Analysis of impacts of alternative policies aimed at increasing US energy independence and reducing GHG emissions

The primary objectives of recent energy initiatives have been: (1) lowering greenhouse gas (GHG) emissions; and (2) increasing US energy security by reducing oil imports for the purposes of making the US less vulnerable to the actions of other countries. The concern is that relying on sometimes adversarial, sometimes unstable countries for a quarter of our oil carries certain risks. For that reason, reducing the external oil dependence has been of interest to policy makers. This paper examines the impacts and costs of transportation-based policies on light-duty vehicle fleet energy usage and emissions. Using the 2010 elastic version of the US Environmental Protection Agency's Market Allocation (MARKAL) model, recent increases in US Corporate Average Fuel Economy (CAFE) Standards are compared to what some economists suggest would be a much more “efficient” alternative-asystem-wide oil tax internalizing a number of environmental externalities. We discover that our series of oil taxes produce larger and more cost-effective reductions in economy-wide emissions than CAFE. The same cannot be said in regards to net oil imports. Stricter fuel economy regulations result in much larger cutbacks in imports than the oil tax. In fact, we found that in 2040 import demands are roughly 250 million BOE (barrels of oil equivalent) higher with our oil tax regime than they are with CAFE. The additional import reductions achieved with stricter CAFE Standards do come, however, at a much larger cost to society. A great deal of these additional economic costs stems from greater usage of more energy-efficient automobiles and the higher initial capital costs associated with their adoption. In our supplementary analysis, we find that even if the costs of these types of vehicles are lowered by as much as 75%, oil taxes would still be able to maintain their competitive edge over CAFE standards in regards to cost-effectiveness.