Environmental and Resource Economics

, Volume 68, Issue 1, pp 15–45 | Cite as

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

  • Finn Roar Aune
  • Ann Christin Bøeng
  • Snorre KverndokkEmail author
  • Lars Lindholt
  • Knut Einar Rosendahl


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.


Fuel efficiency Transport Oil market Market power Distributional effects Feedback mechanisms 

JEL Classification

D42 Q54 R48 



Thanks to Cathrine Hagem, Bjart Holtsmark, three anonymous referees, the guest editors and participants at the 11th Tinbergen Institute Conference on “Combating Climate Change” for comments. The project is financed by CREE, the PETROSAM program at the Research Council of Norway and the ENTRACTE Project financed by the European Union. While carrying out this research the authors have been associated with CREE - Oslo Centre for Research on Environmentally Friendly Energy. The CREE Centre acknowledges financial support from The Research Council of Norway.


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Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  1. 1.Research DepartmentStatistics NorwayOsloNorway
  2. 2.Ragnar Frisch Centre for Economic ResearchOsloNorway
  3. 3.Norwegian University of Life SciencesÅsNorway
  4. 4.Department of National Accounts and Industry StatisticsStatistics NorwayOsloNorway

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