Improving the energy efficiency of passenger cars makes it cheaper to drive, leading to increased driving. This increased driving is known as the direct rebound effect because it offsets some of the expected energy savings from energy efficiency.
Such rebound effects could have a large impact on social welfare according to a recent study titled “Welfare Implications of the Rebound Effect from More Energy-Efficient Passenger Cars” by the King Abdullah Petroleum Studies and Research Center (KAPSARC).
The study is the first to quantify the welfare implications of the direct rebound effect from more efficient cars for 100 countries. The study revealed that the direct rebound effect is welfare reducing in most countries because of the large externalities associated with driving, which include air pollution, greenhouse gas emissions, congestion, and accidents. These externalities increased as a result of the increased driving (that is, rebound). The increase in externalities was found to outweigh the benefits to consumers from increased driving.
The study authored by KAPSARC’s researchers Anwar Gasim and Ziyad Alfawzan had three key messages for policymakers in the road transport sector. First, it highlighted the importance of accounting for the rebound effect. Second, it showed that energy efficiency policies such as fuel economy standards are less likely to deliver net benefits when rebound effects are large and welfare reducing. Third, it revealed that the rebound effect may be welfare enhancing for other energy efficiency improvements, such as more efficient air conditioners in buildings.
The study shows that in Saudi Arabia, as in many other countries, the direct rebound effect from more efficient cars is welfare reducing. However, the Kingdom has recently started to reform gasoline prices and implement policies to improve road safety. Such complimentary policies will likely mitigate some of the negative impacts from the direct rebound effect and increase the net benefits of energy efficiency for cars. This in turn may encourage policymakers in the Kingdom to further pursue energy efficiency in the road transport sector.
KAPSARC conducts independent research and develops insights in collaboration with leading local and international research centers, public policy organizations. The center has focused on finding solutions for the most effective and productive use of energy, creating added value that contributes to the welfare of both energy exporting and consuming societies. — SG