Don't belittle the rebound effect

We disagree with Kenneth Gillingham and colleagues' contention that the rebound effect — in which greater consumption offsets the energy saved by increasing efficiency — is exaggerated (Nature 493, 475–476; 2013). We and others have shown rebound effects as large as 60% (see, for example, M. Frondel et al. Energy Econ. 34, 461–467; 2012).

In our view, energy-efficiency standards are among the least cost-effective ways of lowering carbon emissions (see H. Allcott Am. Econ. Rev. 101, 98–104; 2011). For example, the costs of the US Corporate Average Fuel Economy standard are more than ten times higher than a petroleum tax that induces the same reduction in oil consumption (R. W. Crandall J. Econ. Persp. 6, 171–180; 1992). This is mainly because of the rebound effect: the standard actually encourages driving by marginally lowering its cost, unlike a tax.

The greater cost-effectiveness of a tax could be undermined by coupling it with an efficiency standard, as Gillingham et al. suggest, because of interaction effects between the two.