New vehicle fuel economy in the UK: Impact of the recession and recent policies

Interests in vehicle fuel economy have increased in the past few years with the implementations of more stringent CAFE standard in USA and mandatory carbon emission standard in the EU. We seek to understand the effects of recent policies such as restructuring of Vehicle Excise Duties and EU standard on new vehicle fuel economy in the UK. In the past few years there have been substantial fluctuations in income and fuel prices, offering an interesting testing ground to understand their impact on the demand for fuel economy in vehicles. We use a monthly dataset to find that the emission standard is the largest driver for fuel economy improvements in recent years. Also, contrary to some recent findings in Europe and in UK, we find that income has an effect and that the recession had some role in improving the fuel economy. The effects of fuel prices were relatively small. Restructuring of the VED also improved new vehicle fuel economy in the UK, but the scrappage scheme had no significant effect. Results indicate that both supply and demand side policies are effective in improving fuel economy, although quantitatively the emission standard appears more effective due to its stringency. It is also important to consider the effects of income while devising demand side policies.