The global energy, CO2 emissions, and economic impact of vehicle fuel economy standards

Fuel economy standards have been recently tightened in the United States and Europe, and have been adopted in Japan, Korea, China, Australia, and Canada. This analysis uses a global computable general equilibrium model to analyze the combined effect of existing national or regional fuel economy standards on global demand for petroleum-based fuels, CO2 emissions, and welfare. We also examine the impact of more aggressive targets for fuel economy through 2050 for all regions, and compare it to a market-based (cap-and-trade) instrument that achieves identical reductions. We find that while fuel economy standards reduce demand for petroleum-based refined fuels and lead to a net decrease in global CO2 emissions, the standards are not cost effective in part because they indirectly subsidize the use of these fuels in unconstrained sectors and regions. Refined oil demand even increases in India, Indonesia (Rest of East Asia), and Africa due to lower refined oil prices, as fuel economy standards reduce demand in other parts of the world. Fuel economy standards are also a relatively expensive way of reducing global CO2 emissions—year-on-year consumption loss reaches 10% in 2050 with fuel economy standards, as opposed to 6% by 2050 with a global cap-and-trade system that achieves comparable total CO2 reductions. This study underscores how the effects of national and regional fuel economy standards can propagate through global fuels markets to offset petroleum or CO2 reductions at the global level, as well as lead to surprising outcomes in unconstrained countries or regions.