# T h e G l o b a l R e b o u n d E f f e c t

V e r s u s C a l i f o r n i a ’ s L o w

‐ C a r b o n F u e l S t a n d a r d

Documentation available at: www.global

‐ energy.org



## S t e v e n S t o f t

October 1, 2009



### A b s t r a c t

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.



# OBAL ERGY 

# G E L N 

# P O L I C Y 

# C E N T E R

R e s e a r c h P a p e r N o

. 0 9

‐ 0 4

# T h e G l o b a l R e b o u n d E f f

e c t

V e r s u s C a l i f o r n i a ’ s L o w

­ C a r b o n F u e l S t a n d a r d

Steven Stoft *

October, 2009



### 1. Introduction

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

* Thanks to Dan Kirshner for many helpful clarifications. Questions and comments to steven@stoft.conn..

23 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.



### 2. Too Small to Matter?

Perhaps the main reason people ignored the global rebound effect is the belief that local actions are too

small to affect the world market. This is like believing that taking a plane causes no emissions because the

plane was going to fly anyway. It’s also like believing that not driving to work and back has no impact,

because it will not change the plans of any oil refinery. In truth, most specific uses or non

‐ uses of fossil

fuel may well have no impact on total emissions, but the next step of “logic,” which says we can therefore

ignore small changes in fuel use, is a fallacy.

Suppose we know that taking 10 million fewer plane trips will result in 1 million fewer tons of CO 2

emitted. With that large a change, many flights will be cancelled. But any single avoided trip will probably

make no difference. How should we view a trip not taken—as too small a change to matter? Suppose a

study shows that, on average, for every 200 plane trips not taken there is one fewer flight. Then avoiding

a trip has only one chance in 200 of making a difference (causing a flight to be cancelled). But it also

means that when avoiding a trip does make a difference, it makes a huge difference—one whole flight’s

worth, to be precise. The trip that mattered would be the proverbial “straw that broke the camel’s back.”

So one out of 200 avoided trips saves 200 times the average effect of not flying. That’s 20 tons of

emissions. The other 199 times you decide not to fly, it does no good at all.

But no one has any idea which trips matter and which trips don’t. So the only sensible way to think

about this problem is to think that, on average, each trip not taken saves one tenth of a ton. That’s never

actually true, but it’s our best one

‐ number estimate of the truth. So even when a change is too small to

matter most of the time, it still matters, on average, just as much as if each small change had its own

proportional effect. If we think of each small change as having an average effect, we will make the right

choices. If we ignore small changes because they rarely matter, the effect will be disastrous. On average,

all small changes matter—or as a statistician would say, “in expectation” they all matter.

If California’s LCFS were a small change, it would still matter proportionally as much as a large

change because of the camel’s

‐ back effect, but in fact, relative to the global market, it’s not a small

change. Such a policy makes a large change compared with what it takes to cause the global market to

respond. If the global market did not respond, all 70 million barrels of gasoline that California proposes to

displace each year would end up as inventory. The market would neither cause suppliers to keep the oil in

the ground, nor encourage consumers to use any of the oil piling up in storage tanks. But, today’s oil

headline (9/16/09) says “Oil tops $72 on inventory drop.” And the article explains that “Crude for October

delivery rose 2.23%, or $1.58.

... The Energy Information Administration said crude stocks dropped 4.7

million barrels in the week ended Sept. 11.”

So California’s policy is big enough, not just to shift the market a little, but to make oil

‐ market

headlines every month if the market fails to adjust to the LCFS. Although the price may need to adjust

several times, in the end, price will control the inventory level. This means oil will not build up in

inventory, but instead, the price will change (as the headline announced) and production will decrease

and consumption will increase just enough to keep inventory where it’s wanted. Instead of letting

inventory change, the market will increase consumption—that’s rebound—or decrease production.

Decreasing production means keeping oil in the ground that would have been supplied to the market.



