated to provide a deeper understanding of the effect of income and congestion on the rebound effect of CAFE standards.
The theory developed in this research will point to economically efficient ways to reduce greenhouse gas emissions in the transportation sector, an important, yet difficult sector to address. In addition, since incomes and congestion are generally expected to increase in the United States, the empirical results may indicate that the rebound effect will decline into the future. This has critical environmental policy implications for the discussion of increases in CAFE standards.