Light vehicle fuel efficiency standards and the rebound effect

Abstract

Australia is planning to take action to tackle climate change via improvements in light vehicle fuel efficiency. The proposed light vehicle emissions standards are expected to reduce petroleum use as well as greenhouse gas emissions from passenger vehicles, sports utility vehicles and light commercial vehicles. Consumers of light vehicles, including private households and firms, will respond to this policy in a way that maximise their utility based on economic theory. On one hand, these economic agents will use less petrol, through directly purchasing more efficient new cars to react to the mandatory standard. On the other hand, the more efficient vehicle will provide an incentive for the consumers to use it more as the effective cost of driving decreases. Understanding these economic and behavioural responses to the policy is crucial for policymakers. This thesis makes three contributions to understanding the policy and the associated rebound effect, focusing on the Australian proposed light vehicle emissions standards.First, this thesis contributes to theoretical analyses of the household and firm responses to a fuel efficiency improvement by investigating the utility maximisation problem and the cost minimisation problem of the economic agents in response to fuel efficiency changes. Using microeconomic theory, specifically the consumer and production theory, the theoretical study shows that the magnitude of the rebound effect is determined by different elasticities for the household and the firm, which also changes as the policy standards become more stringent.Second, this thesis makes an innovative contribution that enriches the modelling of the vehicle fuel efficiency changes over time. This methodological advance integrates time series analysis with detailed engineering fleet model to provide credible forecast for fuel efficiency changes under business-as-usual and policy scenarios. The time series approach captures the compositional changes of vehicles, or the taste shifts over vehicle types, and gives a stock change forecast to the model year 2025. The engineering fleet model takes into account the new vehicle sales, the vehicle stock turnover, distance travelled, and fuel consumption to make the best prediction on the fleet level fuel efficiency. The results from this study are crucially important for the simulations in the next study.Third, the thesis contributes to the empirical studies of the rebound effect by simulating the BAU and policy scenarios in a computable general equilibrium framework. The direct rebound effect of the Australian proposed light vehicle fuel efficiency standards are shown to range between 25 per cent and 30 per cent, measured by petroleum use. Each of these policy scenarios is shown to have a much larger economy-wide rebound effect, reaching up to 50 per cent measured by life-cycle greenhouse gas emissions. Although the stringent fuel efficiency standard generates more direct rebound effects measured in percentage than the lenient and medium standards, the stringent policy produces the most reduction in carbon emissions measured in physical units overall.This thesis concludes by making policy recommendations based on the studies carried out in the previous chapters. It integrates the results from each of the individual analyses to provide a comprehensive understanding of the Australian proposed light vehicle fuel efficiency standards. The theoretical analysis of the behaviour of the household and the firm, together with the CGE simulations which use results from a detailed engineering fleet model, captures the economy-wide economic and environmental impacts of the policy that are essential for policymakers to evaluate each policy option.n