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

  • Thomas Klier
  • Joshua Linn

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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File URL: http://hdl.handle.net/10.1111/j.1756-2171.2012.00162.x
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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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  1. 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.
  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. 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.
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