Estimating the Costs and Benefits of Fuel-Economy Standards

Fuel-economy standards for new vehicles are a primary policy instrument in many countries to reduce the carbon footprint of the transportation sector. These standards have many channels of costs and benefit, affecting sales, composition, vehicle attributes, miles traveled, and externalities in the new-car fleet, as well as the composition and size of the used fleet. We develop a tractable analytical framework to examine the welfare effects of fuel-economy standards and apply it to the recent government proposal to roll back fuel-economy standards. We find that our combined, multimarket vehicle-choice model implies that the proposal would increase the size of the vehicle fleet over time and generates smaller welfare gains than models with a less rich structure of the vehicle market, such as the one used in the analysis associated with the 2018 Notice of Proposed Rulemaking (NPRM) announcement. The disparities across the two models appear to result from the absence of feedback effects in the NPRM analysis. We stress the importance of instead using a multimarket vehicle-choice model to provide the most accurate predictions of costs and benefits. We also derive bounds that can serve as a check on the theoretical consistency of such analyses and that offer insights into the magnitudes of potential errors resulting from imperfect multimarket integration.