Clearing the Air: The Costs and Consequences of Higher CAFE Standards and Increased Gasoline Taxes

Abstract:     
Concerns about energy security and climate change have sparked legislators' interest in reducing gasoline consumption by increasing corporate average fuel-economy (CAFE) standards. Using an empirically rich simulation model and cost estimates for anticipated fuel-economy technologies, we estimate annual costs of reducing long-run gasoline consumption by 10% via a 3.8 miles per gallon increase in the standards, and the potential cost savings from allowing manufacturers to buy and sell fuel-economy credits. Maximum gasoline savings would be realized only after all existing vehicles were replaced, or 14 years in our model. A gasoline tax would produce greater immediate savings by encouraging people to drive less, and eventually to choose more fuel-efficient vehicles. We demonstrate the advantage of a tax by comparing the cost of the higher CAFE standards over the first 14 years, against the cost of a gasoline tax that would save the same amount of gasoline over that time.

Keywords: CAFE, fuel economy standards, gasoline tax, credit trading, climate change

JEL Classifications: Q40, Q48, Q25, H21

Accepted Paper Series