A team of SPEA researchers first examined fuel economy standards in 2015. They have now updated their findings in this peer-reviewed report and offer them here:
In 2016, the transportation sector became the leading emitter of greenhouse gasses (GHG) among all sectors of the U.S. economy, surpassing the electricity sector for the first time. Within the transportation sector, the majority of GHG emissions (about 60 percent) come from the light-duty vehicle (LDV) fleet, which consists of cars and light trucks, the vehicles in the U.S. economy that consume most of the oil. Recognizing the importance of the LDV fleet and its contribution to climate change and oil dependence, the federal government in 2012 updated the Corporate Average Fuel Economy (CAFE) standards and paired them with greenhouse gas emission standards, setting a goal of 54.5 miles per gallon for LDVs by model year 2025.
At the same time, the Zero Emission Vehicle (ZEV) mandate of the California Air Resources Board (CARB), which has now been adopted by nine other states, set an increased sales requirement for electric vehicles in those states. These combined federal and state regulations present an ambitious challenge for the U.S. automobile sector and have important implications for the U.S. economy.
In 2015, our SPEA faculty team, including Nikos Ziroglannis, Sanya Carley, Denvil Duncan, Saba Siddiki, and John D. Graham, was commissioned by the Alliance of Automobile Manufacturers to examine the macroeconomic effects of the combined standards.
Our results can be summarized in two key findings:
- The automotive sector is a large enough part of the U.S. economy that the combined standards will cause short-term decline in key economic indicators, but after 2025, the economy will start to show gains that will increase over time.
- There are significant uncertainties with respect to the impact that the standards will have on sales of new vehicles, mostly due to the value consumers place on fuel savings resulting from the standards.
Key causal mechanisms that link the combined standards to U.S. economic performance
Our work addressed three key causal pathways through which the standards could affect the U.S. economy, namely:
- the price premium for fuel efficient and electric vehicles;
- the boost to the automotive supply chain from investments in fuel-saving technologies; and
- the mixed effects on the cost savings resulting from reductions in gasoline consumption that stimulate consumer spending versus the curtailment of U.S. oil production. The study quantifies each of these causal mechanisms separately and then models their combined effects from 2017 to 2035 and thereafter.
How do consumers weigh a vehicle price increase against fuel savings over the life of the vehicle?
In order to comply with the standards, manufacturers will have to invest in new technologies that are expensive and will likely increase the sale price of LDVs. An important effect that is still undetermined is the size of that price increase. When the standards were finalized in 2012 the National Highway Traffic Safety Administration (NHTSA) estimated that the price premium for the average LDV in model year 2025 would be $1,461. However, a 2015 report by the National Research Council found that, for the typical midsize car, the price increase could be either 11 percent or 55 percent higher than what NHTSA predicted in 2012. This is a substantial increase that, if applied to other types of vehicles and passed on to consumers, could burden new-vehicle buyers. The majority of the benefits from the combined standards are derived from savings to motorists from reduced gasoline expenditures. The size of the cost savings depends in part on how fuel prices evolve in the future. Over the past few years changes in the international oil markets have brought a significant decline in gas prices (see Figure 1), thus decreasing the projected fuel savings that car owners will experience compared to the 2012 projections.