Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect

We estimate the rebound effect for motor vehicles, by which improved fuel efficiency causes additional travel, using a pooled cross section of US states for 1966-2001. Our model accounts for endogenous changes in fuel efficiency, distinguishes between autocorrelation and lagged effects, includes a measure of the stringency of fuel-economy standards, and allows the rebound effect to vary with income, urbanization, and the fuel cost of driving. At sample averages of variables, our simultaneous-equations estimates of the shortand long-run rebound effect are 4.5% and 22.2%. But rising real income caused it to diminish substantially over the period, perhaps aided by falling fuel prices. With variables at 1997-2001 levels, our estimates are only 2.2% and 10.7%, considerably smaller than values typically assumed for policy analysis. The point estimates suggest that the rebound effect would remain constant if real incomes continue to grow and fuel prices were to grow about 3.5 times as fast. JEL-codes: Q0, D5, R4, C2