### 3. The Rebound Emissions Identity

Suppose you strike oil offshore, and strike it rich. Soon you are producing a million barrels a day and

selling them into the market. That’s the thought experiment, and here’s the question. Which is closer to

the truth: (1) every new barrel will keep one barrel of old supply in the ground, or (2) all of the new oil will

cause a consumption rebound? Does the new production do no harm (by keeping old oil in the ground) or

does it all fully add to emissions (the rebound effect)?Conventional wisdom holds that new production adds 100 percent to emissions. If that’s true, it

means the global rebound effect (GRE) is 100 percent. Suppose the oil strike was off the California coast

and all the new oil is sold in California. That displaces oil from, perhaps, Texas, but when that oil is not

used it can go elsewhere and displace other oil. Somewhere along the way, the extra oil could discourage

production, but conventional wisdom says that instead, it will be sold to consumers. The entire stream of

displaced old oil will go to rebound consumption and then into the atmosphere.

So what does that mean for biofuel? Suppose you didn’t strike it rich after all, but set up an

advanced biofuel factory that produced zero

‐ emission biofuel, and sold that to California. It would go into

the same cars and trucks as the new oil in the previous thought experiment. Californians would use less

old oil exactly as before, so the world oil market would do exactly what it did before with the million

barrels per year of displaced oil. As before, the market would cause a 100

‐ percent consumption rebound

elsewhere in the world.

That means the biofuel—even though it’s the best possible biofuel—would do no good at all. All of

the oil being supplied to the market by old sources would still be consumed somewhere.



### GRE = 100 Percent: If a barrel of new oil contributes a barrel of carbon to the atmosphere, then

producing zero

‐ carbon biofuel does absolutely nothing to reduce global emissions.

This is not conventional wisdom. If I’m not mistaken, conventional wisdom holds that a gallon of new oil

adds 100 percent to emissions and a gallon of perfect biofuel subtracts 100 percent from emissions. That

makes perfect biofuel 200 percent better than gasoline. It’s not. That’s wrong by 100 percent. Now for

balance, let’s look at the other extreme view, based on the other half of conventional wisdom regarding

this topic.

Assume that a gallon of perfect biofuel does save a gallon of gasoline emissions. That means the GRE

is zero. The market holds back a barrel of oil in the ground for every barrel of oil that the biofuel displaces.

There is no rebound consumption. In that case the market will do the same for newly produced oil. That

new oil will come into the market, displace some old oil, and the market will keep an equal amount of old

oil in the ground instead of producing it. So pumping new oil causes no extra emissions.



### GRE = Zero Percent: If using a barrel of zero

‐ carbon biofuel saves an oil

‐ barrel of emissions,

then pumping a new barrel of oil does not increase emissions at all.

Again this says that perfect biofuel is only 100 percent better than new oil. Biofuel saves 100 percent on

emissions and new oil saves zero percent. That’s unlikely, but at least it’s possible. These two results are

both extreme special cases of the

...



### Rebound Emissions Identity:

(Savings if a barrel is conserved) + (Emissions if a barrel pumped)

= One barrel of emissions.

Note that the two items summed are unrelated, except that they occur in the same world. If it’s a low

‐

rebound world, the first will be large and the second small. If it’s a high

‐ rebound world, the reverse will be

true. But in either case the two effects will sum to the emissions from burning one barrel of oil. Note that

using a barrel of zero

‐ carbon biofuel is equivalent to conserving a barrel by not driving. So the identity

applies to emission savings from zero

‐ carbon biofuel just as it does to emission savings from conservation.



### 4. Are the Saudis in Control?

It’s nearly impossible for either extreme GRE value to be correct. But one not

‐ quite

‐ impossible argument

is frequently suggested in support of a zero value for the GRE—the Saudis control the world oil price, and

they will not let it change. This would make biofuel work perfectly and it would prevent all new non

‐ OPEC

oil production from harming the climate. Agreeable outcomes, but they have not occurred in the past.

The Saudis could do this, at least until their production dropped to zero. They would simply reduce

their production by one barrel for every barrel of new biofuel or of new non

‐ OPEC oil. Supposedly, they

would do this to keep the price up and their profits up. However, as they found in 1985, when they had

cut production by 75 percent, their profits were not up. The Saudis did reduce the rebound effect quite a

4bit during that period, but certainly not to zero. And when they threw in the towel at the end of 1985, and

let prices collapse, the rebound effect returned in force. In the end, total rebound was neither zero nor

100 percent, and the price of oil was anything but constant.

