The Global Rebound Effect

Warning, math ahead. This box derives the 0.26 gallons value.

1. First, the IEA tells us that a 1 percent reduction, O, in oil demand causes a 1.5 percent reduction, P, in the world oil price.

P = 1.5 O.

2. Nordhaus tells us that a 1 percent reduction in oil price causes a 0.24 percent increase, F, in fuel demand:

F = –0.24 P.

3. Combining these two gives:

F = –0.36 O.

4. The change in oil use caused by ethanol is given by:

O = F – E.

5. Combining 3 and 4 gives:

O = –0.36 O – E.

O = –0.74 E.

6. Add the increase in ethanol to the global reduction in oil to find the effect on total liquid fuel use:

F = E + O = 0.26 E.

If alternative fuel or conservation cuts oil demand by 1 unit, the world liquid-fuel price will fall and cause a Global Rebound Effect of 0.26 units more fuel demand.