Josh Linn (U. Maryland ARE)

Abstract

Fuel economy and greenhouse gas standards affect about half of all vehicles globally. This paper provides the first comprehensive estimates of the social welfare effects of recent standards, focusing on the US for the years 2012 through 2016 during which fuel economy standards tightened by 13 percent. We use a new equilibrium model that includes heterogeneous preferences across consumer groups, fixed and variable costs of raising fuel economy, and substitution between fuel economy and performance. We find that the standards have reduced greenhouse gas emissions at a cost of -150 to 25 dollars per metric ton of carbon. Most of the fuel economy improvements have been achieved by trading off horsepower for fuel economy, rather than adjusting vehicle prices or adding fuel-saving technology. Horsepower would have increased 25 percent if standards had not tightened, but instead remained roughly unchanged as standards tightened through 2016.