Commentary

More Travel = Higher Income = Lower Energy Use

The Cascade Policy Institute in Portland, Oregon has released a report that will become must reading for those involved in the transportation, climate change, and energy debate. Written by Randall Pozdena, a former research vice president for the San Francisco Federal Reserve, the study found that increased mobility as measured by car use (vehicle miles traveled, or VMT) is strongly related to increased economic growth. This relationships wasn’t just statistical, but causal. Moreover, higher incomes led to innovations in automobile technology that actually reduce energy use. Thus, attempts to limit automobile use will work against very policy goals of those wanting to limit it.

From the executive summary:

The VMT-economy causality investigation finds that, indeed, VMT is a large and statistically significant driver of GDP. It finds also that, historically at least, the price of energy has not been an important driver of innovation in vehicle efficiency. If fuel efficiency could be improved, there would be positive economic effects, but limited, long-run effects on VMT. Specifically, the causality analysis reveals the following:

Although the causality between VMT and GDP is bidirectional, the primary one is for VMT to “cause” GDP growth. In the short run (2 years), an exogenous (an outside influence, such as regulation), downward shock to VMT results in a reduction of GDP of 90 percent of the size of the VMT shock. In the long run (20 years) the link is weaker, at about 46 percent.

In contrast, endogenous (an influence from within the model, research- or discovery-based) improvements in fuel efficiency appear to have a positive effect on GDP. A 10 percent increase in fuel efficiency yields only a 1 percent GDP increase in the short run, but a 6 percent effect in the long run.

VMT is not particularly sensitive to shocks to fuel price alone. The values calculated by the analysis predict well the effects of recent gasoline price increases on VMT. Increases in fuel efficiency cause positive rebounds (increases) in VMT. Although the effect is modest in the short run, after 20 years, exogenous increases in fuel efficiency cause completely offsetting increases in VMT, and thus, energy use, everything else equal.

This does not bode well for strategies such as regulated fleet fuel efficiency standards having a persistent effect on VMT or energy use. It suggests that much of the positive effect of fuel-efficiency improvements on GDP may flow from rebound effects on VMT.

Samuel R. Staley, Ph.D. is a senior research fellow at Reason Foundation and managing director of the DeVoe L. Moore Center at Florida State University in Tallahassee where he teaches graduate and undergraduate courses in urban planning, regulation, and urban economics. Prior to joining Florida State, Staley was director of urban growth and land-use policy for Reason Foundation where he helped establish its urban policy program in 1997.