Fuel Economy 2.0

Abstract

Motor vehicle fuel-economy standards have long been a cornerstone of U.S. policy to reduce fuel consumption in the light-duty vehicle fleet. In 2011 and 2012 these standards were significantly expanded in an effort to achieve steep reductions in oil demand and greenhouse gas emissions through 2025. In 2018, following a review of the standards, the Environmental Protection Agency and National Highway Traffic Safety Administration proposed to instead freeze the standards at 2020 levels, citing high program costs (and potential safety issues).

The current debate over the future of U.S. efficiency standards provides an opportunity to consider whether the existing approach could be improved to achieve environmental goals at a lower cost. The current policy prescribes standards that focus on efficiency alone, as opposed to lifetime consumption, and treats vehicle categories differentially, meaning that it imposes unnecessarily high costs and does not deliver guaranteed petroleum/greenhouse gas (GHG) savings. On the basis of a commitment to cost-benefit analysis, defining U.S. regulatory policy for more than 30 years, we propose a novel reform that has three main features: 1) the regulation of expected fuel consumption/GHG emissions directly without consideration of the type or size of the vehicle; 2) use of existing data to assign lifetime fuel consumption/GHG emissions to each model; and 3) creation of a robust cap-and-trade market for automakers to reduce compliance costs. We show that this approach would increase the certainty of reductions in fuel consumption/GHG emissions in transportation and do so at a far lower cost per gallon/ton of GHG avoided. Such an approach would be consistent with existing statutory authorities at the Environmental Protection Agency and the Department of Transportation.