Working Paper: NBER ID: w22925
Authors: Lucas W. Davis; Christopher R. Knittel
Abstract: Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. We pair a simple model of the automakers' profit maximization problem with unusually-rich nationally representative data on vehicle registrations to estimate the distributional impact of U.S. fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers which creates an implicit subsidy for fuel-efficient vehicles and an implicit tax for fuel-inefficient vehicles. Moreover, when these obligations are tradable, permit prices make it possible to quantify the exact magnitude of these implicit subsidies and taxes. We use the model to determine which U.S. vehicles are most subsidized and taxed, and we compare the pattern of ownership of these vehicles between high- and low-income census tracts. Finally, we compare these distributional impacts with existing estimates in the literature on the distributional impact of a carbon tax.
Keywords: fuel economy standards; carbon tax; distributional impact; implicit subsidy; implicit tax
JEL Codes: H22; L51; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. fuel economy standards (R48) | implicit subsidy for fuel-efficient vehicles (H23) |
| U.S. fuel economy standards (R48) | implicit tax for fuel-inefficient vehicles (H23) |
| U.S. fuel economy standards (R48) | distributional impact on vehicle ownership patterns (R48) |
| U.S. fuel economy standards (R48) | greater cost for high-income households (H31) |
| U.S. fuel economy standards (R48) | greater burden for low-income households when including used vehicles (R48) |
| Fuel economy standards (R48) | more progressive than a carbon tax without revenue recycling (H23) |
| Fuel economy standards (R48) | more regressive than a carbon tax with revenue recycling (H23) |