Consider one of these two sectors: electricity or transportation. What policies do you suggest for the sector to decrease energy consumption? What is the rebound effect associated with each of the suggested policies? How would you quantify these rebound effects so that you are certain that the suggested policy results in a net benefit? How do you evaluate the effectiveness of your suggested policy with respect to the generated rebound effect?
What policies do you suggest for the sector to decrease energy consumption?
In 2008, transportation accounted for 28% of the energy consumption and 33% of the CO2 emission, but a much larger 71% of the consumption of liquid fuels in the US [1]. To reduce the magnitude of energy consumption from the transportation sector and help prevent its bad effect on the environment, a proper policy must be put in place. US Congress specifies that CAFE standards must be set at the “maximum feasible level” given consideration for technological feasibility, economic practicality, effect of other standards on fuel economy, and need of the nation toconserveenergy [2]. In this term paper, I would suggest combination of CAFE standards combined with carbon tax on fuel price.
What is the rebound effect associated with each of the suggested policies?
One advantage of CAFE standards over fuel is that the standards provide a quantitative target whose effects on energy consumption can be reasonably well predicted [1]. However, the standard has rebound effect. The rebound effect refers to the social and behavioral responses to the introduction of more energy efficiency technologies and processes by which there is a corresponding increase in energy service demands. In general, rebound is thought of as a ratio of the lost energy savings as it might compare to the total expected savings from efficiency.

Get Help With Your Essay
If you need assistance with writing your essay, our professional essay writing service is here to help!
Essay Writing Service

A comprehensive measure of rebound includes both direct and indirect effects which can occur at both the micro level (within households, businesses and organizations) and at the macro level (economy-wide effects). Direct rebound effects are those that result from an increase in the use of a device that is deemed more energy efficient. Cars provide the best examples. When a more efficient car results in an increase in vehicle miles traveled, the lost energy savings are considered to be direct rebound effects. Indirect rebound effects are those that have less direct causal chains and result from increases in consumerism (acquisitiveness) by buying new vehicle, increased vehicle production, and increased air pollution [3].
How would you quantify these rebound effects so that you are certain that the suggested policy results in a net benefit?
Some studies in macro and micro economic have shown that rebound effect value range is between 0% and 100% with formulation expressed below. Value of rebound effect 0% means that the expected savings were achieved through reduced consumption, whilst 100% means that no energy savings were realized and energy efficiency program was failed. The backfire effect happen when consumption has been increased more than extent or in other word rebound effect more than 100%. It is also possible to have a negative RE, such that the energy savings are greater than originally anticipated, for behavioral or technical reasons, or both [4].

Based on the above formula, the rebound effect measurements can be made ​​directly and indirectly. Direct measurement is based on a survey of how big the success rate of the CAFE program. One study by Sorrel in 2009, the rebound effect estimation is between 10% and 30%. Meanwhile other study by Greening, Greene and Difiglio in 2010 show rebound effect for transportation below 10%. Geller and Attali study in 2005 also support this number as shown in Table 1 [5]. CAFÉ standards and fuel tax could reduce 10%-30% value range when the fuel price is taxed according to released carbon emissions. This is equal to externalities generated by fossil fuel. High fuel price with tax could suppress the rebound effect due to need of having energy efficient car. In addition, changes in behavior based on strong motivation to reduce energy consumption become appropriate step anticipating rebound effect [5].
For indirect estimation, the rebound effect with energy price elasticity is defined as the change in demand according to the decrease in price. To calculate elasticity, transportation energy use, price and income of buyer are required. It is important to know that there is limitation of the calculation since it doesn’t consider the capital outlay of the technology that would lower rebound effect [4]. Research that estimates indirect and economy-wide effects is limited. An often cited source of economy-wide rebound analysis is the National Energy Modeling System (NEMS) designed and implemented by the Energy Information Administration (EIA). Using NEMS, a scenario of accelerated technology whereby the national energy intensity is 6.5 percent lower than in the base case, produces a total energy demand that is 5 percent less (Greening 2000, citing Kydes 1997). This suggests that improved energy efficiency (part of the accelerated technology assumption) leads to an economy-wide rebound in the order of 25 percent [6]. Many researchers suggested that RE on CAFÉ standard should be balanced with other policy. The other policy should account many factors affecting RE value and incorporate RE value into the target. The RE is not always detrimental. RE could stimulate economic growth in developing countries rather than developed ones. The rebound effect can be reduced when the CAFE standards coupled with carbon tax policy, where the price of fuel is taxed according to the carbon emissions released [7].
This is equivalent to externalities generated by fossil fuel. The key of rebound effect is the behavior of driver tends to driver more because of fuel saving car. The carbon tax would increase the price and make consumers drive less [8]. It is important to realize that all taxes can be invested to public transportation. Energy efficiency get from each car and energy efficiency resulted from mass transit can be benefit to reduce overall consumption. At the same time, public transportation will reduce private vehicles.
How do you evaluate the effectiveness of your suggested policy with respect to the generated rebound effect?
The rebound effect can be evaluated based on the percentage of the success rate of the policy. Direct rebound effect could be seen directly from the increased mile travelled or increased sales of the vehicles. Indirect rebound effect or wide economy effect can be seen from the increase in the gross domestic product (GDP) and an increase in private income in the transportation sector. Moreover, the success of this policy can be observed by comparing the desired CO2 reduction with the actual result during the policy implementation period. If there is a difference of more than the desired decrease, it means that the rebound effect takes place [9].
The evaluation of the rebound effect also works indirectly as a result of the additional energy demand for the energy efficient equipment or services. For example; the energy cost saving may be used by the producers to increase the output, thereby increasing consumption of the capital, labor and materials, all of which require energy. Another example is that energy efficiency and reduction in energy costs may disproportionately reduce the cost of energy-intensive goods and services, encouraging consumers to disproportionately increase their demand for such products and services [3].
The combination between the fuel standard and the Carbon tax with the encouragement of public transportation will anticipate the rebound effect and specifically reduce the energy consumption in transportation. In addition, the policy will reduce the GHG emission. The small rebound effect could not reduce the order of magnitude from the reduced energy consumption that give more benefit compared with the rebound itself.
References

http://www.rff.org/Documents/Features/NEPI/RFF-BCK-Small-AutoPolicies.pdf

http://en.wikipedia.org/wiki/Corporate_Average_Fuel_Economy

http://www.aceee.org/files/proceedings/2010/data/papers/2142.pdf

http://www.erc.uct.ac.za/Research/publications/10-Davis_Rebound_effect.pdf

http://eng.sut.ac.th/transportenergy/data/paper4web/Energy%20policy%20in%20transport%20and%20transport%20policy.pdf

http://policyintegrity.org/files/publications/The_Rebound_Effect.pdf

http://www.sciencedirect.com/science/article/pii/S0301421509005187

http://www.gao.gov/new.items/d07921.pdf

http://www.unternehmenssteuertag.de/fileadmin/user_upload/Redaktion/Seco@home/Projektpartner_Ergebnisse/macroeconomicRebound.pdf

http://www.rand.org/content/dam/rand/pubs/conf_proceedings/2009/RAND_CF256.pdf
http://en.wikipedia.org/wiki/Fuel_tax
http://en.wikipedia.org/wiki/Vehicle_miles_traveled_tax
http://aida.econ.yale.edu/~nordhaus/homepage/documents/small_dender_rebound.pdf
Appendix

Figure 1. Causal Diagram of Direct and Indirect Rebound Effects