The Effect of Improved Fuel Economy on Vehicle Miles Traveled: Estimates Using U.S. State Panel Data
We estimate the rebound effect for motor vehicles, by which improved fuel efficiency causes additional travel, using a cross-sectional time series of 50 US states plus the District of Columbia from 1966 to 2001. Our method accounts for endogenous changes of fuel efficiency in response to regulation, prices, and other factors, it incorporates a measure of the stringency of the corporate average fuel economy (CAFE) standards, it distinguishes between autocorrelation and lagged effects, and it allows the rebound effect to depend on levels of income and of urbanization. We find that the endogeneity correction strongly reduces the estimated rebound effect, that the long-run effect is substantially larger than the short-run effect, and that the rebound effect declines with income. Our preferred (3SLS) estimate of the rebound effect at sample averages of income and urbanization is 5.2% for the short run and 24% for the long run. We also find that CAFE regulations have a moderate effect on fuel efficiency of new passenger vehicles, which began immediately upon their implementation and peaked in 1984.