There’s a new paper from the Victoria Transportation Policy Institute looking into the price elasticity of both miles driven and fuel use. The author, Todd Litman, has done an in-depth literature survey which will be of interest to readers who liked my recent look into Jevons’ Paradox.
Jevons’ Paradox, also known as the rebound effect, states that increasing efficiency can lead to increased use of a resource, because the resource is now cheaper. I pointed out that this is only true in elastic markets, where the use of a resource is sensitive to price. In inelastic markets, it makes sense to mandate efficiency, because efficiency will not greatly increase use. In elastic markets, the best policy avenue is to increase the marginal price of usage.
One great example of this is the potential benefits of smart metering. While the early results of smart metering trials were very positive, seeming to show that average people would reduce their energy use by 10-15% when given good data, more recent and broader trials have shown that the actual effect is much smaller. The difference is that the early trials tended to be focused on particularly price-sensitive populations, such as people who had trouble paying their electricity bills who reduced their energy use for Woodstock Hydro. More recent trials have shown much lower reductions in bills because they have been serving the general populace, not just a particularly price sensitive subgroup, like the poor or people who volunteer to have smart meters installed.
Litman’s survey of price sensitivities reaches several interesting conclusions:
1) While the price sensitivity of driving is quite elastic, the price sensitivity to fuel cost is much less elastic because fuel only accounts for about a quarter of the cost of driving.
2) Price sensitivities were temporarily depressed over the last 25 years due to various demographic changes, and now seem to be rebounding. As a result, many policies meant to reduce fuel use (such as higher CAFE standards) are likely to be less effective than expected due to the rebound effect. Better policies would work to increase the marginal cost of driving without increasing the total cost. Such policies include Pay as you drive car insurance and registration.
There’s much more. I highly recommend it or anyone interested in policies to reduce our dependence on foreign oil. Blurb follows:
Changing Vehicle Travel Price Sensitivities, The Rebounding Rebound Effect (www.vtpi.org/VMT_Elasticities.pdf ).
There is growing interest in various transportation pricing reforms to help reduce traffic congestion, accidents, energy consumption and pollution emissions. Their effectiveness is affected by the price sensitivity of transport, that is, the degree that travelers respond to price changes, measured as elasticities (the percentage change in vehicle travel caused by a percentage change in price). Lower elasticities (price changes have relatively little impact on vehicle travel) imply that pricing reforms are not very effective at achieving objectives; that higher prices significantly harm consumers; and rebound effects (additional vehicle travel that results from increased fuel efficiency) are small so strategies such as fuel economy mandates are relatively effective at conserving fuel and reducing emissions. Higher elasticities imply that price reforms are relatively effective, consumers are able to reduce vehicle travel, and rebound effects are relatively large. Some studies found that price elasticities declined during the last quarter of the Twentieth Century, but recent evidence described indicates that transport is becoming more price sensitive. This report discusses the concepts of price elasticities and rebound effects, reviews information on vehicle travel and fuel price elasticities, examines evidence of changes in price elasticity values, and discusses policy implications.