Estimating the Costs and Benefits of Fuel-Economy Standards

Abstract

Fuel-economy standards for new vehicles are a primary policy instrument in many countries to reduce the carbon footprint of the transportation sector. These standards have many channels of costs and benefit, impacting sales, composition, vehicle attributes, miles traveled and externalities in the new-car fleet, as well as the composition and size of the used fleet. We develop a tractable analytical framework to examine the welfare effects of fuel-economy standards, and apply it to the recent government proposal to roll back fuel-economy standards. We find that our combined, multi-market vehicle choice model implies that the proposal would increase the size of the vehicle fleet over time, and also generates smaller welfare gains than models with a less rich structure of the vehicle market, such as the one used in the analysis associated with the 2018 Notice of Proposed Rulemaking (NPRM) announcement. The disparities across the two models appear to result from the absence of feedback effects in the NPRM analysis. We stress the importance of instead using a multi-market vehicle choice model to provide the most accurate predictions of costs and benefits. We also derive bounds that can serve as a check on the theoretical consistency of such analyses, and that offer insights into the magnitudes of potential errors resulting from imperfect multi-market integration.

Policy-Induced Innovation in Clean Technologies: Evidence from the Car Market

“…12 It is well established that car manufacturers have some degree of market power and thus some price-setting ability (e.g., Berry et al 1995). In this way the standard works as an implicit tax on dirty vehicles (Bento et al, 2020). Without changing their vehicle mix, firms have also been shown to trade off vehicle characteristics (Knittel, 2011).…”

“…Anderson and Sallee (2016) use a simple model to illustrate the welfare effects of various instruments. Parry and Small (2005) discuss the optimal fuel tax and Jacobsen (2013) and Bento et al (2020) analyze the welfare effects of the American Corporate Average Fuel Economy (CAFE) standards. Jacobsen and van Benthem (2015) highlight the importance of scrappage decisions and the effects of policies on the market for used vehicles.…”

Behavioral Welfare Economics

“…economics; it is conventional. For example, fuel economy regulations impose costs, which can be calculated (and which are imposed largely on consumers, in the form of higher sticker prices) (Bento et al, 2019). Those regulations also reduce air pollution, including greenhouse gas emissions; monetization is more challenging here, but standard tools are available to do exactly that (Greenstone, 2013).…”

Environmental, Redistributive and Revenue Effects of Policies Promoting Fuel Efficient and Electric Vehicles

“…As such, it is important to analyze households' car choice decision between combustion engine and alternative fuel vehicles to be able to be er understand the factors that hinder or foster the di usion of these technologies in the population (Xing, Leard, & Li 2021, Springel 2021. Furthermore, policies should also be assessed with regards to their impact on environmental outcomes (Bento, Jacobsen, Kni el, & Van Benthem 2020, Holland, Mansur, Muller, & Yates 2016) as well as their potential redistributive implications, which requires an in depth analysis of the e ects of tax policy changes or subsidies across the income distribution (Sallee 2011, Durrmeyer 2021.…”