The rebound effect of the Australian proposed light vehicle fuel efficiency standards

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 paper contributes to the empirical studies of the rebound effect by simulating the business-as-usual (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 paper concludes by providing comprehensive understanding of the Australian proposed light vehicle fuel efficiency standards and offering policy recommendations based on the CGE simulation results.