Working Paper: CEPR ID: DP1373
Authors: Joseph F. Francois; Hakan Nordstrom
Abstract: The US Corporate Average Fuel Economy (CAFE) regulation mandates, subject to a civil penalty, producers to achieve a certain fleet average fuel economy on sales of new passenger cars. Analysing the incentive effects of CAFE, we find that it affords differential tax treatment to car models with identical fuel economy, and therefore differential incentives for improvements. In fact, the incentives may be negative for producers that specialize in small or large models. This casts doubt over the environmental merits of fleet averaging. Moreover, product-mix taxes can be abused by exploiting the specialization patterns of domestic and foreign firms.
Keywords: Corporate Average Fuel Economy; CAFE; Trade Dispute; GATT; Trade and Environment
JEL Codes: F13; K32; K33; 038
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CAFE regulation (L51) | differential tax treatment (H25) |
| differential tax treatment (H25) | varying incentives for fuel economy improvements (R48) |
| fleet averaging (L92) | negative incentives for manufacturers specializing in small or large cars (L62) |
| CAFE regulation (L51) | schedule of internal taxes and subsidies (H23) |
| schedule of internal taxes and subsidies (H23) | distort market incentives (H31) |
| CAFE regulation (L51) | protectionist outcomes (F13) |
| CAFE regulation (L51) | mixed signals for fuel economy improvements (Q49) |