The more kilometers, the merrier? The rebound effect and its welfare implications in private mobility

Abstract

Tighter fuel economy standards came into force in the EU in 2020. Such standards reduce the usage cost of cars, encouraging people to drive more, a reaction known as the rebound effect. Whether and how to prevent the rebound is an ongoing policy debate – since the rebound eliminates parts of the expected fuel savings – yet the economic analysis of the rebound welfare implications is very scarce. To fill this gap, first the direct rebound for private vehicles in Switzerland is estimated and is found to be between 30% and 40%. Second, the utility surplus from the extra kilometers is estimated for each household, at 7 cents per kilometer on average. This is half the external costs of driving in Switzerland (15 cents per km). This gap supports a rebound mitigation, for instance through an internalization of external costs with a tax on the distance driven.