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New‐vehicle characteristics and the cost of the Corporate Average Fuel Economy standard

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  • Thomas Klier
  • Joshua Linn

Abstract

Recent legislation has increased the Corporate Average Fuel Economy (CAFÉ) standard by 40 percent, which represents the first major increase in the standard since its creation in 1975. Previous analysis of the CAFÉ standard has focused on the short run effects, in which vehicle characteristics are held fixed, or the long run, when firms can adopt new powertrain technology. This paper focuses on the medium run, when firms can choose characteristics such as weight and power, and have a limited ability to adopt engine technology. We first document the historical importance of the medium run and then estimate consumers’ willingness-to-pay for fuel efficiency, power and weight. We employ a unique empirical strategy that accounts for the characteristics’ endogeneity, which has not been addressed in the literature, by using variation in the set of engine models used in vehicle models. The results imply that an increase in power has an equal effect on vehicle sales as a proportional increase in fuel efficiency. We then simulate the medium run effects of an increase in the CAFÉ standard. The policy reduces producer and consumer welfare and causes substantial transfers across firms, but the effects are significantly smaller than in previous studies.

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Bibliographic Info

Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 43 (2012)
Issue (Month): 1 (03)
Pages: 186-213

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Handle: RePEc:bla:randje:v:43:y:2012:i:1:p:186-213

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References

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  1. Austin, David & Dinan, Terry, 2005. "Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 562-582, November.
  2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  3. Goldberg, Pinelopi Koujianou, 1998. "The Effects of the Corporate Average Fuel Efficiency Standards in the US," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 1-33, March.
  4. Antonio M. Bento & Lawrence H. Goulder & Mark R. Jacobsen & Roger H. von Haefen, 2009. "Distributional and Efficiency Impacts of Increased US Gasoline Taxes," American Economic Review, American Economic Association, vol. 99(3), pages 667-99, June.
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Citations

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Cited by:
  1. Thomas H. Klier & Joshua Linn, 2012. "Using vehicle taxes to reduce carbon dioxide emissions rates of new passenger vehicles: evidence from France, Germany, and Sweden," Working Paper Series WP-2012-09, Federal Reserve Bank of Chicago.
  2. Sallee, James M. & Slemrod, Joel, 2012. "Car notches: Strategic automaker responses to fuel economy policy," Journal of Public Economics, Elsevier, vol. 96(11), pages 981-999.
  3. Soren T. Anderson & Carolyn Fischer & Ian Parry & James M. Sallee, 2010. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," NBER Working Papers 16370, National Bureau of Economic Research, Inc.
  4. Lawrence Goulder & Mark Jacobsen & Arthur van Benthem, 2009. "Unintended Consequences from Nested State & Federal Regulations: The Case of the Pavley Greenhouse-Gas-per-Mile Limits," Discussion Papers 08-049, Stanford Institute for Economic Policy Research.
  5. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
  6. Thomas Klier & Joshua Linn, 2011. "Corporate Average Fuel Economy Standards and the Market for New Vehicles," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 445-462, October.
  7. Michael Anderson & Maximilian Auffhammer, 2011. "Pounds that Kill: The External Costs of Vehicle Weight," NBER Working Papers 17170, National Bureau of Economic Research, Inc.
  8. Chugh, Randy & Cropper, Maureen & Narain, Urvashi, 2011. "The cost of fuel economy in the Indian passenger vehicle market," Energy Policy, Elsevier, vol. 39(11), pages 7174-7183.
  9. Mark R. Jacobsen, 2013. "Evaluating US Fuel Economy Standards in a Model with Producer and Household Heterogeneity," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 148-87, May.
  10. Lawrence H. Goulder & Mark R. Jacobsen & Arthur A. van Benthem, 2009. "Unintended Consequences from Nested State & Federal Regulations: The Case of the Pavley Greenhouse-Gas-per-Mile Limits," NBER Working Papers 15337, National Bureau of Economic Research, Inc.
  11. Linn, Joshua, 2013. "The Rebound Effect for Passenger Vehicles," Discussion Papers dp-13-19, Resources For the Future.

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