1. Overlapping Strategies for Reducing Carbon Emissions from Light Duty Vehicles
Soren Anderson (MSU and NBER)
Carolyn Fischer (RFF and FEEM)
Alexander Egorenkov (RFF)
October 2016

2. Source: https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100ONBL.pdf
Problem
Transportation accounts for 26% of U.S. greenhouse gas emissions …
… of which light-duty vehicles account for 61% (EPA 2016).
Image sources:
Climate change:
Source:

3. Problem Causes MILES CARS FUELS attributes (ex: size)
tech (ex: hybrid)
Image sources:
Climate change:
Traffic jam:
Ford Explorer:
Oil rigs:
FUELS

4. Problem Causes Solutions
Image sources:
Climate change:
Traffic jam:
Ford Explorer:
Oil rigs:
Cyclists:
Ford Focus:
Bio-processing plant:

5. Multiple margins for reducing CO2 emissions from transportation
CO2 tax
Drive less
Smaller cars
MPG tech
Switch fuels

6. What policy tools do we have, and how do they affect these margins?
Image source:

7. CO2 tax or cap-and trade
Symmetry between price and quantity regulations
Impose PRICE on CO2 via an emissions tax  emissions quantity
Impose QUANTITY of CO2 via cap-and-trade  emissions permit price
Source:

8. CO2 tax pushes all margins
Drive less +
Smaller cars
MPG tech
Switch fuels

9. Source: TaxFoundation.org
Fuel taxes
$0.184 per gallon since 1993, not indexed to inflation
Sales-weighted average state gasoline tax is about $0.30
Source: TaxFoundation.org
Also: sales-weighted average state gasoline tax ≈ $0.30 per gallon.

10. Fuel tax pushes all margins except fuel switching
CO2 tax
BTU tax
Drive less +
Smaller cars
MPG tech
Switch fuels

11. Fuel Economy Standards (CAFE)
Source: James Adcock / Wikipedia

12. CAFE only pushes small cars and MPG technology
MARGIN
CO2 tax
CAFE traditional
CAFE size-based
Drive less + –
Smaller cars
MPG tech
Switch fuels

13. Renewable Fuel Standard (RFS)
Source: EIA

14. RFS only pushes renewable fuels
MARGIN
CO2 tax
RFS (Q)
RFS (%)
Drive less + – ~
Smaller cars
MPG tech
Switch fuels

15. Low Carbon Fuel Standard (LCFS)
Source: Author
Source: Authors’ figure based on LCFS intensity targets from California Air Resources Board

16. LCFS behaves similarly to RFS %
MARGIN
CO2 tax
RFS (Q)
RFS (%)
LCFS
Drive less + – ~
Smaller cars
MPG tech
Switch fuels

17. Carbon policies could make OTHER problems better—or worse!
Pollution (miles)
Congestion (miles)
Image sources:
Pollution:
Traffic jam:
Accident scene:
Accidents (miles & weight)

18. Policies that push less driving and/or smaller cars are extra helpful
MARGIN
CO2 tax
BTU tax
RFS (Q)
RFS (%)
LCFS
CAFE traditional
CAFE size-based
Drive less + – ~
Smaller cars
MPG tech
Switch fuels
BTU tax > CO2 tax > other policies
CAFE (traditional) > CAFE (size-based)

19. Research questions What are the effects of current policy mix?
Carbon savings
Cost-effectiveness ($/tCO2)
Other damages from miles and/or weight
What would be optimal?
How well do single policies perform?

20. Overview of our model Based on Fischer, Newell, and Preonas (2014)
Two stages: 1 and 2
Fuel production
Gasoline
Corn ethanol
Sugarcane ethanol
Cellulosic ethanol (learning-by-doing)
Fuel demand
Fuel economy: size & technology (undervaluation)
Miles traveled

21. We consider the following policies
CO2 tax
BTU tax
LCFS
RFS (quantity)
RFS (%)
CAFE (traditional)
CAFE (size-based)

22. Baseline reflects multiple policies
CO2 tax
BTU tax
LCFS
RFS (quantity)
RFS (%)
CAFE (traditional)
CAFE (size-based)
Baseline policies