The path of oil prices since the summer of 2008 shows that the Saudis have quit trying to control the

price on their own. They now insist on help from their cartel. OPEC has gained in coherence a bit, but

even if they had the self discipline of the Saudis in the early 1980s, it would not be profitable for them to

hold rebound to zero by absorbing 100 percent of the displaced oil themselves. As in the past, reduced

demand or increased supply will continue to reduce the price of oil on the world market, and that will

inevitably cause some rebound in consumption.



### 5. Estimating the Value of the GRE

Partly because of OPEC’s influence on the GRE, it’s quite difficult to estimate its value. In fact, I can find no

published estimate. Barker et al. (2009) may come closest, but their estimate applies to a panoply of

efficiency programs and macroeconomic effects. However the impacts of rebound show up in the results

of many climate models, and also in U.S. Department of Energy’s estimates of the impact of new oil

production on world oil prices. These models contain implicit estimates of the GRE.

To estimate the rebound effect, we need values that answer two questions. How much does a drop

in oil demand reduce the world price of oil? 1 How much does a lower price of oil increase oil

consumption? The first of these can be backed out of model results. The implied values range from 1.5 to

12. 2 That is, a one percent decrease in demand may cause anywhere from a 1.5 percent to a 12 percent

decrease in the world price of oil. To be cautious, I’ll use the value of 1.5, derived from a recent

International Energy Agency (2005) investigation.

For the effect of price on consumption, contemporary estimates are in the range of 0.2 to 0.3

(Hamilton, 2009). Such an effect takes about ten years to fully materialize, but even that time frame is

short when considering climate change. To calculate a value for GRE, assume the price elasticity of

demand is 0.25, meaning a one percent decrease in price causes a 0.25 percent increase in consumption.

Both values describe long

‐ term changes. But the world oil price is much more sensitive over short

time horizons and consumption is much less responsive over short time horizons. So one will be strong

when the other is weak, and this will tend to stabilize the result sooner than the long

‐ run nature of the

estimates would indicate.

Combining these two numbers produces a global rebound effect of 27 percent (see the appendix).

That means that when a barrel of oil is displaced by an increase in the supply of biofuel, almost three

quarters of the oil will not be produced and consumption will increase to use the remaining 0.27 barrels.

If the supply increase comes from perfect biofuel, using that biofuel in place of a barrel of oil causes a one

barrel decrease in emissions. The net effect (1

− 0.27) is a 0.73 barrel decrease in emissions. This is

significantly less than the one

‐ barrel decrease assumed by conventional wisdom but still a strong effect.

Like an increase in biofuel supply, pumping a barrel of new offshore oil produces a rebound

consumption increase that uses 0.27 barrels. But the new oil causes no direct decrease in emissions as

biofuel does, so the total effect on emissions is the 0.27 barrel rebound. Hence, offshore drilling is only

about a quarter as bad as assumed by conventional wisdom. And remember, if you believe that’s too low,

you must accept that the benefit of perfect biofuel is less than the 73 percent just estimated. Note that

perfect biofuel is better than new offshore oil by exactly one barrel of emissions per barrel of supply

increase. That makes sense. Put another way, the savings from perfect biofuel (0.73) plus the emissions

from new gasoline (0.27) sums to exactly 1.00 (not because they effect each other, but because they are

1 See the appendix for a graph of the estimated effect.

2 The low value is from the IEA’s (2005) alternative scenario, while the high value is from the IEA’s (2007)

High Growth Scenario. In this scenario oil demand is 5771 (p. 109) instead of 5585 (p. 74), or 3% greater,

while the price of oil is 40% greater (p. 151) than in the reference case. Many other estimates lie in

between these two extremes (Stoft, 2008).

5controlled by the same rebound effect). That’s the Rebound Emissions Identity. The estimated value of 27

percent for the GRE is not particularly accurate, but whatever the true value is, the identity will still hold,

and perfect biofuel will be 100 percent better than oil, no more and no less.



### 6. California’s Low Carbon Fuel Standard

California’s Low Carbon Fuel Standard (LCFS), which is not yet in place, proposes to require a 10 percent

reduction in the average carbon content of California fuel. Suppose that fuel is currently all gasoline, and

there is biofuel available with 50 percent of gasoline’s carbon content (superb, by today’s standards). How

much gasoline will need to be replaced to reduce global emissions by 10 percent of California’s current

fuel emissions?

