• Environmental and Resource Economics Review
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• v.21 no.2
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• pp.321-340
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• 2012

Korean government recently announced that new passenger cars sold within South Korea in 2009 ran an average of 12.27 kilometers per liter of fuel, which is an 7% point increase of the fuel efficiency. The government interpreted these improvements in the fuel economy as energy savings of 60,000 toe and as a reduction of 160,000 ton $CO_2$ emissions. However, improvements in energy efficiency make energy services cheaper, which is known as rebound effect. If this rebound effect exists, and the size of the effect is not negligible, ignoring this could result in overestimating the energy savings achieved by the fuel efficiency increase. Using detailed data on household and vehicle characteristics, our results suggest that there exist a short-run rebound effect of 0.299(29.9%) for the Korean automobile industry. This is notably smaller than the estimates of West (2004), which finds an estimate of 87% using cross-section data for the US. Furthermore our results highlight the importance of rebound effect on energy savings and the $CO_2$ emissions reduction. Our estimates suggest that the report from Korean government overestimates the energy savings and related $CO_2$ emissions by 29.9% point.