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Are Fuel Economy Standards Regressive?


  • Lucas W. Davis
  • Christopher R. Knittel


Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. We pair a simple model of the automakers' profit maximization problem with unusually-rich nationally representative data on vehicle registrations to estimate the distributional impact of U.S. fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers which creates an implicit subsidy for fuel-efficient vehicles and an implicit tax for fuel-inefficient vehicles. Moreover, when these obligations are tradable, permit prices make it possible to quantify the exact magnitude of these implicit subsidies and taxes. We use the model to determine which U.S. vehicles are most subsidized and taxed, and we compare the pattern of ownership of these vehicles between high- and low-income census tracts. Finally, we compare these distributional impacts with existing estimates in the literature on the distributional impact of a carbon tax.

Suggested Citation

  • Lucas W. Davis & Christopher R. Knittel, 2016. "Are Fuel Economy Standards Regressive?," NBER Working Papers 22925, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22925
    Note: EEE IO PE

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    References listed on IDEAS

    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. Burtraw, Dallas & Sweeney, Richard & Walls, Margaret, 2009. "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues From a Cap-and-Trade Auction," National Tax Journal, National Tax Association, vol. 62(3), pages 497-518, September.
    3. 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 667-699, June.
    4. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association, vol. 68(1), pages 195-214, March.
    5. ITO Koichiro & James M. SALLEE, 2014. "The Economics of Attribute-Based Regulation: Theory and evidence from fuel-economy standards," Discussion papers 14057, Research Institute of Economy, Trade and Industry (RIETI).
    6. West, Sarah E., 2004. "Distributional effects of alternative vehicle pollution control policies," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 735-757, March.
    7. Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-634, June.
    8. Klier, Thomas & Linn, Joshua, 2016. "The effect of vehicle fuel economy standards on technology adoption," Journal of Public Economics, Elsevier, vol. 133(C), pages 41-63.
    9. John E. Kwoka, 1983. "The Limits of Market-Oriented Regulatory Techniques: The Case of Automotive Fuel Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 695-704.
    10. 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.
    11. James M. Sallee, 2011. "The Surprising Incidence of Tax Credits for the Toyota Prius," American Economic Journal: Economic Policy, American Economic Association, vol. 3(2), pages 189-219, May.
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    Cited by:

    1. Arik Levinson, 2017. "Energy Efficiency Standards Are More Regressive Than Energy Taxes: Theory and Evidence," Working Papers gueconwpa~17-17-01, Georgetown University, Department of Economics.
    2. Owen, Sally & Noy, Ilan, 2017. "The unfortunate regressivity of public natural hazard insurance: A quantitative analysis of a New Zealand case," Working Paper Series 6399, Victoria University of Wellington, School of Economics and Finance.
    3. Arik Levinson, 2016. "Energy Efficiency Standards Are More Regressive Than Energy Taxes: Theory and Evidence," NBER Working Papers 22956, National Bureau of Economic Research, Inc.
    4. Benjamin B. Lockwood & Dmitry Taubinsky, 2017. "Regressive Sin Taxes," NBER Working Papers 23085, National Bureau of Economic Research, Inc.
    5. Kenneth Gillingham & Anders Munk-Nielsen, 2017. "A Tale of Two Tails: Commuting and the Fuel Price Response in Driving," CESifo Working Paper Series 6792, CESifo Group Munich.
    6. Don Fullerton & Erich Muehlegger, 2017. "Who Bears the Economic Costs of Environmental Regulations?," CESifo Working Paper Series 6596, CESifo Group Munich.

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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