Vehicle Attribute Tradeoffs and the Distributional Effects of US Fuel Economy and Greenhouse Gas Emissions Standards

This paper presents welfare and distributional effects of US passenger vehicle fuel economy and greenhouse gas standards between 2012 and 2022. We build an equilibrium model that allows for endogenous markups, market shares, and nonprice attributes. The model includes fixed and variable costs of raising fuel economy, manufacturer substitution between fuel economy and performance, and heterogeneous consumer preferences and manufacturer costs. We estimate all demand and supply parameters from observed consumer and manufacturer choices. We find that the standards have increased social welfare and that consumer undervaluation of fuel cost savings accounts for most of the social benefits. Manufacturers achieve most fuel economy improvements by trading off horsepower rather than adjusting prices or adding fuel-saving technology. Due to this compliance strategy, the standards have been progressive because high-income households value horsepower much more than low-income households do. Consumer undervaluation of fuel cost savings also contributes to progressivity.