There’s a quirk of macroeconomics known as the rebound effect, and it can be a bit of a drag. When the price of a widely used commodity falls, consumers tend to use more of it. In most cases, that’s a good thing. But sometimes the price drop is the unintended consequence of policies or technologies that were actually designed to reduce the use of the commodity, due to concerns about the commodity’s harmful side effects. In those instances the price drop is a bad thing, because a rebound in the usage rate can worsen the problem that the policies and technologies were meant to address.
Understanding the rebound effect is important because it partly explains why the United States’ biofuel consumption mandate—the revised Renewable Fuel Standard, or RFS2—is increasing the amount of greenhouse gas emitted by cars and trucks, instead of lowering those emissions. The RFS2 has boosted the supply of motor vehicle fuel in the United States by requiring refiners to add billions of gallons of biofuel into the US fuel supply each year. Fuel markets are influenced by a variety of factors, but higher supply usually begets lower prices. Drivers buy more fuel than they would have, and emit more GHG as a result.
This is ironic, of course, because the RFS2 is supposed to reduce GHG emissions. According to the Environmental Protection Agency, the net lifecycle GHG emissions associated with growing, producing, and burning many types kinds of biofuel (taking into account the CO2 that’s sequestered by the plants before they’re harvested to make the fuel) are lower than the lifecycle GHG emissions of gasoline and diesel. That’s a highly debated point, especially with respect to conventional biofuels like corn ethanol (which has accounted for 87% of the biofuel used to comply with the RFS over the last ten years).
But even if you were to assume that biofuels have lower net GHG emissions than gasoline and diesel, a key factor in determining the RFS2’s climate impact is the extent to which the mandated biofuels actually displace petroleum fuels. As described by the University of Minnesota’s Jason Hill, Liaila Tajibaeva, and Stephen Polasky in their incisive new study in the journal Energy Policy,
[I]f the displacement of fossil fuel by low-carbon fuel is one-for-one, the savings in GHG emissions is equal to the reduction in carbon intensity. (For example, assuming full displacement, a low-carbon fuel with a GHG intensity 20% lower than that of a fossil fuel will reduce GHG emissions by 20%.) If, on the other hand, there is no displacement, then GHG emissions increase by the amount of GHG emissions from the additional supply of low-carbon fuel. In general, increasing the supply of low-carbon fuel only partially displaces fossil fuel. This results in lower GHG emissions only when the savings from the reduction in carbon intensity outweighs the increase in GHG emissions from additional fuel use.
Why does an increase in the supply of biofuel only partially displace fossil fuel? Economics. Or more specifically, the rebound effect.
The rebound effect is most often used to describe why efficiency improvements rarely result in one-to-one reductions in energy consumption, but it affects other policy-driven energy transitions as well, including efforts to replace gasoline and diesel with biofuels. The rebound effect associated with policies that promote biofuels is well-documented—in their new study, Hill et al. cite 15 recent articles on the issue—and its impact was acknowledged by EPA in 2010 when the Agency implemented the current version of the RFS2:
Increased renewable fuel use domestically is expected to also have the effect of lowering the world crude oil price and therefore increase international demand for petroleum-based fuels and increase GHG emissions.
Most of the relevant literature attempts to determine what percentage of fossil fuel use is actually displaced by a particular biofuel subsidy. For example, a CATF-supported analysis by Steven Stoft of the Global Energy Policy Center found that every 100 gallons of biofuel mandated by the RFS2 would displace 32 energy-equivalent gallons of petroleum fuel. The other 68 energy-equivalent gallons of petroleum would be consumed along with the 100 gallons of biofuel, as drivers take advantage of lower fuel prices. Stoft’s 32% displacement rate sits comfortably within the range of displacement rates calculated by other researchers.
Despite having acknowledged the rebound effect’s countervailing impact on net GHG emissions, EPA has so far refused to incorporate the rebound effect into its RFS2 lifecycle GHG assessment of biofuels—essentially assuming a displacement rate of 100%. CATF petitioned EPA to reconsider its approach, pointing out that the Agency is required by law to consider “significant indirect emissions” when calculating biofuels’ lifecycle GHG emissions.
The new study from Hill et al. shrewdly sidesteps the debate regarding the correct displacement percentage in some of the previous analyses by generously “select[ing] a conservative gasoline displacement rate of [50%].” In other words, the authors assume that every 100 gallons of biofuel mandated by the RFS2 displace 50 energy-equivalent gallons of gasoline or diesel. The authors’ generous 50% displacement assumption allows them to proceed apace to the more pressing question of whether “the increase in energy use overwhelms the benefits of reduced carbon intensity.” They also assume (again, quite generously) that all of the biofuels used to comply with the RFS actually achieve the GHG reduction targets set by Congress in 2007.
The resulting analysis should extinguish any lingering hope that the RFS2 might be a useful tool for mitigating climate change:
Taking this [50%] fuel market rebound effect into account and assuming the biofuels in RFS2 achieve their targeted GHG emissions reductions in all years, RFS2 actually leads to a net increase in GHG emissions of 22 million metric tons in 2022, and of 431 million metric tons cumulatively from 2006 to 2022. In sum, this mandate for the production of less GHG intense fuels actually increases net GHG emissions to the atmosphere relative to no action due to the low amounts of gasoline being displaced. In other words, RFS2 increases GHG emissions instead of reducing them when individual fuel GHG reduction targets are met.
As we debate whether and how to reform the RFS2, supporters of the existing policy will point to its first-of-a-kind GHG reduction requirement and hail the good intentions of its drafters. Climate change, however, “is one of those rare issues—because of its magnitude, because of its scope—that if we don’t get it right we may not be able to reverse.” Climate change is indifferent to our good intentions, and pitiless when those intentions backfire. Addressing climate change requires real—not intended—emissions reductions.
We are going to make mistakes as we search for the best ways to achieve those reductions, but we cannot afford to perpetuate those mistakes once we’ve been alerted to them. More to the point, we can’t afford to keep a nominally climate-friendly policy on the books when research shows that the policy will put an additional 431 million metric tons of CO2 into the atmosphere by 2022. We have to shift course on the Renewable Fuel Standard.