Working Paper: NBER ID: w26309
Authors: Antonio M. Bento; Mark R. Jacobsen; Christopher R. Knittel; Arthur A. Van Benthem
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.
Keywords: fuel economy standards; welfare effects; vehicle fleet; multimarket interactions
JEL Codes: H23; L51; Q38; Q48; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| proposed rollback of fuel economy standards (R48) | increase in size of the vehicle fleet over time (L92) |
| increase in size of the vehicle fleet over time (L92) | smaller welfare gains (D69) |
| fuel economy effect (Q41) | welfare gain or loss from changes in standards (D60) |
| mileage effect (R48) | welfare loss from increased driving due to lower driving costs (R48) |
| gasoline market effect (L94) | welfare gains from reduced externalities associated with fuel consumption (D62) |
| tightening of standards (J80) | welfare gain (if consumers undervalue fuel economy) (D11) |
| tightening of standards (J80) | welfare loss (if consumers fully value fuel savings) (D69) |
| overall welfare effect of tightening standards (D69) | depends on interplay of fuel economy, mileage, and gasoline market effects (R48) |