Fuel consumption of European cars: The effect of standards, taxation and safety

1. Fuel consumption of European cars: The effect of standards, taxation and safety Theodoros Zachariadis Economics Research Centre, University of Cyprus COST 355 meeting, Madrid, May 2007

2. Contents • The effect of standards on fuel economy (Clerides and Zachariadis, “Are standards effective in improving automobile fuel economy?”, July 2006) • Some recent results, trying also to explain the share of diesel cars in each country • Do vehicle safety requirements compromise fuel economy?

3. Rationale of the study on fuel economy standards • Share of transportation in energy use and GHG emissions steadily rising • It will take time for biofuels and new technologies (hybrids, fuel cells etc.) to be effective  Improve fuel economy of conventional engines/fuels FE improvements may be attained through: • Higher fuel prices • FE standards / industry voluntary commitments • CO2-based vehicle taxation • Autonomous technical progress How much improvement from which measure?

4. Previous similar work • Espey (Energy Economics, 1996); Johansson & Schipper (J. Transp. Econ. Policy, 1997) • Greene (Energy Journal, 1990) • Gately (Energy Journal, 1992) • Small & Van Dender (UC Irvine, 2005) What is new in our study: • 18 countries, 20 cross-sections, period: 1975-2004 • Period with & without FE standards, with high & low fuel prices • FE standard is explicitly addressed as a variable

5. New-car fuel consumption and standardsin the US and EU, 1975-2004

6. Data (sample size: 384)

7. Regression results Notes: Estimation carried out with the Arellano-Bond GMM procedure. Robust t-statistics in brackets. *, ** and *** denote significance at 10%, 5% and 1% level. Last column reports the probability of the Arellano-Bond test for second order serial correlation of residuals.

8. Policy implications – 1 • Are FE standards significant for reducing automobile fuel consumption? • Use data from AT, BE, FR, DE, IT, JP, SE and UK • Split data in two periods: ‘pre-standard’ (1980-1994) and ‘with standards’ (1995-2004) • Re-estimate model without STD variable: i) for ‘pre-standard’ period ii) for entire period • Perform a Wald test and a Chow test to examine stability of estimated coefficients • Both tests reject the null of coefficient stability  structural break, i.e.FE regulations made a difference

9. New-car fuel consumption in Europe and Japan, 1980-2003

10. Policy implications – 2 • Given a future FE (or CO2) target to be met without tighter standards, how much should prices increase? • In the US, tightening current CAFE standard by 10% is equivalent to raising gasoline price by 36 US cents’2004 / gallon (result is similar with those of other studies) • In Europe, stated policy target of 120 g CO2/km – 25% tighter ‘standard’; retail fuel prices might have to double to induce similar fuel savings

11. Policy implications – 3 • How might fuel consumption evolve without further standards and at today’s fuel prices? Time trend coefficient: α1 insignificant, near zero • i.e. no ‘autonomous’ improvement per year ? • Changing consumer preferences towards more powerful and comfortable cars have cancelled out any autonomous technical progress • European long-term models, assuming that FE will continue to improve at fast rates even without post-2010 FE regulations, may have to be revisited

12. Policy implications – 4 • Are taxes always the most efficient measure? “To tackle an externality, impose a tax and let the market work” But: • Taxes less effective because of consumer myopia • Impact of higher taxes on the whole economy?(e.g. sectors that use fuel as an intermediate good) • Political acceptance of higher taxes • Major externalities (accidents, congestion) associated with miles driven, not with fuel consumed

13. Conclusions of the study on FE standards • If there were no standards in force, car fuel economy would not have improved considerably • Very high fuel price increases required in Europe if fuel economy to be improved without standards • Absent technological breakthroughs or an economic recession, FE will only improve further with tighter standards • Raising fuel taxes is not an option for Europe, could be considered in the US together with stricter standards (modified CAFE rules)

14. Recent extensions • Focus on European countries only • Fuel consumption may also depend on: • total vehicle taxes (registration, circulation, insurance etc.) • urbanisation and population density • ratio of retail gasoline/diesel price • Except for gasoline/diesel ratio, other variables not available as a time series but only as a country-specific figure for a given year (i.e. fixed effect) • Efficient estimation of dynamic panel models wipes out fixed effects, therefore adding these as explanatory variables is not possible • Feedback requested: are national data on vehicle taxation available for several years?

15. Effect of gasoline/diesel price ratio • Price ratio was constructed from retail fuel prices (source: IEA) • To avoid endogeneity/collinearity: • Gasoline price is the average of the previous three years • Gasoline/diesel ratio is the current year’s price ratio • Using both price variables improves estimation

16. Is there a safety – fuel economy trade-off? • “Car manufacturers don’t respect their CO2 commitment … legislation to cut CO2 emissions from cars to come soon” EU Environment Commissioner, 03/11/2006 • “Decrease in CO2 emissions has recently slowed. This is due to strong customer demand for larger and safer vehicles and disappointing consumer acceptance of extremely fuel-efficient cars” European car industry (ACEA), 05/11/2006 • “Better car safety does not jeopardise emission reduction … the added weight due to safety interventions is negligible” European Transport Safety Council, 13/11/2006

17. Safety vs. fuel economy Two questions: • Does safety affect vehicle mass? • Does safety affect fuel consumption / CO2 emissions? • US studies analyse relationship between traffic fatalities and attributes of vehicles involved in accidents [see Ahmad and Greene, Transp. Res. Record 1941(2005): 1-7] • Earlier results showed that lower fuel consumption leads to less safety  more fatalities • Recent evidence is inconclusive

18. Safety vs. fuel economy: Empirical analysis • Car safety data obtained from EuroNCAP website for 193 cars of model years 2000-2007(www.euroncap.com) • EuroNCAP provides consumers with independent information about a car’s safety • Ratings for three tests are provided: Adult occupant test, pedestrian test, child protection test • Score is provided in integer numbers (e.g. 0-30) and then codified in stars (‘excellent’ is 5 stars for adult & children tests, 4 stars for pedestrian test) • For each model tested, EuroNCAP provides exact model description (e.g. Peugeot 207cc, 1.6 ‘sport 1’), kerb weight and model year

19. Safety vs. fuel economy: Empirical analysis (2) • For each one of the 193 EuroNCAP car models, fuel consumption & CO2 data were retrieved from the 2001-2006 databases of the German Federal Motor Transport Authority (KBA) (purchased on CD-ROMs) • Data for 2007 models were obtained from online databases of the UK Vehicle Certification Agency (VCA) (www.vcacarfueldata.org.uk) & of portal www.carpages.co.uk • Linear regressions: massi = f(safetyi, engine_sizei, dsl_dummy, year_dummy) CO2i = f(safetyi, engine_sizei, dsl_dummy, year_dummy)

20. Results (1): Safety effect on vehicle mass is very small

21. Results (2): Safety effect on CO2 is marginally significant, small and negative!

22. Safety vs. fuel economy: tentative conclusion • “Better car safety does not jeopardise emission reduction … the added weight due to safety interventions is negligible” European Transport Safety Council, 13/11/2006 • ETSC is probably right ! • Results are similar if we observe subsets of the whole sample (e.g. if we exclude SUVs and/or superminis, observe family cars and/or MPVs only) • Results are similar if safety variable includes both adult+pedestrian test ratings • Results are consistent with Ahmad and Greene (2005) who used fatalities as dependent variable • Please comment!