A higher rebound effect under bounded rationality: Interactions between car mobility and electricity generation

It is widely believed that with the right economic incentives, electrification of transport can significantly reduce CO₂ emissions by 2050. Estimates of future emissions from car transport tend, though, to ignore technological change in electricity generation and bounded rationality of consumers. In this article we address these two shortcomings by developing a novel approach that captures the dynamic interdependence between the car industry and electricity generation. We assess how incorporating realistic behaviors affects estimates of emissions from passengers cars in four models of vehicle adoption, namely with rational, myopic, habit-oriented and loss-aversive consumers. This is then combined with three behavioral models of travel distance, describing rational, habitual and loss-averse drivers. In the electricity sector, technological change occurs through installation of new power plants embodying different energy technologies. This allows us to study the impact of policies promoting renewable energy on the price of electricity, and indirectly on the rate of adoption of electric cars. The findings indicate that substituting renewable energy for fossil fuels in electricity generation by 2050 can triple the electricity price. This undermines the positive effect of subsidies on electric car adoption, with the specific effect depending on particular behaviors assumed to hold. In addition, we show that myopic and loss-averse consumers buy on average less fuel-efficient cars than rational agents. Habitual drivers tend to commute larger distances than rational ones, as they do not adjust their behavior optimally to changes in fuel prices and improvements in fuel efficiencies. These behavioral effects contribute to the rebound effect. Our findings indicate that vehicle choice and driving under rational behavior generate consistently the lowest estimates of life-cycle emissions. By ignoring more realistic behaviors consistent with bounded rationality, current studies underestimate emissions from passenger cars, in turn contributing to overly optimistic expectations about policy impacts.