The Global Rebound Effect
Versus California’s Low-Carbon Fuel Standard
September 29, 2009
Displacing gasoline with a new source of biofuel, as California’s low-carbon fuel standard proposes to do, will reduce the global demand for oil. This will reduce the world oil price, which will cause an increase in oil use outside of California—the global rebound effect. Conventional wisdom views this effect as negligible.
But the global rebound effect applies to discovering and pumping new oil, just as it applies to producing new biofuel. And if rebound is negligible, this paper shows that pumping new oil harms the environment negligibly, contradicting conventional wisdom.
In fact, the global rebound effect is likely to be near 25 percent or greater, and biofuels will likely reduce carbon by that much less than anticipated. Some biofuels may be credited with helping, even while they harm the climate.
The world market largely determines the price of ethanol in Iowa. And on average, that determination is quite accurate. The world market not only determines price but also the effect of ethanol on global oil production and consumption. So when we inject new biofuel into the market, the result is determined by global supply and demand curves. The outcome is not obvious.
Although these global curves are poorly understood, one result, the Rebound Emissions Identity, is known with considerable precision, and it flatly contradicts conventional wisdom. It should also prove to those who believe that new offshore oil production is bad for the climate that the global rebound effect is real and substantial. That effect tells us that a “gallon” of perfect biofuel saves considerably less than a “gallon” of carbon. (All “gallons” in this note are gasoline-energy-equivalent gallons.) Similarly all biofuels save less carbon globally than they save locally.
This means that California’s low-carbon fuel standard (LCFS) must be carefully applied, or the global rebound effect could more than counteract the local benefit. Additional biofuel use could result in net harm to the climate, as has been the case with corn ethanol.
The rebound effect is based on the fact that when we reduce our consumption of gasoline, the world market finds itself with too much production for this new lower consumption level. So the market must rebalance supply and demand either by reducing supply, increasing demand, or both. In reality, both will adjust, and the global rebound effect is the increase in demand (Stoft, 2008). If a local demand reduction of a gallon causes a global rebound in demand of a quarter of a gallon, then numerically the global rebound effect is 25 percent.
There are many energy rebound effects, almost all of which concern energy efficiency. The global effect discussed here is similar to the “global macroeconomic rebound effect” discussed by Terry Barker and Athanasios Dagoumas (2009) and the “global rebound effects” of Taoyuan Wei (2008). Steve Sorrell (2007) also recognizes the importance of a global rebound effect. Wei, in particular, points to the central role of energy supply. This paper explicitly considers only the supply and demand for liquid fuels, but the elasticity estimates used take account of broader macroeconomic effects. Barker and Dagoumas, estimate the total (global) rebound effect at 50 percent, which does not seem improbably. This paper considers a somewhat different effect, takes a more cautious approach and finds a smaller value.
As shown in the appendix, the global rebound effect is just “Econ 1.” Shifting the demand curve for oil changes the market price and changes the quantities produced and consumed. Typically, global supply and demand gets ignored, just as it is being ignored by California’s LCFS. But global warming is a problem precisely because global effects have been ignored, and if we continue to ignore them, we will not solve the climate problem.
* Thanks to Dan Kirshner for many helpful clarifications.