Monday, February 13, 2012

Will the "Rebound Effect" Cause Global Warming?

I haven't read David Owen's new book but he appears to be taking Jevons too seriously.   He needs to read Gary Becker's work on the value of time in a society where our value of time is rising.   Here is the blurb for his book;


"Hybrid cars, fast trains, compact florescent light bulbs, solar panels, carbon offsets: Everything you've been told about living green is wrong. The quest for a breakthrough battery or a 100 mpg car are dangerous fantasies. We are consumers, and we like to consume green and efficiently. But David Owen argues that our best intentions are still at cross purposes to our true goal - living sustainably and caring for our environment and the future of the planet. Efficiency, once considered the holy grail of our environmental problems, turns out to be part of the problem. Efforts to improve efficiency and increase sustainable development only exacerbate the problems they are meant to solve, more than negating the environmental gains. We have little trouble turning increases in efficiency into increases in consumption."

So, in plain English -- if you used to drive a Hummer and it achieves 10 MPG and you trade it in and buy a Prius and it achieves 100 MPG  --- your gasoline consumption and hence your GHG emissions will plummet if you continue to drive the same amount of miles each day.

But, demand curves slope down!   To keep the math simple, assume the price of a gallon of gasoline is $2.  In this case, the total gasoline expenditure to drive one mile in a Hummer =  2/10 or 20 cents.  While, the total gasoline expenditure to drive one mile in a Prius = 2/100 = 2 cents.   Suppose you respond to this 90% reduction in price by driving 11 times as many miles.   I recognize that this would be a huge price elasticity but bear with me.

Suppose you used to drive the Hummer 10,000 miles per year so your gasoline consumption was 1000 gallons.

Given the assumptions above, when you substitute to the Prius, your gasoline consumption is now (1/100)*110,000  = 1,100 and that's the "proof" that Prius driving will cause climate change.

There is one obvious mistakes in Owen's logic:

Behavioral responses to price declines are not that large.  The reason for this is that we often need to use our own time when we use a product that consumes electricity.   As Lucas Davis notes in this strong paper,  when we use an appliance such as a car or washing machine we use energy and our time.  Since our time is our scarcest asset, the "Becker Price" of using the device doesn't fall that much as technology becomes more efficient.  So, by ignoring our value of Time --- Owen is overstating the importance of the Rebound Effect.



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