If the GRE is zero percent, a 20 percent replacement would reduce carbon emissions 10 percent. This

is shown in the second column and second row of Table 1. But if the GRE is 27 percent as estimated above

and shown in column three, then the biofuel has an effective carbon content of 77 percent (50+27) as

shown in column four, and the required replacement is 44 percent. Of course, if the biofuel being used

has a carbon content of 70 percent, as claimed by some corn

‐ ethanol optimists, its true effective carbon

content, due to the GRE, is 97 percent. Even if all gasoline were replaced, the carbon reduction would be

only three percent, not the required 10 percent.

Table 1. Meeting a 10 Percent Low Carbon Fuel Standard

Biofuel

carbon

content Required

biofuel

substitution

w/o GRE Global

Rebound

Effect

(GRE) Effective

carbon

content

biofuel Required

biofuel

substitution

with GRE



### 30% 14% 27% 57% 23%

50% 20% 27% 77% 44%

70% 33% 27% 97% Impossible

30% 14% 33% 63% 27%

50% 20% 33% 83% 60%

70% 33% 33% 103% Harmful

The International Energy Agency made one study of a world with a tight supply of oil, and this study

found that a one percent reduction in demand for oil caused a 12 percent fall in price. If we assume the

world is looking just a little tight on oil supply and that a two percent fall in price is more realistic than the

minimal estimate of 1.5 percent, then the GRE becomes 33 percent instead of 27 percent. For a biofuel

with a 50 percent carbon content, that makes quite a difference. Its effective carbon content rises to 83

percent, which is getting close to the impossibility cutoff of 90 percent. So it would require replacing 60

percent of all gasoline to achieve the 10 percent reduction in carbon emissions (see Table 1).

To assure that the LCFS does little harm, it should use a modestly safe value for GRE, say 30 percent,

and add that to carbon content when crediting biofuels. Of course, this is no guarantee that the policy will

not harm the climate, but it will improve the policy’s chances dramatically.

If it is felt that accounting for GRE makes the policy too stringent, then the policy can be relaxed by

targeting a five percent carbon reduction instead of a 10 percent reduction. For a 40 percent carbon

‐

content biofuel, that would be as easy to meet as meeting a 10 percent reduction without the GRE effect

taken into account. The benefit of taking into account the GRE and using a 5% target is that it rules out

the relatively high

‐ carbon biofuels, which are harmful globally, even though they appear beneficial locally.



### 7. Conclusion

This paper contributes several innovations to the rebound literature. First, it looks at rebound in oil use

instead of energy use. Second, it looks at fuel substitution as well as efficiency. And third, it uses results of

global climate and energy models to estimate the magnitude of the global rebound effect.

6Finally, it establishes a useful quantitative relationship between net global emissions from a new

supply of oil and the net global reduction in emissions from oil conservation. In particular these must sum

to 100 percent. For example, if conserving a barrel saves 0.75 barrels of global emissions, then a new

barrel of oil supplied to the market causes a net increase of 0.25 barrels of global emissions. This

relationship is useful in showing that the global rebound effect must be important, and in aiding with

consistent policy evaluation.

Although its purpose is to assess global emissions, this paper does not consider the effects of

switching between fossil fuels. This effect reduces the impact of the oil rebound on the emissions

rebound. But it is likely not a large effect because fuel

‐ switching is difficult in the transportation sector.



### 8. Technical Appendix

The global rebound effect results from the interaction of global supply and demand curves when the

demand curve for oil from all existing producers is shifted left by the injection of biofuel from a new

producer. It also results from shifting the demand curve left by simply removing some demand from the

world oil market through some form of conservation.

Figure 1. The Global Rebound EffectPriceofSupplyorDemad

Quantity of Oil Suppy or Oil Demand 

### Biofuel

Rebound Supply

Demand

When, for example, California produces and uses new biofuel, that reduces global demand for oil,

but it does not change how much consumers elsewhere in the world demand at any give price of oil.

Hence the global demand curve simply shifts left without changing shape. Of course, if California does not

create a new supply of biofuel, but simply purchases the biofuel from the world market, then the global

demand curve will shift very little. Instead the primary effect may be simply to move biofuel to California

and gasoline to wherever the biofuel would have been used.

