The role of efficiency improvements vs. price effects for modeling passenger car transport demand and energy demand–Lessons from European countries

The objective of this paper is to analyze the impact of changes in fuel prices and fuel intensity (i.e. liters of fuel used per 100kilometers) on overall fuel (gasoline and diesel) consumption and on the demand for vehicle km driven in car passenger transport. This is important for deriving effective policy portfolios consisting of fuel taxes and technical standards such as fuel intensity mandates or specific CO2 emission limits. To extract these impacts, we apply cointegration analyses to six European countries and their aggregate over the period 1970–2007. We consider the impact of fuel prices, household income and fuel intensity on fuel consumption. Furthermore, we investigate how changes in fuel prices and fuel intensity interact, analyzing the rebound effect due to lower fuel intensity and due to the switch to diesel. Because we find a high rebound effect with 44% more km driven if fuel intensity is improved 100%, the major conclusion of our analysis for policy makers is that technical standards as the only policy instrument will have limited success. Rather we recommend increased fuel taxes along with fuel intensity standards so that the taxes compensate for the rebound due to the standards.