Fuel efficiency (alone) is not the answer, Mr. President

In his weekly address on Saturday, March 3, the President spoke on issues relating to the auto industry and energy.  I support the vast majority of what he said: auto industry bailout–check, decreasing dependence on foreign oil–check, increasing investments in clean renewable fuel–check, ending subsidies for fuel companies–check.  What I don’t support is pushing fuel efficiency as a standalone means to end our dependence on oil.  Don’t get me wrong, I believe in driving more efficient vehicles, and fuel economy is a driving factor when my family (rarely) buys a car.  But efficiency alone will most likely counter-intuitively lead to an increase in fuel consumption.

WEEKLY ADDRESS: Taking Control of Our Energy Future, from WhiteHouse.gov, Mar. 3, 2012

Thanks to new fuel efficiency standards we put in place, they’re building cars that will average nearly 55 miles per gallon by the middle of the next decade. That’s almost double what they get today. That means folks will be able to fill up every two weeks instead of every week, saving the typical family more than $8,000 at the pump over time. That’s a big deal, especially as families are yet again feeling the pinch from rising gas prices.

The problem with this logic is explained by the Jevons Paradox and/or the rebound effect.  The basic notion is that as fuel efficiency increases, fuel costs decrease, leading to an increase in demand for fuel.  William Stanley Jevons described the phenomenon in his 1865 book The Coal Question as follows:

“It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth.”

The New Yorker covered this issue in a recent piece called The Efficiency Dilemma by David Owen [the abstract is available at the link, the article itself is pay-wall restricted, might I suggest a visit to your local public library?].  The author uses the example of refrigeration, which has become much more efficient over the years.  Concurrent with this increased efficiency, we have seen significant increases in the overall amount of refrigeration–think of all the places you now see refrigerated beverages that you didn’t used to even just ten years ago, and think of how air conditioning led to the southward migration of millions over the last half century.

The answer, alas, is not one that many politicians are likely to support: increase the tax on gasoline so as to place downward pressure on the demand for it.  That way, when people begin to drive those fifty-five mph vehicles the President is talking about, they won’t be tempted to squander the energy savings on driving more and more miles.

The above certainly seems reasonable to me, but I’m no expert.  Arguments against these ideas can be found here and here.  I invite my father, a retired economist with a focus on energy, and anyone else who knows more on this issue to add to the discussion in the comments


One Comment on “Fuel efficiency (alone) is not the answer, Mr. President”

  1. Rodney says:

    The gasoline demand snap-back effect from increased fuel efficiency will not be substantial. Because the demand for gasoline is highly inelastic, the net effects of substantially increased fuel efficiency standards will be substantial reductions in gasoline demand. Because people will spend less for gasoline, they will buy more goods and services, increase savings, and reduce debt. The economy and employment levels will improve as more goods and services are produced to meet increased demand. .
    Increasing gasoline taxes is a very poor alternative for tighter fuel efficiency standards. In the short run, gasoline use will not decline very much since transportation is essential and mass transit alternatives are limited. In the long run, unless they are required to do so, automobile producers will not substantially improve fuel efficiency. Since people will spend more for gasoline, purchases of other goods and services will decline and the economy and employment will weaken. While government tax revenues will increase, given past political behavior, tax rates for corporations and upper income individuals will likely be reduced with hardly any benefit to others.
    Few if any serious individuals argue for an efficiency-only energy policy. Increases in clean energy supply is very much needed. However, there are very substantial gains that can come from increased energy efficiency. The most effective way to assure energy efficiency improvements is through mandated efficiency standards.

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