23. Optimal carbon policy targets market failures more directly
CO2 tax
BTU tax
LCFS
RFS (quantity)
RFS (%)
CAFE (traditional)
CAFE (size-based)
Optimal policy

24. Carbon and welfare changes
Hold CO2 emissions constant
Private welfare
Consumer surplus
Fuel producer surplus
Tax revenue (lump-sum transfers)
Other external damages
Miles (congestion, local pollution, traffic fatalities)
Miles x weight (traffic fatalities)

25. Parameters from EIA’s AEO (2014)
Stage 1 = ; Stage 2 =
Baseline prices, quantities, and policies
Pins down fuel supply intercepts (with help of other #s)
Fuel supply slopes
Gasoline: low vs. high oil demand
Ethanol: supply curves for underlying feedstocks
MPG via size: low vs. high oil supply
MPG via technology: car costs as size-based CAFE ramps up

26. Other parameters from literature
Cellulosic ethanol supply
Learning-by-doing elasticity: 0.15
Knowledge appropriability rate: 50%
Fuel demand
Fuel economy valuation rate: 100%
Short-run price elasticity -0.1 (long-run ≈ -0.45)
Annual discount 5%  0.54 factor on Stage 2
Other external damages
Miles: ≈ $0.10 per mile
Miles x weight: ≈ $0.05 per mile (at baseline weight)

27. Results—main calibration
For each policy, table reports …
Total emissions (cumulative, )
Changes in private surplus and other damages relative to the no-policy scenario (presented discounted value, )
Average abatement costs excluding and including other damages

28. Baseline policy Relative to “no policy” scenario …
CO2 emissions fall by 9%
Targets all margins except car size
Cost-ineffective: marginal costs vary greatly across strategies
Average cost of $44/tCO2

29. Optimal policy Under the “optimal” policy …
No cellulosic ethanol  production subsidy is not necessary
No undervaluation  CO2 tax is optimal
Average cost of $15/tCO2

30. CO2 tax and BTU tax Relative to “optimal” policy …
CO2 tax is also optimal (no cellulosic ethanol)
BTU tax stimulates zero ethanol of any kind (corn, sugar, or cellulosic)
But BTU tax is very close to CO2 tax

31. LCFS and quantity-based RFS
Relative to “optimal” policy …
Much greater ethanol production
Lower fuel prices
Lower fuel economy and more driving
Average costs of $24/tCO2 and $28/tCO2
Note: The RFS we consider here is a quantity-based standard that subsidizes corn, sugarcane, and cellulosic ethanol at a level equivalent to the RELATIVE subsidy that these fuels receive under the LCFS (vis-à-vis gasoline).

32. Traditional and size-based CAFE
Relative to “optimal” policy …
Both types of CAFE deliver similar fuel economy
But size-based CAFE emphasizes technology (vs. smaller cars)
Average costs of $20/tCO2 and $27/tCO2

33. Marginal abatement costs

34. Accounting for other damages in miles and weight
Relative to costs that exclude other damages …
Large NEGATIVE costs for CO2 tax and BTU tax (size↓ miles↓)
Small effect on LCFS and RFS (no incentive for size or miles)
Small effect on traditional CAFE (size↓ but miles↑)
Massively increases cost of size-based CAFE (size↑ & miles↑)
Note that BTU tax actually performs BETTER than CO2 tax because ALL of its mitigation occurs via fewer miles and smaller cars.

35. Sensitivity to undervaluation of fuel economy (25%)
CO2 emissions fall 13% under baseline (no-policy emissions ↑)
Optimal policy differs from CO2 tax (undervaluation; cellulosic needed)
CO2 tax, BTU tax, and CAFE have NEGATIVE costs (undervaluation)
Accounting for other damages reinforces benefits of fuel taxes ...
… and undermines benefits of size-based CAFE

36. Conclusions Current policy is too focused on technology
Missing low-tech, low-cost options (miles & size)
Fuel taxes deliver low-cost abatement
Especially when measuring other damages
LCFS and RFS are more costly
CAFE’s performance sensitive to assumptions
Undervaluation
Other external damages