Estimating the Costs and Benefits of Fuel-Economy Standards

26 Pages Posted: 30 Sep 2019 Last revised: 22 May 2022

See all articles by Antonio Bento

Antonio Bento

University of Southern California - Sol Price School of Public Policy

Mark R. Jacobsen

University of California, San Diego (UCSD) - Department of Economics; Stanford University

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR); National Bureau of Economic Research (NBER)

Arthur van Benthem

University of Pennsylvania - Business & Public Policy Department

Date Written: September 2019

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.

Suggested Citation

Bento, Antonio and Jacobsen, Mark R. and Knittel, Christopher R. and van Benthem, Arthur, Estimating the Costs and Benefits of Fuel-Economy Standards (September 2019). NBER Working Paper No. w26309, Available at SSRN: https://ssrn.com/abstract=3461478

Antonio Bento (Contact Author)

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

Mark R. Jacobsen

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

Stanford University ( email )

Stanford, CA 94305
United States

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR) ( email )

One Amherst Street, E40-279
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Arthur Van Benthem

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States
215-898-3013 (Phone)

HOME PAGE: http://bepp.wharton.upenn.edu/profile/21174/

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