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Fuel Efficiency Improvements: Feedback Mechanisms and Distributional Effects in the Oil Market

Finn Roar Aune (), Ann Christin Bøeng (), Snorre Kverndokk (), Lars Lindholt () and Knut Einar Rosendahl ()
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Ann Christin Bøeng: Statistics Norway
Lars Lindholt: Statistics Norway

Environmental & Resource Economics, 2017, vol. 68, issue 1, No 2, 15-45

Abstract: Abstract We study the interactions between fuel efficiency improvements in the transport sector and the oil market, where the efficiency improvements are policy-induced in certain regions of the world. We are especially interested in feedback mechanisms of fuel efficiency such as the rebound effect, carbon leakage and the “green paradox”, but also the distributional effects for oil producers. An intertemporal numerical model of the international oil market is introduced, where OPEC-Core producers have market power. We find that the rebound effect has a noticeable effect on the transport sector, with the magnitude depending on the oil demand elasticity. In the benchmark simulations, we calculate that almost half of the energy savings may be lost to a direct rebound effect and an additional 10% to oil price adjustments. In addition, there is substantial intersectoral leakage to other sectors through lower oil prices in the regions that introduce the policy. There is a small green paradox effect in the sense that oil consumption increases initially when the fuel efficiency measures are gradually implemented. Finally, international carbon leakage will be significant if policies are not implemented in all regions; we estimate leakage rates of 35% or higher when only major consuming regions implement fuel economy policies. Non-OPEC producers will to a larger degree than OPEC producers cut back on its oil supply as a response to fuel efficiency policies due to high production costs.

Keywords: Fuel efficiency; Transport; Oil market; Market power; Distributional effects; Feedback mechanisms (search for similar items in EconPapers)
JEL-codes: D42 Q54 R48 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10640-017-0134-7

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