Rebound’s Role in Trump’s Fuel Economy Rollback
A funny thing happened on the way to repealing fuel economy standards—program benefits went up.
As the summer winds down and the school year reboots, I’m trying to finish up some of my beach reading. At the top of my unfinished pile is the Notice of Proposed Rulemaking for the Safe Affordable Fuel-Efficient Vehicle Rule, aka Trump’s rollback of Obama-era fuel economy standards. This 515-page tome paves the way for a rollback by arguing that tighter standards would raise vehicle prices by thousands of dollars, increase traffic deaths by 1,000 annually, and produce only negligible environmental benefits.
This overturns a prior report conducted by the same agencies in 2016 during the Obama administration. Setting the reports side-by-side, a number of differences stand out. One surprise is that the new report estimates larger benefits from tighter standards, even while arguing for a rollback. The explanation for this curiosity, and a central driver of the rollback’s main talking points, turns out to be a familiar friend to readers of this blog—the rebound effect.
The Rebound Effect for Cars
Raising vehicle fuel economy lowers the cost of driving, which induces consumers to drive more. This is rebound. As Severin pointed out in his ode to rebound, the rebound effect erodes energy conservation, but it represents a private benefit to consumers who enjoy more, lower cost travel. The bigger the rebound, the bigger the driving benefits attributed to better fuel economy.
There are many estimates of the size of the rebound effect, which leaves plenty of room for honest (or dishonest) disagreement. In the 2016 report, agency analysts surveyed the academic literature and chose a relatively small rebound effect, 10%, to plug into their models. Analysts in 2018 looked at essentially the same research and decided to double the rebound effect to 20%.
This larger rebound inflates the private benefits of tighter standards, accounting for the larger benefits in the new report. But greater rebound also erodes pollution savings and increases accidents because tighter standards increase driving. For fuel economy standards, rebound is a particularly vexing side effect because the safety and congestion externalities are big. Some analyses find that these additional miles-related externalities outweigh the benefits of gasoline conservation, so that fuel economy standards are like a cure for heart disease that causes your liver to explode.
In the end, the increased costs and benefits seem to largely cancel out in the new report, but the assumption of greater rebound is critical to the administration’s talking points, which argue that tighter standards cost lives but produce negligible environmental benefits. But, as I explain next, the report runs into problems of internal consistency by claiming that rebound is large, while simultaneously arguing that cars will get much more expensive and have less desirable performance.
If Consumers Dislike Efficient Cars, Would They Really Drive Them More?
The 2018 report makes much of the claim that most consumers do not want to buy hybrids or electric vehicles, and moreover that they don’t even want lighter vehicles with things like stop-start technology or fuel-conserving transmissions. All of these fuel-saving technologies are said to create hidden costs to consumers, as policy forces them to yield performance, range or comfort in favor of fuel economy.
That argument makes sense, but it runs up against the rebound story. If tighter standards greatly erode other desirable attributes of a vehicle, this makes driving less desirable, which will counteract rebound.
Catherine made the same point after off-roading with her rental Prius. She cited evidence from a study by Jeremy West, Mark Hoekstra, Jonathan Meer and Steve Puller that bears repeating. That study found no increase in driving from consumers who were nudged into buying a more efficient vehicle as part of the Cash for Clunkers program. They argued this was because the more efficient vehicles were smaller and less fun to drive. The government’s report tries to have its cake and eat it too by claiming tighter standards will force consumers to buy less desirable cars, but they will still want to drive them more.
Driving More Expensive Cars is, Well, More Expensive
A similar issue arises with the new report’s claim that vehicle prices will rise substantially as a result of tighter standards. They conclude that tighter standards would raise the price of vehicles by $2,340. This higher compliance cost is fundamental to building the case for rollback.
Something the report fails to consider, however, is how this higher upfront vehicle price influences the cost of driving via depreciation. Unless you are putzing around in a 1963 Ferrari GTO, your vehicle will be worth less a year from now than it is today. That loss of value is the vehicle’s depreciation, and it’s a big deal. AAA says that the annual costs of depreciation are typically the largest fraction of ownership costs, and they greatly outweigh gasoline expenditures (see figure).
What does depreciation have to do with rebound? Your car will lose value each year even if it stays parked in your garage. But it will lose more value the more you drive—higher mileage cars sell for less.
All else equal, a more expensive vehicle with the same useful life will depreciate more per mile, raising the cost of driving. If tighter standards make cars more expensive, this increase in depreciation per mile should serve as a counterbalance to rebound.
To see how this nets out, I ran my own analysis of how increased mileage affects the price of used vehicles, using a data set made up of vehicles sold at wholesale auctions. I found that, controlling for a vehicle’s age and type, every extra 10,000 miles lowers a car’s value by about 4%. If cars were all $2,340 more expensive, then these estimates would translate into a 1-cent per mile increase in the cost of driving due to the higher price of cars.
Compare this to the direct effect of changing fuel economy. The rollback, translated into real world fuel economy performance, mandates an average fuel economy around 29.3 miles per gallon. With $3 gas, that equates to a per mile fuel cost of 10.2 cents. Following through with the tighter standards would lower costs per mile by another 1.9 cents—it is this change in cost per mile that induces the rebound.
But, the 1-cent increase in depreciation costs per mile should works against the direct rebound effect. The new report doubled rebound, but a proper appreciation of depreciation would cut this back by half, leaving us close to where we started in the 2016 report. That would go a long way toward restoring the environmental benefits of tighter standards and reducing the estimated safety costs.
There are a range of credible estimates for the rebound effect that encompass the numbers used in both reports, and even modest rebound implies that alternative policies might be better than fuel economy standards. Even so, it’s worth pondering whether more aggressive assumptions about rebound pair well with assertions that vehicles will be getting pricier, and less desirable. In my view, you can’t have it both ways.
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James Sallee View All
James M. Sallee is an Associate Professor in the Department of Agricultural and Resource Economics at UC Berkeley, a Research Associate of the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. He is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles.
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While it is true that increased mileage decreases the resale value of a car, you do not provide any reason that resale value is considered in the micro decision to drive more as mileage efficiency increases. Since driving decisions are made on the margin (operating costs), it does not seem that adding average sunk costs (depreciation costs per mile) to the decision making process is sound.
Thanks for another thoughtful post that helps those of us concerned about the issue better understand the analytic aspects of this issue. The fact that consumers’ increased driving reflects that they are deriving a benefit from driving is a basic point that is too often lost in the discussion.