Should a vehicle fuel economy standard be combined with an economy-wide greenhouse gas emissions constraint? Implications for energy and climate policy in the United States

The United States has adopted fuel economy standards that require increases the on-road efficiency of new passenger vehicles, with the goal of reducing petroleum use, as well as (more recently) greenhouse gas (GHG) emissions. Understanding the cost and effectiveness of this policy, alone and in combination with economy-wide policies that constrain GHG emissions, is essential to inform coordinated design of future climate and energy policy. In this work we use a computable general equilibrium model, the MIT Emissions Prediction and Policy Analysis (EPPA) model, to investigate the effect of combining a fuel economy standard with an economywide GHG emissions constraint in the United States. First, a fuel economy standard is shown to be at least five to fourteen times less cost effective than a price instrument (fuel tax) when targeting an identical reduction in cumulative gasoline use. The GHG emissions reduction under a fuel economy standard alone is also shown to be proportionally less than the reduction in gasoline use, in part because GHG emissions from electricity production used in grid-connected electric vehicles are excluded from the regulation. Second, when combined with a cap-and-trade (CAT) policy, the fuel economy standard increases the cost of meeting the GHG emissions constraint by forcing expensive reductions in passenger vehicle gasoline use, replacing other more cost-effective abatement opportunities. Third, the impact of adding a fuel economy standard depends on the availability and cost of abatement opportunities in transport—if advanced biofuels provide a cost-competitive alternative to gasoline, the fuel economy standard does not bind and passenger vehicles provide a significantly larger contribution to GHG emissions abatement. This analysis underscores the potentially large costs of a fuel economy standard relative to alternative policies, as well as importance of jointly considering the effects of policies on petroleum use and GHG emissions reductions, and the associated economic costs.