Do light vehicle emissions standards promote environmental goals in Australia?

Policy makers around the world deem fuel-efficiency improvement schemes as a cost-effective way to reduce energy consumption and greenhouse gas emissions in the private transport sector. However, there has been a heated discussion over whether the mechanical approach of improved fuel efficiency may be offset by behavioural changes that lead to more consumption of energy goods and services. In previous literature, economists have defined this adjustment on the consumer side as the “rebound effect”, and if the rebound effect were larger than the “mechanical effect”, there would be a “backfire effect”, meaning that total energy consumption would soar after a technological improvement in energy efficiency. To investigate this effect, we first examine theoretically the possible results of an exogenous technological improvement in fuel use, and then empirically analyse the magnitude of the rebound, adopting a computable general equilibrium (CGE) model of the Australian economy. We simulate a 3% increase in fuel efficiency in the transport sector, in accordance with the target of the mandatory policy on light-vehicle emission standards proposed by the Climate Change Authority (CCA) of Australia in 2014. The simulation results show that for the Australian economy, although a specific technological improvement in transport fuel produces a rebound effect, it still results in an overall fuel saving. In addition, a 0.02% growth in GDP is achieved, meaning that the overall energy efficiency is improved, since fuel consumption has been reduced. However, the results and policy implications of this analysis should be taken cautiously, as this simulation applies only to one specific improvement in fuel efficiency, not to a general energy-efficiency improvement. In addition, all other industrial sectors are assumed to have no technological change in this simulation.