Takahiko Kiso August 6, 2012 An Evaluation of Footprint-Based Corporate Average Fuel Economy Standards

Introduction Corporate Average Fuel Economy (CAFE) Standards: Regulate each automakers sales-weighted average fuel economy Administered by EPA & Dept. of Transportation Goal: reduce gasoline consumption CAFE Standards have been tightened in recent years Current goal: improve market average fuel economy by 40% between 2009 and 2016 In addition to stringency, the rules of CAFE standards are changing This paper evaluates effectiveness of 4 different rules

Rule 1: Flat Standard, Two Functions, Two Constraints (Old EPA/DOT rule) Passenger Cars (Sedans, etc) credit deficit credit deficit Gallons per 100 miles (GPHM) Footprint (vehicle size) For each automakers each category, sales weighted average of credit > sales weighted average of deficit PCs GPHM LDTs GPHM Target Light Duty Trucks (SUVs, Pickups, etc)

Rule 2: Footprint-based Standard, 2 Functions, 2 Constraints Passenger Cars (Sedans, etc) Light Duty Trucks (SUVs, Pickups, etc) credit deficit credit deficit Deficit (credit) for large (small) vehicles decreased Standards looser (tighter) if primarily produce large (small) vehicles PCs GPHM LDTs GPHM Target Footprint (vehicle size) Gallons per 100 miles (GPHM)

Rule 3: Footprint-based Standard, 2 Functions, 1 Constraint (New EPA/DOT rule) Passenger Cars (Sedans, etc) credit deficit credit deficit Allow credit trading across two categories only 1 constraint PCs GPHM LDTs GPHM Target Footprint (vehicle size) Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM)

Rule 4: Footprint-based Standard, 1 Function, 1 Constraint Passenger Cars (Sedans, etc) credit deficit Remove gap between PCs and LDTs PCs (LDTs) target loosened (tigthened) PCs GPHM LDTs GPHM Target Footprint (vehicle size) Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM)

Framework Equilibrium model of US new vehicle market Data: National Household Travel Survey (2001) WARDS Automotive Yearbook EPAs fuel economy test data Estimate consumers vehicle choice and VMT (vehicle miles traveled) choice Model automakers profit maximization under imperfect competition and fuel economy standards Simulate counter-factual standards Related studies: Bento et al. (2009), Coleman et al. (2010), Whitefoot et al. (2012)

Welfare measures (changes from Rule 1) Rule 2: 2 functions, 2 constraints Rule 3: 2 functions, 1 constraint Rule 4: 1 function, 1 constraint

Welfare measures (changes from Rule 1) Case 2: Medium production cost for improving FE

Welfare measures (changes from Rule 1) Rule 2: 2 functions, 2 constraints Rule 3: 2 functions, 1 constraint Rule 4: 1 function, 1 constraint

Main Findings Compare Rules 1-4 that achieve (almost) same market average fuel efficiency: Few robust differences across Rules 1, 2 & 3 1-constraint rules (3 & 4) can save more gasoline than 2-constraint rules (1 & 2) Rule 4 consistently achieves highest social welfare Overall, flat and footprint-based do not differ much in terms of market-level effectiveness Credit trading across categories (i.e., 1-constraint; Rules 3 & 4) or removing target value gap between PCs and LDTs (e.g., 1- function; Rule 4) has larger market-level impact Improving LDTs fuel efficiency is socially less costly than improving PCs fuel efficiency

Thank you!