Computing the GRE. Global climate

‐ policy models estimate what happens when policy

‐ induced

conservation and alternative energy programs shift the demand curve left, as in Figure 1. So the output of

these models gives the total change in oil price and quantity. Figure 1 shows this change from the start of

the Biofuel arrow to the tip of the Rebound arrow. These two points are both on the supply curve, so the

values reported above from climate models describe the long

‐ run global supply curve. The price elasticity

of demand is the second necessary input. Both values are given as a ratio of percentage changes, so they

are represented by the inverse price elasticity of demand as follows: elasticity of supply and price



### ݀ܲ

݀ܳ ௌ 

### ܳ ௌ



### ܲ ൌ ݊, and െ݀ܳ ஽



### ݀ܲ ܲ

ܳ ஽ 

### ൌ ݁

In the discussion above, ݊ ൌ 1.5

, and ݁ ൌ 0.25

. These two equations provide the information needed to

determine the rebound effect for small shifts in demand.

78 A supply and demand curve pair go g ଴ , ܲ ଴ ሻ, along with a biofuel shift factor,

ܤ

, can be written as follows. in through the point ( ܳ

ܳ ܲ

ௌ ൌ ܳ ଴ ൅ߚ·ሺ െܲ

଴ ሻ

ܳ ஽ ൌ ܳ ൅ ߙ · ሺܲ

଴ െ ܲሻ െ ܤ

଴

Setting supply equal to demand, solving for ܲ

, and differentiating with respect to ܤ

, gives ݀ܲ כ ݀ܤ ⁄

ൌ

െ1 ሺ ߙ൅ߚ ሻ

, ⁄ where ܲ כ is the equilibrium value of ܲ

. Next, from the supply curve, find that ݀ܳ כ ݀ܤ ⁄

ൌ െ ߚ ሺߙ ൅ ߚሻ ⁄

. This tells by how much supply and deman will fall when the demand curve shifts left b

one u ሺߙ ൅ ߚሻ ⁄ is the rebound effect, which si plifies ߚሻ

. d y

nit. So 1െߚ m to ߙ ሺߙ ൅ ⁄

Differentiating the supply function with respect to ܲ and substituting that into the definition of ݊

gives ߚൌܳ

଴ ݊ܲ ଴ ⁄

. Similarly, the demand function reveals that ߙ ൌ ݁ܳ ଴ ܲ ଴ ⁄

. Substituting these values

into the formula for the rebound effect, gives GRE = ݁݊ ሺ1 ൅ ݁݊ሻ ⁄

. This can also be deduced less

rigorously, but more simply, from an example in Carbonomics (Stoft, 2008, p. 92).



### 9

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Efficiency Policies.” Presented at the Cambridge Energy Forum and 4CMR Seminar, May 14.

http://www.landecon.cam.ac.u k/research/eeprg/4cmr/news /pdf/Rebound_Barker%20&% 20Dagoumas_Rebound_14052009V3.pdf

Barker, Terry, Athanasios Dagoumas, and Jonathan Rubin. 2009. “The macroeconomic rebound effect and

the world economy.” Energy Efficiency 1570

‐ 6478. Published online, May 28.

IEA (2005): World Energy Outlook 2005

. International Energy Agency.

IEA (2007): World Energy Outlook 2007

. International Energy Agency.

Hamilton, James D. 2009. “Understanding Crude Oil Prices,” Energy Journal

, vol. 30, no. 2: 179

‐ 206.

Sorrell, Steve and Horace Herring, eds. 2009. Energy Efficiency and Sustainable Consumption: The

Rebound Effect (Energy, Climate and the Environment)

. Palgrave Macmillan.

Sorrell, Steve. 2007. The Rebound Effect: an assessment of the evidence for economy

‐ wide energy savings

from improved energy efficiency

. UK Energy Research Centre, Oct. ISBN 1

‐ 903144

‐ 0

‐ 35.

http://www.ukerc.ac.uk/Downloads/PDF/07/0710 ReboundEffect/0 710ReboundEffe ctReport.pdf

Stoft, Steven. 2008. Carbonomics: How to Fix the Climate and Charge It to OPEC

. Nantucket: Diamond

Press.

Wei, Taoyuan. Forthcoming. “A general equilibrium view of global rebound effects,” Energy Economics

. Wei, Taoyuan, 2009. http://papers.ssrn.com/sol3/pap ers.cfm?abstract_id=1374303