Energy-efficiency policies targeting consumers may not save energy in the long run: A rebound effect that cannot be ignored

Regulating the production and incentivizing the purchase of energy-efficient cars has long been a primary policy recommendation to curb the world's ever-increasing energy usage. However, as cars become increasingly energy efficient, the cost of using them decreases, and cheaper usage costs provide a strong economic motivation to increase the usage of these cars. A rich body of literature examining this ‘rebound effect’ under the fuel efficiency standards regulating manufacturers (e.g., CAFE) has largely concluded that the effect diminishes over time. However, research on policies targeting consumers remains limited, and the magnitude and trend over time of a rebound associated with such policies remain unclear. We empirically estimated a ten-year rebound following ongoing policy measures targeting consumers in Israel, in a research setting highly suitable for disentangling the complex effects affecting distance traveled and the demand for energy efficiency of cars. The empirical results indicated a fairly large rebound effect of 62% emerging shortly after the initial introduction of the policy. Unexpectedly, this rebound effect gradually intensified over time, reaching the point at which all potential energy savings were lost to increased driving.